Wal-Mart’s Bank Creates Uncertainty for Banks As Well As Processors

The disclosure by Wal-Mart Stores Inc. in late July that it plans to charter an industrial bank in Utah to acquire its own payment transactions is creating more questions than answers about current relationships between the world's largest retailer and the payments entities with whom it currently works. Bentonville, Ark.-based Wal-Mart uses Chase Merchant Services LLC, a joint venture of New York City-based banking giant JP Morgan Chase and Co. and leading payment processor First Data Corp., as an acquirer. Through CMS and First Data, which also owns the Star electronic funds transfer network, Wal-Mart gets credit card, signature debit, and PIN-based debit card processing and network services. Greenwood Village, Colo.-based First Data bought Star's owner, Concord EFS Inc., in February 2004. Wal-Mart says the Utah bank will reduce its transaction-processing costs. The Salt Lake City-based bank will operate with a small staff and be insured by the Federal Deposit Insurance Corp. Essentially, the bank will act as Wal-Mart's captive acquirer for credit and debit card sales and also will handle check transactions. Wal-Mart currently receives more than 140 million credit, debit, and electronic check payments per month, Jane Thompson, president of Wal-Mart Financial Services, said in a statement. A transaction may cost Wal-Mart mere pennies, but the savings could be substantial because of Wal-Mart's huge volume. “What happens here is the industrial bank will process these transactions,” a Wal-Mart spokesperson tells Digital Transactions News. “We'll be taking money out of our left pocket and putting it into our right. We'll be passing the savings to our customers.” Spokespersons for Chase Merchant Services and First Data's merchant processing entity, First Data Merchant Services, declined to comment on the Utah venture, saying they had little information about Wal-Mart's plans. “We can't comment on specific clients, it's too early in the process,” say an FDMS spokesperson. The Wal-Mart spokesperson didn't shed much light either, but did say Wal-Mart will continue to have business arrangements with Chase and other money-center banks. “We'll be dealing with them in our relationships,” he says. Processing expert C. Marc Abbey, a partner with Linthicum, Md.-based First Annapolis Consulting, believes the potential loss of Wal-Mart's transactions will have little effect on the earnings of Chase, First Data, and any other acquirers it may use because Wal-Mart has so much clout in negotiating with vendors. “It's a big, marquee account,” he says. “It's priced at such a low level it really doesn't contribute much to scale.” Instead, Abbey believes the Utah bank is probably the first step in a Wal-Mart effort to offer more banking services to customers directly, a strategy the banking industry, nervous about competition from Wal-Mart, has thwarted in the past. “We're convinced that it has little to do with processing, although that's their public positioning, and probably has a lot to do with a broader financial-services strategy,” he says. Even so, in announcing the charter application, Wal-Mart denied it had broader ambitions for the bank. “The bank will accept limited deposits from non-profit and charitable organizations, but we have no plans to operate branch banks under this charter and it will not engage in lending of any type,” Alan Whitchurch, a Utah banker who will be the industrial bank's president, said in a statement. Wal-Mart currently has independent banks in 1,000 of its stores. Formerly known as industrial loan corporations, or ILCs, industrial banks are state-chartered entities that can be owned by commercial firms and are eligible for FDIC insurance. Utah has chartered 35 such banks, more than half the nation's total, and in mid-2004 they had assets of $108.9 billion, according to the Utah Department of Financial Institutions. Owners include such familiar names as American Express Co., Merrill Lynch, and Wal-Mart's archrival, Target Corp. Under Utah law, industrial banks can do most things regular commercial banks can, including issuing credit cards, but they can't take demand deposits if their assets exceed $100 million. ILCs have a colorful history in the credit card industry. In the early 1990s, when it still owned the Discover card and the Dean Witter brokerage businesses, Sears, Roebuck and Co. through a subsidiary bought a failed Utah thrift called MountainWest and rechartered it as an ILC in an attempt to become a big Visa issuer. Unaware until the last minute of MountainWest's new owner, Visa, which regarded Discover as a direct competitor, quashed MountainWest Financial's planned Prime Option Visa card just as it was about to hit the mails. That led to an extended court fight, but Visa ultimately prevailed in preventing a Discover affiliate from issuing Visa cards. Wal-Mart's application is pending before the Utah Department of Financial Institutions and the FDIC.