The National Association of Realtors and the American Bankers Association have come out with guns blazing against Wal-Mart’s plan to open its own bank.

The National Association of Realtors and the American Bankers Association have come out with guns blazing against Wal-Mart’s plan to open its own bank. But even the opposition of these powerful critics won’t win the day against the world’s largest retailer unless Congress closes a worrisome loophole in federal banking law.

Wal-Mart’s banking operation initially would have only five employees and occupy less square footage than the size of most new-built houses, yet critics believe its very existence would violate the necessary and traditional separation between banking and commerce and thus would threaten the strength and soundness of the nation’s banking system. NAR’s Congressional testimony against Wal-Mart’s application stated that the retailer’s bank would “lead to an erosion of the national policy against mixing of banking and commerce.”

The arguments in favor of strict separation between the two types of activities shouldn’t be taken lightly given the sad history of this issue in the United States, and the Realtors group has rightly argued that “Congress, not regulatory agencies, should resolve the clash between banking and commerce.” Yet so far, Congress hasn’t acted to counter any number of attacks on the separation doctrine. Wal-Mart’s bank may indeed be a signal for Congress to take a closer look at the issue, but without action, the new bank is likely to become a reality. As long as the federal government persists in blurring the lines between finance and commerce, it’s difficult to make the case that Wal-Mart’s intentions differ in any material respect from those of other similarly situated corporations.

That’s because Wal-Mart’s “bank” would be an “industrial loan company,” a little-known financial corporation structure that bypasses the separation of banking and commerce in federal law. Some 30 other commercial institutions already operate ILCs, according to The Economist. Among them are retailers Target and Nordstrom as well as General Electric, General Motors, Merrill Lynch, Morgan Stanley, American Express and Daimler-Chrysler, according to Wikipedia. Why would Wal-Mart’s bank be any different than the ILCs those corporations offer?

Critics suggest that Wal-Mart’s bank would hurt community banks in rural towns just as Wal-Mart’s stores have hurt small businesses in such places. This argument is difficult to credit since there is little hard evidence that Wal-Mart would expand the ILC into full-scale banking operations, and the jury may never come back with a verdict as to whether Wal-Mart’s retail stores have been a net detriment or benefit to communities where they are located. Yes, small businesses have suffered, but should that harm be attributed to Wal-Mart itself or to the local shoppers who abandoned those small businesses and flocked to Wal-Mart’s lower prices?

What’s more, Wal-Mart already offers a store-branded Discover credit card, and a number of Wal-Mart stores around the country offer money order, payroll check-cashing and money-wiring services at cheap prices. Wal-Mart also has leased space within some of its stores to local community banks, which then operate their own branches within those stores.

Wal-Mart has stated that its banking operations will be limited and specific in scope and that it will continue to expand and support the program that allows community banks to operate within its stores.

“We heard a lot of unfounded speculation and dramatic rhetoric from our critics, but most of their testimony had little to do with our application (to own an ILC),” the retailer stated.

Meanwhile, NAR and the ABA have been locked in a years-long battle with each other over whether banking institutions should be allowed to own real estate brokerage companies. The ABA’s opposition to Wal-Mart’s entry into banking seems questionable since the organization essentially has argued that it’s okay for banks to jump the finance-commerce fence into real estate, but it’s not okay for a major retailer to jump the same fence into banking.

Some 138 million consumers per week shop at Wal-Mart stores, according to the company, which reported $312 billion in sales in its recent fiscal year ended Jan. 31, 2006. What’s not clear is how Wal-Mart’s bank supposedly would hurt these consumers, even if the retailer offered retail banking services in competition with local community banks. Indeed, some consumer advocates have suggested that Wal-Mart might apply its trademark lower prices to banking services, a change that could benefit those consumers who aren’t happy with the banking services available in the marketplace today.

The obvious question behind much of the angst is whether Wal-Mart could be the long-awaited answer to much lower banking fees and perhaps even to lower cost real estate brokerage and mortgage origination services. For now, the bankers probably have more to fear than the brokers.

Marcie Geffner is a freelance reporter in Los Angeles.

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