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In Praise of Banking at Big-Box Stores
In Praise of Banking at Big-Box Stores
July 23, 2013
Originally published in The Wall Street Journal
Cowritten by Research Associate Kyle Tassinari
Here's some good financial news for millions of Americans: The provision in Dodd-Frank that imposed a three-year moratorium on banks affiliated with nonfinancial businesses expired this week. Now, if Congress simply does nothing and regulators apply the law fairly, Wal-Mart WMT +0.87%could begin offering affordable credit, savings accounts and CDs to consumers. So could Home Depot HD +0.24%and Berkshire Hathaway, BRKB -0.61%both of which applied for a charter to offer banking services before Dodd-Frank took effect.
Opponents—including established banks big and small—will no doubt scream about the risks of allowing nonfinancial firms to enter the banking world. In the mid-2000s, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan might have brushed off concerns about subprime mortgages, but they warned about the supposed dangers of breaching the "separation of banking and commerce." Yet most other countries have no such separation.
When Dodd-Frank was enacted in 2010, the United States joined just three other countries—the economic powerhouses of Fiji, Guernsey and the Isle of Man—as the only jurisdictions prohibiting new charters for banking affiliates of commercial firms, according to a 2011 Milken Institute study.
Yet successful banks owned by nonfinancial firms exist all over the world. While Wal-Mart was barred from financial services in America, it operated a full-service bank in Mexico and a bank that issues credit cards in Canada. The Loblaws supermarket chain has a banking unit, President's Choice Financial, which earned J.D. Power & Associates' highest customer satisfaction rating from 2007 to 2011 among Canadian midsize banks.
Perhaps the most successful example of a bank affiliated with a commercial enterprise is the banking division of Tesco, TSCO.LN -0.24%the British grocery and general merchandise retail chain. In 1997, Tesco entered a joint venture with Royal Bank of Scotland RBS.LN -0.39%to create Tesco Personal Finance. In 2008, when RBS was hit hard by the financial crisis, Tesco bought out its partner's stake and became sole owner of the renamed Tesco Bank.
Tesco Bank currently has more than £5.57 billion ($8.6 billion) in outstanding mortgages, personal loans and credit-card debt to British residents. In addition, 12.5% of credit-card transactions in the United Kingdom are charged on Tesco cards and one pound out of every eight withdrawn from a cash machine comes from a Tesco ATM, according to the Daily Telegraph newspaper. Tesco Bank also offers insurance to more than 1.5 million home and auto policy holders.
In 2009, Alistair Darling, then chancellor for the exchequer in Gordon Brown's Labour Government, praised Tesco's initiatives and made the case for new types of banks. "We need more competition in the banking sector," Mr. Darling said. "It is therefore very important that we do everything we can to encourage new entrants into this sector."
More banking competition serves another important interest. In order for large firms to fail in any industry without significant disruption elsewhere, there must be new and competing firms ready to supply the product or service.
By the time Borders and Blockbuster went bust, Amazon and Netflix had grown large enough to sell books and DVDs to a large national customer base. By contrast, if a megabank fails, there is a very real possibility that the supply of credit and financial services will be constrained. That concern can be eased greatly if large commercial businesses could create banking units.
Internationally and in the U.S.—where about 15 such grandfathered banks exist—the safety and soundness of banks owned by commercial firms exceeds that of the banking sector as a whole. According to the Milken Institute, U.S. industrial loan companies, the most common classification for such banking entities, "in the aggregate have a significantly higher ratio of capital to assets (16.7 percent) than the banking industry as a whole (11.3 percent)." Industrial loan companies owned by nonfinancial firms also "have the lowest percentage of troubled assets of all banks (2.35 percent)."
The banking subsidiaries of Target, Harley-Davidson HOG +0.59%and Toyota are examples of such companies that have been in existence for decades and extend credit mostly to their own customers. For safety, convenience and price, the U.S. needs to join the rest of the world and allow nonfinancial companies to own and operate banks.