Question

1. Why do community banks not want Wal-Mart to be in the banking business? What are the possible benefits to Wal-Mart of such move? What drawback to community bankers anticipates if Wal-Mart can operate full-scale bank in the United States?

Answer 1

Answer

When the world's largest retailer proposed to enter the financial business by establishing industrial bank, American banks started trembling. Wal-Mart was seeking regulatory approval to set up a "limited" purpose bank only. One of the important reasons for opposing this move was that banking industry insiders and analysts believed that if Walmart wins approval to set up industrial bank, it will eventually expand into retail banking, a move that could shake-up the banking industry. Furthur, this new entrant is very competent and aggressive on prices. Although Walmart proposed to open bank to save millions of dollars on payment processing fees but most of the banks fear that Wal-Mart will start offering deposit, checking and loan services.

Some possible benefits to Wal-Mart of such move are:

• The entry of Walmart into banking would lead it to extend more financial services to its primary clientele and thus improve financial access for an underserved group.
• It will eliminate third-party transaction costs that it currently incurs from processing of credit, debit card and electronic check transactions in its stores.
• In-house payment processing will save unprecedented amount of money in yearly fees which can be passed  to the customer in the form of lower prices.
• Freed-up funds can be invested in other areas of its business where sales and profit prospects are more.

Drawbacks to community bankers if Wal-Mart operates full-scale bank in the United States:

• Smaller regional banks would lose customers and eventually shut down due to the  low-price structure of wal-mart.
• If these banks' customers move to Wal-Mart, banks' deposits drop and they can't afford to make loans. As a consequence of this, small businesses would get adversely effected as they depend on community banks for loans to support their operations.
• While the initial effect may be cheaper services at the Wal-Mart bank, the long-term effect will be reduced choices for consumers as the number of financial services providers shrinks, and as the products become more commoditized.
• A Wal-Mart owned bank will not be able to make the customer a loan based on a long-standing relationship and personal knowledge of the customer which community banks does every day.
• As Wal-Mart is very aggressive on prices, life will get more difficult for incumbent banks.