Piggy Banker?

By Kathleen Day
Washington Post Staff Writer
Sunday, February 12, 2006

Wal-Mart entered the grocery business in 1988 to compete with established names such as Kroger, Safeway and Albertsons, which had dominated food retailing for decades.

Today Wal-Mart is America's biggest grocer, with 16 percent of the U.S. retail food market, and its sales continue to climb, even as dozens of grocery chains struggle.

Wal-Mart Stores Inc.'s decision to jump full-force into toys about 15 years ago has had similar results. Its sales overtook leader Toys R Us Inc. -- the inventor of selling toys in big-box discount stores -- in 1998. Wal-Mart now has 28 percent of that market. And it's not just food and toys: Owners of religious bookstores worry about being outpriced by the retailing behemoth. The list of Wal-Mart's effects on businesses goes on and on.

Congressional lawmakers and federal regulators now face a tough question: Should they permit Wal-Mart to use a legal loophole to enter banking and potentially do in that arena what it has done to nearly every other consumer product and service it has touched?

The question rattles bankers from Maine to California, even though the retailer no longer wants a full-service bank, only a limited-purpose one. It has whipped up longtime Wal-Mart critics, including labor unions, consumer groups and some congressmen on both sides of the aisle, who say the company is already too big, with too much power over the American economy, sometimes to the detriment of workers' pay and domestic jobs.

Charles Fishman, author of a new book, "The Wal-Mart Effect," chronicling how the company's growth and low-price philosophy influences the U.S. economy, is undecided: "I don't know if Wal-Mart would be good or bad for banking in the long run. But I'll bet ATM fees would come down pretty quick."

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At issue is the possibility that Wal-Mart and a dozen other nonfinancial firms would be allowed to erode and possibly jettison a prohibition that's been in place for most of America's 230-year history barring commercial firms from owning full-service retail banks, and vice versa. Supporters of the ban say letting commerce and banking mix would foster unfair concentrations of power, create conflicts of interest in how credit is granted and perhaps one day burden taxpayers should the failure of a bank and its affiliate put at risk the Federal Deposit Insurance Corp., the federal fund that insures consumers' bank deposits.

"What's really at issue is the nature of the American economy," says Rep. Jim Leach (R-Iowa), who for two decades has fought efforts by industry to lift the ban. "If such concentrations are allowed, you could have our largest banks combined with our largest retail companies and high-tech companies and create questions about how credit is allocated. It has enormous consequences for competition, and I think America would become less competitive in the world."

But others say low pricing is king. "Wal-Mart sees banking as an opportunity to give the customer a better deal," says Howard Davidowitz, founder and chairman of Davidowitz & Associates Inc., a New York retail consulting and investment banking firm. "That's what Wal-Mart's about. That's why they have demolished the food and toy industries. If it's better for the customers, then that's the way it ought to be."

Sparking the current uproar is Wal-Mart's application to obtain federal deposit insurance, which is required before it can open a state-chartered bank in Utah known as an industrial loan corporation, or ILC.

Congress overlooked the ILC loophole in 1999 when it passed laws to deregulate financial services by allowing bankers, securities brokers and insurers to enter one another's businesses and sell such products under one roof. But despite overlooking ILCs, Congress specifically addressed the issue of commerce and banking: It voted to maintain the ban on mixing the two by closing another loophole that allowed nonfinancial firms such as Wal-Mart to own a savings and loan, a specialty bank.

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