Banks vs. Wal-Mart: Round Two

When last we checked in on the banking industry’s fight with retailers over the Dodd-Frank Act, the banks had lost their battle against caps on debit-card fees. Now U.S. lenders are squaring off against the world’s largest retailer, Wal-Mart Stores.

The banking industry is arguing that the Consumer Financial Protection Bureau, created by Dodd-Frank, should be able to regulate Wal-Mart, because the retailer qualifies as a so-called larger participant in financial services under the act. The new agency must issue a rule on larger participants in less than a year and had requested public comments by Aug. 15. “If you’re going to play in the financial sector, you play by the rules,” says Richard Hunt, president of the Consumer Bankers Assn., a lobby group that represents retail banks.

Banks have tried for more than a decade to slow Wal-Mart’s moves into finance, fearing its ability to underprice rivals. The financial industry, along with unions and community groups, fought against the company’s bid in 2005 to secure a banking license that would have allowed it to accept deposits and issue credit cards. The company eventually dropped the application.

Even so, Wal-Mart has become a significant player in consumer finance. It operates MoneyCenters in 1,800 U.S. stores offering services such as money transfers, bill payment, and prepaid debit cards. Self-service kiosks in many other outlets let customers reload their debit cards. On Aug. 8 the company said it is expanding check cashing to virtually all of its more than 4,300 stores in the U.S. Wal-Mart’s financial-services division “experienced double-digit growth,” said William S. Simon, the president and chief executive officer of Wal-Mart U.S., in an Aug. 17, 2010, conference call.

Wal-Mart does have banking licenses in Mexico and Canada. Launched in 2007, Banco Wal-Mart has 263 in-store branches in 31 Mexican cities, according to a Mar. 15 statement from the company. In Canada, rollout of Wal-Mart Rewards, a MasterCard credit card, is “performing ahead of plan,” according to the company’s Canada spokesman Andrew Pelletier.

Elizabeth Warren, the Obama Administration adviser who organized the Consumer Protection Financial Bureau, hinted that Wal-Mart would fall under the agency’s supervision at a meeting with industry and consumer groups in early July, according to one person who attended and spoke on condition of anonymity because the session wasn’t public. Wal-Mart spokesman Greg Rossiter declined to comment on the retailer’s treatment under Dodd-Frank, as did Jen Howard, a Consumer Financial Protection Bureau spokeswoman.

Like Wal-Mart, consumer banks are vying for the business of lower-income people. “Everybody shops there at some point, but a lot of consumers who are traditionally unbanked or underbanked have a higher propensity to shop at Wal-Mart,” says Madeline K. Aufseeser, a senior analyst at Boston-based researcher Aite Group. A 2008 study by Aite found that Wal-Mart had 11 percent of the market for check-cashing, with plenty of room to expand. Natalie Berg, co-global research director at Planet Retail in London, says that in its finance operations the retailer has “been able to capitalize on the down economy, leveraging its scale to offer consumers better rates than its competitors while still reaping a sizeable margin.”

Nonbank firms that compete with Wal-Mart in check cashing and other services say they expect greater oversight from the consumer protection bureau and want Wal-Mart to face the same rules. “As long as we’re not singled out, we get that,” says Bill Sellery, executive director of the Financial Service Centers of America, which represents outlets that cash checks, pay bills, and transfer money. “But we want everybody covered.”

The 36 branches of Miami-based Check Cashing USA already are subject to oversight by Florida financial regulators, while Wal-Mart falls under the state exemption for large retailers. Joe Doyle, Check Cashing USA’s owner, has watched over the past decade as Wal-Mart has expanded into his business, advertising that it would cash checks for $3, while Doyle was charging an average of 2 percent of the check’s value. “Competition is good,” Doyle says. “It keeps people on their toes, as long as it’s a level playing field.”

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