Coming Soon: The Bank of Wal-Mart?

Retail giant Wal-Mart has applied to get into the banking business. Reporter Alix Spiegel examines Wal-Mart's move, and the reasons behind the historical separation of commerce and banking.

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BRAND: This is DAY TO DAY, I'm Madeleine Brand. Wal-Mart wants to become a bank. It needs the approval of the FDIC, which is holding a second set of hearings next week. Wal-Mart has said repeatedly that it does not want to enter so called traditional consumer banking, like offering checking accounts or home loans. Instead, the company said it wants to save money by processing credit card transactions and cashing checks. Wal-Mart's critics though, are not convinced. NPR's Alix Spiegel reports on the pros and cons of a Wal-Mart bank.

ALIX SPIEGEL reporting:

It's one of the bitter ironies of life that it often costs more to be poor than to have money. Exhibit A is banking. Back when she was flush, Dola Turner(ph) of Washington, D.C. didn't have to pay to cash her weekly check. At the bank where she had an account that service was free. But then Turner fell on hard times, had to close her account, and now each week she visits the neighborhood check cashing business, a grim store front with bulletproof glass where she pays top dollar to get access to her own money.

Ms. DOLA TURNER: A weekly check for $450, costs me about $20, close to $20.

SPIEGEL: $20, that's more than four percent of her income; a huge portion.

Ms. TURNER: It makes a dent.

SPIEGEL: There are millions of people like Turner, poor men and women who pay exorbitant fees for activities most of us get for free. And the people who support Wal-Mart's application to become a bank often point to the fact that Wal-Mart, through virtue of its relentless cost-cutting, could ultimately provide these services at rock-bottom prices to the people who need them most, and in the process drive down costs for the rest of us. That, anyway is what former Labor Secretary Robert Reich says.

Mr. ROBERT REICH (Former Secretary of Labor): Now, don't get me wrong I don't personally like Wal-Mart; I don't shop at Wal-Mart; I don't like their labor practices; Wal-Mart is not, by any stretch of the imagination, my favorite retailer. But, on the other hand, give it credit; it gets prices down.

SPIEGEL: So why do many people argue that letting Wal-Mart bank is dangerous, not just to the banking industry but potentially to the stability of the American economy. The answer is that allowing Wal-Mart to bank would mean abandoning one of the basic rules that has governed the American economy since the early twentieth century, the separation of banking from other forms of commerce. To understand why it's important to separate banking from, say, selling home appliances, you need to go back to one of the nation's most searing traumas. Here's Anthony Plath, a Professor of Economics at the University of Carolina.

Professor ANTHONY PLATH (Professor of Economics, University of Carolina): In 1929 you know the stock market essentially collapsed, and in the wake of the stock market collapse many banks in the United States failed.

SPIEGEL: In the grim years that followed, economists and politicians spent a lot of time trying to figure out what had gone wrong, and one of the conclusions they came to was that banks needed more restrictions. Specifically, they decided it was dangerous to allow banks to mess with the stock market. And so Congress passed a law called the Glass-Steagall Act. Again, Anthony Plath.

Prof. PLATH: Glass-Steagall essentially laid the premise, or it laid the foundation that by combining different forms of business with a bank you get more risk.

SPIEGEL: Glass-Steagall was the beginning, but it wasn't the end. In the 50s Congress passed another bill restricting banks. At that time, banking in American was a very local business. Most towns in the U.S. had just one bank, and people worried that if banks were allowed into commerce, allowed, say, to open a shoe business, then when Joe Smith down the way walked into the bank to start his own shoe store, the bank would turn down his loan. Why would a bank give money to someone to compete with them? Looking at it in reverse, there's also a problem. Anthony Plath points out that when companies are allowed to act as banks they can generate money with no interest.

Prof. PLATH: It creates an unlevel playing field because commercial companies that can raise money in the way of deposits have an unfair advantage in raising cheap money.

SPIEGEL: This is why Congress decided it was important to pass yet another law, one that underlined the separation proposed by Glass-Steagall.

Prof. PLATH: The Bank Holding Company Act of 1956 extended that separation and said it's an additionally bad idea to combine commercial banking with commerce.

SPIEGEL: And this is the way it was for decades. The solid wall between banking and commerce stood and protected. Protected maybe too well. Tom Bliley, who at the time was a Congressman from the State of Virginia said that in the late 70s people began to notice that American banks were falling behind.

Mr. TOM BLILEY (Former Representative, Virginia): We were concerned that our banks were going to lose out in global competition to European banks and Asian banks. People began to realize, yes, I'm protected because of this Bank Holding Company Act in the short term, but long term we need to be able to compete.

SPIEGEL: And so opinion began to shift. Slowly the desire for protection gave way to the desire for profitability. And finally in 1999 Congressman Bliley put his name on a bill, which fundamentally changed the rules.

Mr. BLILEY: What our bill did was abolish Glass-Steagall.

SPIEGEL: Suddenly banks were allowed to get involved in brokerage, in investment, insurance; the lines began to blur and they continue to blur. Again, Tom Bliley.

Mr. BLILEY: Now, the banks want to get into real estate loans. Of course, the realtors are fighting that tooth and nail, but my guess is, that in time, the banks will get into it.

SPIEGEL: And while banks are banging down the door separating them from commerce, companies are trying to wheedle their way into banking. Over the last 20 or so years a handful of large corporations have used a loophole in the law to establish what's called Industrial Loan Companies which allow them to conduct a limited number of banking activities. Professor Anthony Plath.

Prof. PLATH: I mean there are a several examples of that. General Motors is one. Target is another. Pitney Bowes is a third.

SPIEGEL: Now Wal-Mart wants to join their ranks, further threatening the separation between banking and commerce. Part of the danger, critics say, is that banks are insured by the Federal Government which means that if, in some future world, companies like Wal-Mart expand their service to include commercial banking and then make critical mistakes on the business side that threaten their company, the taxpayers may be left to clean up the mess. Congressman Tom Bliley is now working on behalf of the coalition of community banks.

BLILEY: Take Enron, suppose they had a bank. Suppose WorldCom had had a bank. Those companies are gone. Companies big and small come and go; banks are meant to be a thing of stability.

SPIEGEL: Despite these dangers, most of the experts consulted by NPR said that they believe Wal-Mart will ultimately find a way to push itself into full service banking. Here's Anthony Plath.

Prof. PLATH: It's not a question of, you know, if Wal-Mart is going to become a Bank. It's a question of when. Wal-Mart's going to be a bank.

SPIEGEL: Perhaps a Wal-Mart bank could help poor people. As Robert Reich believes. Perhaps, as opponents of the application suggest, it will ultimately undermine community banking. But without question a Wal-Mart bank would mean the end of the separation between banking and commerce. The separation that has likely contributed to the stability of the American economy for close to a century.

Alix Spiegel, NPR News, Washington.

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