Johnson Blocks WalMarts Banking Plan

June 12, 2006
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GRAND RAPIDS — A local banker is standing in the way of Wal-Mart’s stand-alone entry into the financial services industry.

Art Johnson, chairman of both United Bank of Michigan and the American Bankers’ Association Governmental Relations Council, recently testified before the Federal Deposit Insurance Corp. in an effort to keep the retail giant from getting a bank chartered in Utah.

“The FDIC, for the first time in their history, decided to hold a public hearing on this application,” Johnson said of the April event.

Wal-Mart applied to the FDIC for coverage for a bank charter that is pending in Utah. The institution is a state-chartered industrial loan bank, which Johnson said are not found in Michigan.

“The position that the ABA is taking is essentially that the (industrial loan) charter in Utah is essentially the only place where a commercial firm can own a bank,” he said.

Johnson said the separation of retail and banking is well established, while the charter in Utah provides a loophole.

Jane Thompson, president of Wal-Mart Financial Services, also testified at the hearing, stating that Wal-Mart has proposed the bank to “sponsor credit card, debit card and electronic check transmissions — nothing more.”

Johnson said he and others are concerned that is not the case, and Wal-Mart may soon have its own bank branches in the shopping center’s retail locations.

“I think, without question, sooner or later that’s absolutely what we’ll see,” he said.

In her testimony, Thompson said Wal-Mart does not plan to open local branches and that the company is committed to its in-store bank leasing strategy.

“Since July 2003, we have more than doubled our lease agreements and now have long-term leases with more than 1,400 tenants, some extending out to 2024. These leases can only be terminated by the bank tenant,” she said.

Johnson said the position of the American Bankers’ Association is also that commerce banking and non-financial commerce should not be mixed.

“What would happen if the retail company got into financial stress and was no longer a financial support to the subsidiary bank that it owns?” Johnson asked. “That has been a fairly well long-established public policy — that the mixing of banking and commerce is a bad thing.”

As a system that depends on public trust, Johnson said it is risky to have a bank involved with a retail company that may not be able to support a bank forever.

Johnson cited General Motors Acceptance Corp. as an example, saying the financial company had a declining credit rating after its parent company, General Motors, started having financial trouble.

“That’s a good example, I think, of what can happen when the commercial parent company of a bank or other financial company (struggles), that it would have a detrimental effect if they did, in fact, own a bank,” he said.

Thompson said in her testimony the sole reason behind Wal-Mart pursuing the charter is to lower costs for customers and have a more efficient, effective and safe banking system.

“The proposed Wal-Mart Bank would serve as the legally required bank ‘sponsor’ so that Wal-Mart can submit payments to the payment system, but the bank would not have computers and systems to perform the actual processing of payments,” she said. “The payment system involves sending electronic checks, debit and credit card payments by Wal-Mart customers to the customer’s bank, and subsequently returning payment funds to Wal-Mart.”

Whatever the outcome of the application, Johnson said the day-and-a-half-long hearing was unlike anything he had ever seen, with a number of groups that did not always see eye to eye united against Wal-Mart.

“There were some strange bedfellows at this meeting. I found that to be interesting,” he said. “It was nice to see them be on the same side, as opposed to the opposite side,” he said.

Gail Lavielle, senior director of corporate communication for Wal-Mart, said the company is waiting to hear from the FDIC and does not have a timeline for the decision.    

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