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Wednesday, January 04, 2006

Always Low Credit Card Fees?

Traditionally there has been, at least in principle, a strict separation between banking and commercial interests, but that separation has blurred as the industry has been deregulated. Wal-Mart seeks to blur the distinction even further:

Banking Against Wal-Mart January, Review and Outlook, Wall Street Journal: The Federal Deposit Insurance Corporation (FDIC) will soon have to make a big decision: whether to grant retail giant Wal-Mart a charter to enter the consumer banking business. You won't be surprised to learn that the idea of more banking competition is not universally popular with . . . bankers. In particular, the Independent Community Bankers Association (ICBA) is raising a ruckus ... to keep big bad Wal-Mart locked out of their game... a textbook case of a powerful corporate lobby rushing to its pals in Congress and their regulators, in this case the FDIC, and pleading for them to squash competition that might lower the prices of banking services.

At issue is whether Wal-Mart should be granted the authority to establish an Industrial Loan Company (ILC) in Utah. ILCs are state-chartered, quasi-banks that were originally designed a century ago to help low-income workers get cheap loans. ILCs can provide most banking services, such as check cashing, lending, and credit card processing. Target and General Electric have been granted an ILC with little controversy. But because Wal-Mart has been portrayed as America's latest corporate villain, its political hurdles are much higher.

If the bankers succeed in this protectionist gambit, the biggest loser won't be Wal-Mart, but rather consumers, particularly those in lower-income neighborhoods where competition in retail banking is traditionally scarce. ... Wal-Mart already performs many bank-like functions that are especially popular in poor areas -- including wire transfers, money orders, paycheck cashing, and express bill payment services. ... If they decide to regulate Wal-Mart out of the industry, the end result will be higher banking service costs for the poor constituents they claim to represent. ...

Wal-Mart's immediate banking ambitions are quite modest. ... Wal-Mart insists that in the short term it merely wants to create an in-house banking affiliate so it can lower costs on credit card transactions ... Traditionally, banks charge an interchange fee of roughly 2% on the cost of the retail credit/debit card transaction. Wal-Mart has determined that if it owns its own bank it can cut the transaction fee in half, and pass the cost-savings on to its customers who pay with Visa or MasterCard. ...

[T]he meaty policy issue at stake here [is] whether the traditional firewall between banks and commercial enterprises (i.e., the commercial lenders and the borrowers) should be officially torn down. ... Would granting Wal-Mart its ILC status impose an unnecessary financial risk on the soundness of the banking system? The Community Bankers lobby warns that "Wal-Mart's entrance into banking would constitute a dangerous over-concentration of economic power that would skew market forces." ... We suspect, however, that what really spooks the banking industry is the threat of more competition, more convenience and lower prices for financial services. ...

Most of these restrictions were put into place after the Great Depression. The massive failure of banks during that time was blamed, in part, on bank's investment activities and they were prohibited from dealing or underwriting corporate securities with the Glass-Stegall act of 1933. However, in 1999 the Gramm - Leach - Bliley Act relaxed these restrictions and blurred the distinction between banks and insurance companies consistent with the general movement towards deregulation of the financial services industry.  Wal-Mart's request is another step in this direction.

    Posted by on Wednesday, January 4, 2006 at 01:10 AM in Economics, Financial System, Market Failure, Policy | Permalink  TrackBack (0)  Comments (18)

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