Wal-Mart’s application to form a bank ignited controversy among disparate groups, ranging from union backers to realtor’s groups to charitable organizations. The dominant voice, though, was that of independent bankers complaining that the big-box retailer would drive them out of business. Wal-Mart denied any interest in competing with local banks by opening branches, claiming that it was interested only in payments processing. Distrusting Wal-Mart, the independent bankers urged the FDIC to deny Wal-Mart’s request and lobbied state and federal lawmakers to block Wal-Mart’s plans through legislation. Ultimately, WalMart withdrew its application, concluding that it stood little chance of overcoming the opposition.
I was reminded of this by Lawrence J. White, who had written a piece in favor of allowing Wal-Mart into banking.
We are always told that we need regulation to protect consumers and make the financial system safer. That is the theory. The practice is that regulation very often gets used to limit competition.
This is an example of what I mean when I say that in any dispute between libertarians and statists, the libertarians are usually right.
Less competition does not make the financial system safer? Since when? If they had really wanted to enter the business, all they would have to do is buy an existing one. When many were failing as they were when Walmart proposed this, they could have bought one cheaply. Banking did expect this to drive further losses and while banking would have to cover them, as we are constantly told, they would pass these along to their customers, so it was both. Buying an existing bank is not much of a restriction when there are so many to choose from.
I don’t have any idea why Wal-Mart should not have a banking licence outside the fact of the General Electric Capital experience the last ten years. (Remember in Fall 2008 they were bailout by Uncle Ben buying Commercial paper and the AIG bailout and now GE is mostly out of the Finance business.)
1) My guess any hope of local banking would go out the window here. I think a robust local banking is a libertarian & conservative pipe dream but Wal-Mart banking would all but guarantee that small, local banking could robustly exist. Remember Wal-Mart stores could interact/subsidize a lot of local branches.
2) Having a large bank connect with other aspects of the economy would be messy. A GE Capital failure could have impacted their industrial businesses. Does FDIC take over all Wal-Mart including retail if banking fails? Or banking division only?
Investors might expect to a piece of the retail stores if Wal-Mart banking fails. (Or FDIC could use these assets to fund the failure deficit.
3) Despite these problems, I would agree with Wal-Mart because it would a great way to cut down the un-bank population. Given that I think local banking has limited potential in 2017, Wal-Mart (say Amazon or Target) would represent the best potential competition for the large banks.
My guess is that Wal-Mart wants to sit in the gap between bank, with their absent-to-terrible offerings for the low income (but not broke) segment, and check-cashers that offer great service, expensive transactions, but not checking or savings accounts.
If I could get Wal-Mart level service (which my bank doesn’t offer) at Wal-Mart hours (which my bank doesn’t offer) at the price my bank charges (not at the check-cashers rate), I’d be a very happy customer.
But, most regulation makes it hard for new entrants to find a place in the gaps. Like how many state beer laws allow you to be a giant brewer, or a distributor, but not both. Then along come microbrewers that want to be a small brewer and their own distributor to their tap room and a half dozen bars. Some states have a adapted, some haven’t.
+1
The context is missing.
Nothing in the WalMart store cost more than $200, no one is taking a 30 year risk to buy a lawn mower. And Walmart would be stupid to go into the home loan business.
The reason we go and get a government permission slip is to get the government currency insurance when using the government tax dollar. But the consumer loans WalMart does in the store hardly warrant FDIC insurance.