WalMart May Still Get Its Bank: Street Whispers

NEW YORK ( TheStreet) -- While WalMart ( WMT) has gone quite far in developing new "bank-like" services for its customers, it may soon have an opportunity to do the real thing.

The regulatory moratorium on new industrial loan companies ends on July 21, 2013, opening the way for the giant retailer to restart its bank plans..

An industrial loan company, or ILC, is a bank owned by a non-financial company. Like other banks, ILCs are supervised by their chartering authority -- in this case, any of seven states, but mainly Utah and Nevada -- as well as the Federal Deposit Insurance Corp., while enjoying FDIC deposit insurance.

It's been over five years since WalMart gave up -- at least temporarily -- its attempt to charter an ILC, but the company has succeeded in making a huge foray into financial services, first with WalMart Money Card, in partnership with Green Dot ( GDOT), and more recently with Bluebird, in partnership with American Express ( AXP).
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The Bluebird service offers consumers nearly all of the deposit services offered by a bank, including direct deposit, ATM access, electronic bill paying, while allowing checks to be deposited using a smart phone, or, of course at a WalMart store. All of the bluebird services are fee, except for a $2 fee if a customer uses an out-of-network ATM, or of a customer refills the Bluebird debt card using another debit card.

So what's left? Credit. WalMart would need the ILC charter in order to begin lending to its customers.

The company didn't respond to a request for comment on whether it wishes to file a new application to form a bank subsidiary.

The FDIC declined to comment.

WalMart's previous attempt.

In light of the real estate bubble, the financial crisis and the government bailout of so many of the nation's largest financial institutions, WalMart's unsuccessful 2005 bid -- withdrawn in the face of opposition from consumer groups, banking industry groups, members of Congress, and regulatory stonewalling in 2007 -- to form an industrial loan company may seem like ancient history.

While many retailers, including Target ( TGT), Home Depot ( HD) and Sears ( SHLD), and other non-financial companies, including General Motors ( GM) and Harley Davidson ( HOG) already had bank subsidiaries, there was quite an outcry from consumer, member groups concerned that the "WalMart" effect could eventually limit consumers' choices, bank industry groups, who said it was unfair that WalMart might enjoy the advantage of instantly competing with thousands of branch locations, while not facing the same parent company restrictions that bank holding companies have to endure, and members of Congress, who were concerned over the continual breakdown of the barriers between commerce and banking.

V. Gerard Comizio -- a partner in the corporate department of Paul Hastings, in the firm's Washington office -- says that "WalMart ran into a perfect storm. The biggest banks in the country said that if we have a company instantly one of our biggest competitors, that parent should have to suffer under the same regulator regime as we do, and we should be allowed to engage in non-financial activities."

The community banks were worried, and were being told by the community organizations that oppose WalMart's stores, that WalMart would destroy the community banking system as they have destroyed small-town merchants," Comizio says, adding that "everybody else that hates WalMart crawled out of the woodwork and turned it into a circus."

Companies that own ILCs are not subject to the Bank Holding Company Act, and are not regulated by the Federal Reserve, which does regulate large financial holding companies. According to Comizio, the FDIC is, effectively, "the regulator of the ILC and the parent company, but what they said at the time of the WalMart mess was that they don't try to actively regulate the holding company's non-financial business. They focus on protecting the bank from any abuse by its parent company or its affiliates."

The FDIC's own Advisory Committee on Banking Policy has said that the agency's "supervisory experience with ILCs suggests that ILCs charters pose no greater safety and soundness risk than do other charter types."

After the FDIC put in place a six-month moratorium on new ILC charters in August of 2006, the moratorium was extended for another year, following intense pressure from members of Congress. In its March 2008 Blueprint for a Modernized Financial Regulatory Structure, the U.S. Treasury noted that the Gramm-Leach-Bliley Act of 1999 had already "relaxed" the Glass-Steagall Act's separation of banking and commerce, and also said that "the history of commercial firms affiliating with insured depository institutions has not supported the view of greater risks present in such structures."

The ILC issue was put on hold again when the Dodd-Frank Wall Street Reform and Consumer Protection Act -- signed into law by President Obama on July 21, 2010 -- included a three-year moratorium on new industrial loan company charters.

Dodd-Frank also "created an intermediate holding company, regulated by the Federal Reserve, to isolate the banking activities from that company downward and separate from the holding company's non-financial activities, which is more of a European model," according to Comizio, who says that this "may be a viable alternative."

Why bother with another ILC application?

Once the ILC moratorium ends next July, WalMart may try again to form an ILC, and this time around, the company could face less opposition. After all, how much more risk can a WalMart bank subsidiary represent to the U.S. financial system than the largest bank holding companies that received bailout funds through the Troubled Assets Relief Program, or TARP, or the 464 banks that have failed since the beginning of 2008?

Comizio says "you may see less objection from community banks, since WalMart has been leasing space to community banks across the country in their stores. WalMart will have to make the banks comfortable that those relationships continue."

There could also be far less of a protest from consumer groups, who would have a tough time arguing that WalMart is unfriendly to consumers, considering that it is easy to use Bluebird as an alternative to a traditional checking account, while avoiding any minimum balance requirements and easily avoiding any fees. "The practical reality is that Congress will kick the can down the road, or use the intermediate holding company," Comizio says.

The banking industry also shouldn't be counted out, according to Christopher Cole -- Senior VP and Senior Regulatory Counsel for the Independent Community Bankers of America -- who says that the regulation that WalMart "would have to comply with at this point would be significant under Dodd-Frank, since they would have to be a bank holding company and a source of strength for the bank and be subject to restrictions on affiliate transactions."

"Bluebird looks like a comprehensive deposit product, and they may stop with it," Cole says, but if WalMart presses ahead with the ILC charter, his organization will put up another fight.

"We had a lot to do with stopping WalMart from getting approved by the FDIC for an ILC charter," Cole says, and the Independent Community Banks of America "are still concerned about bib box retailers getting into the banking business... we have always thought that the commercial side would conflict with the banking side. There were concerns that the interest of the bank would not always be consistent with the commercial side."

Cole says it is likely that "we will be seeking an extension of the moratorium, but at this point I think there is less interest among the nonbank firms getting into the business of banking, since there is a lot of regulation they would have to comply with and I am not sure if the costs would outweigh the benefits."

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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