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Editorial See other Editorial Articles Title: Wal-Mart should take on Bank of America The economy is in an awful jam. Consumers and businesses need access to credit. Many banks, starved of capital, aren't up to the task. Nor is the shadow banking system, which offered an alternative source of credit from money-market, bond and hedge funds, but has now dried up. One suggested out: Create new banks that wouldn't be saddled with the soured loans and toxic assets constraining other lenders. That's easier said than done. Even with government funds, most start-ups couldn't muster the technology, infrastructure and management expertise to form the kind of big, national bank that could quickly have an impact. Most, that is, except for Wal-Mart. The retailing giant could probably get a big bank up and running pretty easily. If, that is, its opponents put the economy's needs ahead of their own interests. Two years ago next week, Wal-Mart withdrew its application to create an industrial loan company, a kind of banking operation, in the face of opposition from the Federal Deposit Insurance Corp., rival banks and the wider anti-Wal-Mart lobby. Much of the protest was rooted in fears that Wal-Mart's application was a first step toward creating a real bank, as opposed to an entity meant to process payments from customers and suppliers. From there, opponents argued, Wal-Mart would soon crush competitors, especially community banks. Times have changed. The economic crisis demands radical solutions. Giving Wal-Mart a banking license may be one. A Wal-Mart bank would surely add to the sum of lending in the U.S. As a competitor of the big, established banks such as Bank of America Corp. or Wells Fargo & Co., it might also spur them to lend more and be the kind of private initiative that helps ease the smothering influence of government in the industry. Wal-Mart has a ready base for bank branches, with more than 4,200 stores in the U.S. The retailer's technology probably could be adapted to banking since it already offers some limited financial services. The company's management is widely acknowledged to be top notch, and it has garnered banking experience in Mexico, where it already has a banking license. Not to mention that Wal-Mart, unlike most banks, is financially healthy and has a strong balance sheet. As of its latest fiscal year, ended Jan. 31, it had $7.2 billion in cash. Long-term debt was just 50 percent of shareholders' equity; banks rely on much larger amounts of borrowed money. The cost to investors of insuring against a default by Wal-Mart on its debt, a sign of its perceived risk, is a fifth that of Citigroup Inc. and about 40 percent lower than that of JPMorgan Chase & Co. Wal-Mart's reams of transaction data might also help it make safer loans. "If you serve primarily shoppers in the store, then you know something about their spending patterns and behavior," said Joseph Mason, a banking professor at Louisiana State University. "That incremental information can really add value. That's the new frontier of lending." Of course, there would be resistance. As before, much of the fight would likely come from community banks and the FDIC, worried by the competitive threat. There is also a deep-rooted concern that commercial enterprises with banking powers will use their financing arms to subsidize their other businesses or coerce suppliers and customers into giving better terms. This apprehension may really be rooted in a desire to insulate banks "from competition by potentially more nimble" rivals, Columbia Law School Professor Ronald Mann wrote in a 2008 paper. Protection of the status quo is a problem. When Wal-Mart's plans were scuttled two years ago, groups such as the National Association of Realtors and the United Food & Commercial Workers Union cheered. The UFCW called on Congress to "prevent retailers like Wal-Mart from entering the banking business and jeopardizing the nation's economy." Yes, keeping everything in the bank industry's hands has worked out real well. Banking needs a shake up. What better way than by introducing real competition? Wal-Mart might even counter the dominance of the four huge, government-supported banks, ultimately benefiting smaller lenders. Plus, the country can no longer afford to coddle banks. Of course, Wal-Mart might not want to go back into the banking battle. Wal-Mart spokeswoman Deisha Galberth told me that the retailer doesn't "have a banking strategy today" and feels "strongly that we are able to provide the services we need without being a bank." Still, if the opportunity arose, this could be too good for Wal-Mart to pass up. For a new entrant not saddled with old, rotten loans, banking would be attractive. Banks' cost of capital, for example, is low compared with what they can charge for loans, leading to higher profit margins. The chance for profit is so great that legendary investor Warren Buffett declared in a television interview this week, "This is a great time to be in banking." It's time to let Wal-Mart get in on it, too.
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#1. To: Prefrontal Vortex (#0)
Agree - at least they know how to make a profit.
And they know how to collaborate with the Chinese.
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