OVER THE LAST FEW YEARS, it's become trendy for large banks to describe themselves as "financial supermarkets". A less obvious, but equally real, trend is that some of the world's largest supermarkets have earned the right to call themselves banks. And that poses a serious strategic risk for the incumbents.

While supermarkets probably don't need to worry about banks muscling in on their core business, it’s far more likely that supermarkets will become genuine competitors in the sale of credit cards, personal loans and other financial products. And with politicians preparing to vote on a bill expanding the powers of so-called “industrial loan companies” (ILCs), bankers and regulators are predicting that commercial companies will be given a backdoor route into the industry.

The prospect is worrying for some regulators and banks. Alan Greenspan has warned a number of times about the problems that could be created by a “parallel banking system” which was not subject to Federal Reserve scrutiny. And while large banks see opportunities to partner with ILCs in providing and servicing "white-label" financial products, smaller banks are concerned about the sudden emergence of strong competitors who may be able to bid for local business more effectively than the national banking titans.

In theory, any commercial company could take advantage of a rule-change for ILCs. But in practice, it is retailers that banks worry about. Retailers already have massive store networks that could easily double up as vast branch networks. Wal-Mart, the world's largest retailer, has long harboured an ambition to get into banking; small banks are concerned that it might well put them out of business in droves if it suceeds.

And retailers traditionally have a very different relationship with their customers to financial institutions – one that retailers outside the US are already exploiting to sell financial services. Sainsbury’s, a leading UK supermarket, launched a joint venture with Bank of Scotland (now HBOS) in 1997; the venture has proven successful, with customer numbers rising by 30% over the past year to reach around 1.5 million. Sainsbury's Bank chief executive Tim Pile says the nature of its customer relationships is a key competitive advantage: “Our customers come to us. We don’t have to go after them.” 

Sears Canada is taking a slightly different approach – the company announced on July 17 that it hoped to apply for a national banking charter, and received the go-ahead from its board just two days ago. But its basic proposition is similar, says a spokeswoman: “Sears is one of the most trusted companies in Canada, and we already have excellent market penetration with our store cards.” Over 80% of Canadian households currently have a Sears Canada store card, she claims.

No wonder US banks are nervous about taking on Wal-Mart. “We have no doubt that, if Wal-Mart was given the opportunity, it would do the same thing to community banks that it has done to hardware stores, to toy shops, to grocers,” says Ron Ence, director of legislative affairs at the Independent Community’s Bankers of America (ICBA). “In other sectors, they have wiped out the local competition and, in some cases, have then decided that the area is not profitable enough, and left town, leaving the community without certain services.”

Tom Williams, a Wal-Mart spokesman, dismisses bankers’ fears as “hand-waving” and “hyperbole”. He admits that Wal-Mart has made previous attempts to get into the banking industry, but he refuses to say whether the company still has any ambitions to do so, or to comment on whether Wal-Mart would avail itself of increased ILC powers to make a new move.

For now, Wal-Mart will continue providing financial services to its customers in the only ways it is legally allowed: around 800 Wal-Mart stores have in-store banking concessions, owned and provided by local institutions. The company also offers wire transfer, money order and payroll cheque services – around a fifth of Wal-Mart’s customers have no bank accounts. “I would think that, especially for our unbanked customers, there would certainly be interest” if Wal-Mart was allowed to offer full banking services, acknowledges Williams. 

Could Wal-Mart establish or acquire an ILC to get into the banking business? Although ILCs have have been around for decades, they've only become controversial recently. Prior to 1987, explains Bob Davis, head of government relations at America’s Community Bankers (ACB), they were known somewhat confusingly as “non-bank banks” and were one of two routes through which commercial companies could perform certain banking activities. (The other was the thrift, or savings and loan, charter, shut down in 1999 by the passing of the Gramm-Leach-Bliley act.)

In 1987, though, they were renamed as ILCs, and restrictions were imposed on their activities that meant that new ILCs could only be set up in five US states. More importantly, even if an ILC is set up, 33 states prevent institutions from establishing branches unless they have a local state charter, says Davis. So as things stand, ILCs can only establish a presence in the seventeen states with reciprocal agreements allowing so-called de novo branch banking.

Now, however, a new bill could pre-empt state restrictions on de novo branch banking – allowing both banks and ILCs to benefit. “The question is: if banks are given the authority to branch de novo into states, will that power also be given to ILCs?” says the ACB’s Davis. “Some people have suggested that there should not be an expansion of authority for ILCs, if they have commercial parents, and we support that.”

Are bankers over-reacting? Banks in Canada and Europe are having to fend off competition from retailers – why shouldn’t the US industry accept some fresh competition? Competitive arguments don't win US banks much sympathy from Donald Powell, chairman of the Federal Deposit Insurance Commission, which regulates many of the banks that are likely to be most affected. “While I understand the anxiety some people have on this issue, fear of competition should not be the compelling argument in formulating good public policy,” Powell told a conference in May.

The ICBA’s Ence, though, says competition isn’t the problem. “Community banks look out for their local businesses and put money back into the area. If they are displaced by Wal-Mart Bank, money won’t stay in the community. It will go back to headquarters in Arkansas, and we think that’s very bad for the community.”

To date, Wal-Mart’s efforts to get into banking have all been unsuccessful. A proposed joint venture with Toronto-Dominion Bank was blocked by regulators, says Ence, while an attempt to buy a thrift was foiled when Gramm-Leach-Bliley was signed into law. Last year, Wal-Mart was rebuffed again when it tried to buy an ILC in California. State legislators passed a new law specifically to prevent the acquisition, he says.

Given that background, it seems unlikely that Congress will now allow Wal-Mart into banking, but Williams claims that the company is not frustrated when it sees its peers overseas entering a business which it has tried so hard to get into. “There are a lot of things in Europe that are interesting,” he says, “but here we are in the US and we accept what we have here.”

If Congress votes through the ILC bill without amendments – which could happen before the summer recess, says ACB’s Davis – bankers will find out whether Wal-Mart is ready to revive its stymied ambitions.

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