The Federal Advisory Council, a body of bankers that includes PNC Financial Services Group Inc. (PNC) and BB&T Corp., said at a Dec. 19 meeting that Wal-Mart’s sales of prepaid cards warranted greater federal oversight. Minutes of the meeting were obtained yesterday under the Freedom of Information Act.
“Wal-Mart has sought to enter banking formally for over a decade,” council members told the Fed, according to the meeting minutes. “Faced with opposition, Wal-Mart now appears to have entered banking through the back door, without the regulatory framework that applies to banks.”
The minutes outline bankers’ views on Wal-Mart’s entry into services that they traditionally provided to consumers, as well as their concern that a new competitor might face less stringent oversight by the government.
The council urged the Fed to consider limiting payment-related services to “regulated banking institutions,” or at least step up its study of the business. It also said the Consumer Financial Protection Bureau, created by the 2010 Dodd-Frank law, should supervise non-bank companies that provide financial services.
The bank push for oversight of Bentonville, Arkansas-based Wal-Mart’s prepaid card business marks the latest chapter in a long fight over whether the retail giant should be allowed to offer more financial services.
Banks, labor unions and community groups united in 2005 to oppose Wal-Mart’s application to open a limited-service, Utah-based bank, a bid the retailer eventually dropped. Retailers including Wal-Mart, Target Corp. (TGT) and Home Depot Inc. (HD) successfully fought the banking lobby in 2010 and 2011 to obtain Fed curbs on debit-card swipe fees, known as interchange, that they pay to banks.
In 2011 banks asked the consumer bureau to designate Wal-Mart as a “larger participant” in financial services, a label that would lead to direct supervision by the agency.
Since then, Wal-Mart has expanded its presence in financial services by marketing a prepaid card, called Bluebird, in partnership with American Express Co. (AXP) Together with a similar card offered by JPMorgan Chase & Co. (JPM), the product has re-ordered the prepaid market.
“The financial services products offered at Wal-Mart stores are properly regulated,” Deisha Barnett, a Wal-Mart spokeswoman, said in an e-mail yesterday. “In many cases, the regulated entity is the financial services partner.”
The banks argued that the Wal-Mart is selling what is marketed as a “debit and checking alternative” that competes with traditional bank accounts but has a regulatory advantage.
Prepaid cards are exempt from the Fed’s interchange rules. As a result, the exemption “appears to permit Wal-Mart, a strong proponent of lower debit interchange rates, to benefit indirectly from the very thing it opposed: unregulated interchange,” the banking council told the regulator.
The bankers also portrayed Wal-Mart as part of an emerging “shadow banking” system in which financial services are provided outside the system of traditional depositories. Companies that provide check cashing, bill payment, money transfers and prepaid cards are effectively competing with banks, the council argued.
“Regulators should ensure that there is a level playing field for all financial intermediaries to make sure that risks are properly monitored and regulated,” the council wrote.
The term “shadow banking” came into widespread usage around the time of the 2008 financial crisis. It is often used to describe the system of mortgage origination and securitization that bypasses traditional banks.
To contact the reporter on this story: Carter Dougherty in Washington at firstname.lastname@example.org