Retail entry into banking and financial services is either the greatest thing since sliced bread or the biggest threat to the world’s financial infrastructure since the Great Depression – it all depends on who you ask!

Clearly, both comments are more than a little exaggerated. Furthermore, the idea of supermarkets as bankers is less of an issue in the UK and Europe where chains like Tesco, Carrefour, Auchan, Sainsbury’s and Marks & Spencer have been offering these and other financial services to customers for as long as two decades.
However, in the US, where banking is considered as competitive as the supermarket industry, Wal-Mart’s attempt to get an operating license has stirred up a hornet’s nest of controversy and galvanised a broad coalition of opponents ranging from labour unions to the US Congress.

Border disputes
The biggest issue in Europe, and one that affects retailers as well as those in traditional banking circles is cross-border payment flows. “Despite the EU, there are still barriers in the cost of moving money across borders,” said Ely. His comment was underscored by research from Celent, a Boston-based financial services firm, which found that costs could be reduced by 15 per cent if processing centres were moved to low-cost offshore locations.
Meanwhile, the commoditisation of the banking industry in the US has resulted in an explosion of in-store branches by third parties. This has proven to be an advantageous arrangement for retailers who can limit their risk to a few hundred square feet of leased space. In-store branches have enabled banks to get around Sunday closings and capture customers in a visible, convenient location. However, some observers believe that branches generally cater to low-balance customers and are not a venue for more profitable products such as insurance, mortgage and small business loans.
Wal-Mart has had its eye on the banking business for over ten years both as a profit centre and another way to tie its customers to the company. In Brazil, the chain’s Bompreço subsidiary, operates a banking unit called Unibanco. In Mexico, Walmex has received permission to open Banco Wal-Mart de Mexico Adelante SA in the second half of 2007, a move that will enable Wal-Mart to take advantage of the burgeoning consumer loan market. Even so, the banking unit is not expected to show a profit before 2011, according to Walmex president Eduardo Solorzano. Meanwhile, Gigante, another major Mexican retailer had begun searching for a banking partner.
Wal-Mart is also looking at a range of possible financial services in Canada such as mortgages, savings accounts, home and auto insurance. Loblaw Cos., has a banking license but only uses it to run its credit card business and uses its partnership with the Canadian Imperial Bank of Commerce to offer mortgages, lines of credit and no-fee accounts.

ILC debates
Up to now, Wal-Mart’s attempts at banking have been stymied in the US, although the chain processes about one million financial transactions a week, including money orders, check cashing and wire transfers to Mexico. In 1999, it failed to secure a bank in Oklahoma. In 2002, Wal-Mart was prevented from buying an industrial loan company (ILC) in Orange, California, a limited use bank created by state governments that focuses on businesses larger banks neglect. The state legislature passed a hastily written bill preventing anyone but a financial institution from owning an ILC.

In 2005, the chain tried it again in Utah, which is home to half of the existing 61 ILCs in the country where ILC applications have been granted to everyone from Volkswagen to Target Corp. The latter uses its Target Bank ILC subsidiary to handle the chain’s consumer and commercial credit card operations.
The recent mid-term elections in the US may have further hurt Wal-Mart’s chances. The Democrats regained control of Congress as well as the powerful House Banking and Financial Services Committee which overseas most US banking regulations. Wal-Mart’s critics on Capitol Hill immediately petitioned the FDIC (Federal Deposit Insurance Corporation) to extend its moratorium on ILC applications until April. Meanwhile, lawmakers are scurrying to put together legislation that would close up the loophole in the banking laws that allows non-financial companies to operate ILCs. This would also have an impact on Home Depot, another potential entry in the ILC field, according to banking industry observers. The chain sees ILCs as a vehicle for home improvement loans. “Then they would have the problem that all bankers have – how to collect what you lend.”
If Congress fails to pass legislation, Wal-Mart will likely get its way, according to Bert Ely. “Eventually, FDIC will have to grant Wal-Mart the charter. Then, it’s a question of what they will do with it,” he said, noting that the chain has promised to use it exclusively for back office activities such as processing credit and debit charges. “Of course, no one believes them,” he added.

Finding money-makers
However, the bottom line is how successful Wal-Mart or any other retailer can be in the banking business. Firstly, they would have to figure out what to do with deposits, which could conceivably be done at the checkout or a nearby service desk. “I don’t know if they would get into lending. They have bank branches in about one-third of their stores but in-store branches are not very good at generating assets. They would face the same challenge as an Internet bank like ING in Holland – one quarter of assets are in home mortgages with the rest in mortgage backed securities – not the greatest money-makers in the world,” he said.
Additionally, neither Wal-Mart nor any other retailer has the advantage of branch density. “Even if Wal-Mart had a branch in every store, that’s only about 3,500. And many denser metropolitan areas don’t have Wal-Marts. So where’s the convenience?” Ely asked. “Besides, I’ve seen what they do in financial services. They compete more against check cashers and money transferors than banks. If they get the ILC charter they will stick to what they’ve committed to for three to five years then push further into retail banking on a selective basis to figure out how to make money.”
In one way, Wal-Mart may have an edge. The Walton family holds a controlling interest in Arvest Bank in Bentonville that has about 210 branches and US$8.5 billion in assets. Arvest, generally considered the oldest banking institution in the state of Arkansas, is headed by Jim Walton, son of founder Sam Walton. Arvest has been modernising services over the past seven years and while regulations would prevent Wal-Mart from buying the bank, the chain could conceivably develop a closer relationship that would enable it to become more involved in other financial services, sources noted.
However, the Holy Grail of financial services for any retailer may be the development of fully imaged capable ATM machines where people could get an instantaneous picture of the checks and currency they are depositing. The Check Clearing in the Twenty-First Century Act in the US, or ‘Check  21’, removed regulatory barriers to imaging and the technology is now picking up speed, according to Ely. “I think Wal-Mart has this in mind – to be a full service bank that uses ATMs to service their customers. The technology is not here today, but it will be in five years,” he said.