By  on April 11, 2006

ARLINGTON, Va. — Wal-Mart Stores Inc. went before federal regulators on Monday to defend its bid to start a bank, saying it did not intend to open bank branches and would limit the scope of the operation.

In the first of three days of public hearings, the world's largest retailer insisted repeatedly that it would use the bank only to process its credit card, debit card and electronic check transactions and that it had abandoned plans for retail banking.

"One of the most important messages we can leave with you today is, Wal-Mart is absolutely committed not to engage in branch banking," Jane Thompson, president of Wal-Mart Financial Services, said during the first public hearing on a bank application held by the Federal Deposit Insurance Corp. "We are single-mindedly seeking an industrial bank in order to provide greater efficiency, effectiveness and safety in Wal-Mart's interaction with the payment system."

Wal-Mart's effort to set up what is known as an industrial loan corporation to handle processing of electronic payments for its stores has triggered opposition on Capitol Hill and in the banking industry. The FDIC, which supervises state-chartered and state-regulated industrial banks, has received almost 3,000 letters on the issue. It must decide whether to approve Wal-Mart's application.

Opponents argue that the bank, even with its narrow focus, eventually would allow Wal-Mart to open retail banking branches, which could destroy its competitors. Critics of the discount chain have alleged that Wal-Mart has a record of pricing and employment practices that force smaller and independent retailers out of business.

Wal-Mart now pays a third-party bank to process its electronic payments and maintains it could save millions of dollars if it took over processing through its own bank.

Thompson said Wal-Mart — even if the FDIC approves its application — is committed to expanding its in-store bank-leasing strategy through long-term contracts with third-party institutions. The company has independent banks in 1,150 stores, and another 250 are opening between now and 2009. The chain has more than doubled its lease agreements and now has long-term leases with more than 1,400 tenants, some extending to 2024, she said.

"Wal-Mart is, in fact and in practice, clearly committed to supporting community banking, not undermining it," the company said in its written statement to the FDIC."Our commitment not to branch and our independent in-store branch strategy is not simply a promise," Thompson said. "It is a very visible and rapidly growing reality, locked in by hundreds of long-term contracts."

John F. Bovenzi, deputy to the chairman and chief operating officer at the FDIC, asked Thompson to respond to opponents' assertions that Wal-Mart has an "unfavorable history in the treatment of its employees that reflects poorly on the character of Wal-Mart management," which he said, " raises the question of whether Wal-Mart should be allowed to own an insured bank."

Thompson responded that the company is "against discrimination," pays "fair wages" and that 76 percent of its managers come from the "hourly ranks."

Douglas Jones, acting general counsel at the FDIC, asked Thompson to address allegations that Wal-Mart has committed "repeated violations of the law," failed to act ethically and failed to comply with governmental regulations.

"We try very carefully to comply with all laws," Thompson said. "We are a big company and we do have a number of lawsuits."

She added that Wal-Mart has a new compliance office who reports directly to the company's vice chairman.

Andrew Grossman, executive director of Wal-Mart Watch, a watchdog group with ties to organized labor, said, "Wal-Mart's application poses unique and dangerous risks for the FDIC.

"This mammoth corporation's historic patterns of disregarding legal accountability, the potential size of their charter and the troubling lack of transparency in its application all contribute to our strong belief that this application could threaten the deposit insurance system and endanger America's fiscal security," Grossman said.

Rep. Stephanie Tubbs Jones (D., Ohio), who said she was speaking on behalf of 100 Republican and Democratic lawmakers who have expressed concerns about the application to the FDIC, also told the regulators that Wal-Mart poses an "undue risk" to the deposit insurance fund, would violate the nation's policy of separation of banking and commerce, and raise "significant supervisory and regulatory issues."

The FDIC's Jones asked how Wal-Mart Bank would deal with the risk if the parent were in trouble.

Thompson said the bank would be protected by a "formal parent indemnification agreement," an earmarked "evergreen" deposit account of at least $1 million and a conservative investment strategy. She said the company would capitalize the bank initially at $125 million.

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