Wal-Mart Wants to Own Processing Bank

  Wal-Mart Stores Inc. ratcheted up the pressure on the payments industry in July, applying to operate an industrial bank based in Utah.
  The world's largest retailer would use the bank as its link in the complicated chain of processing credit cards, debit cards and electronic checks, says Jane Thompson, president of Wal-Mart Financial Services. Wal-Mart reported it handles about 140 million of these payments monthly.
  Wal-Mart would use the bank as its bank identification number, or BIN, sponsor of payment card transactions into the electronic payments network. Regulations require that an insured depository institution sponsor such transactions. The BIN sponsor charges the merchant a fee per card transaction, so the Wal-Mart institution would be paying itself for the service.
  Observers speculate that Wal-Mart's eventual goal is to offer retail banking at its stores, a concept that strikes fear in the hearts of community bankers. Wal-Mart already offers payroll check cashing, money orders and money transfers. Additionally, banks have branches in about 1,000 of its stores through contracted deals.
  Thompson, however, emphasizes that Wal-Mart wants to use the Utah operation only for processing of cards and not to run a retail bank. Wal-Mart had total U.S. sales in fiscal 2004 of $191.8 billion at its 1,276 Wal-Mart stores, 1,713 Supercenters, 557 Sam's Clubs and 95 Neighborhood Markets.
  Wal-Mart's two previous plans to buy banks were shot down in California and Oklahoma by state politicians. The Independent Community Bankers of America fought those plans, saying it was concerned about mixing merchandise and banking. The organization of smaller banks had not yet opposed Wal-Mart's newest application but noted it would be watching developments.
  Wal-Mart applied to operate an industrial loan corporation, an entity that can issue credit cards, take deposits and make loans. ILCs cannot offer a standard checking account if its assets exceed $100 million.
  Wal-Mart is seeking approval from the Federal Deposit Insurance Corp. and the Utah Department of Financial Institutions. The FDIC reports there are 59 ILCs operating in seven states, with 31 chartered in Utah. Major lenders operating ILCs there include American Express, Merrill Lynch, Morgan Stanley, a bank arm of retailer Target, and the finance side of automakers BMW, General Motors, Volks- wagen and Volvo.
  If Wal-Mart receives approval, it could be in operation in three to four months, according to Thompson.
  Down the road, Wal-Mart theoretically could expand use of the bank to be its own merchant acquirer and possibly even its own processor. But those roles require resources the retailer may not be willing to commit, says Robert Dodd, an analyst that follows card processors for Morgan Keegan.
  "It's harder, longer and more expensive to process than just cutting out the BIN sponsorship," says Dodd. It was not clear how much Wal-Mart could save by using its own bank for processing.
  Wal-Mart's BIN sponsor is J.P. Morgan Chase & Co., its merchant acquirer is Chase Merchant Services and its processor is the First Data Merchant Services division of First Data Corp., says Dodd. First Data and Chase co-own Chase Merchant Services.
  But Wal-Mart is trying out others, especially as debit cards surpass credit cards in consumer use.
  Adam Frisch, an analyst following major processors for UBS Investment Research, says Wal-Mart has begun using BA Merchant Services for a direct link to Visa USA's Interlink PIN-based point-of-sale debit network.
  Dennis Bouchard, Wal-Mart director of payment services, said at a May Federal Reserve conference that Wal-Mart's PIN-debit transaction volume is growing 17% per year and is second only to cash as a payment method used by customers.
  Wal-Mart has challenged some of the card industry's sacred cows. It was a leader in a merchant class-action lawsuit that in 2003 led to the end of the honor-all-cards rules of Visa and MasterCard International. Those rules required merchants that accepted one payment type from the associations to accept all of their branded payment types.
  Wal-Mart also has loudly complained about the interchange fees that the card associations set for card acceptance. Acquirers typically pass on their interchange expenses to their merchant clients.
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