Unfazed by Wal-Mart Pullout, Home Depot Presses on with ILC Plans

Home-improvement giant Home Depot Inc. is pressing on with its plan to get an industrial-loan corporation charter despite a hostile political environment that has only grown stronger over the weekend.

Opponents to ILC applications by commercial enterprises notched a victory Friday with Wal-Mart Stores Inc.’s decision to abandon its efforts to obtain a charter for an ILC, a form of state-authorized bank. A spokesperson for Atlanta-based Home Depot tells Digital Transactions News that Home Depot “absolutely” plans to proceed with its ILC application despite a one-year extension in January by the Federal Deposit Insurance Corp. of its moratorium on pending applications and a bill in Congress that would restrict non-financial companies from getting ILC charters. The FDIC must approve ILC charters, which empower their holders to offer many services offered by conventional banks.

“It’s a good application,” the spokesperson says. “We want to be judged on its merits. Wal-Mart did what they did.” Home Depot is attempting to get control of an ILC charter owned by a Michigan utility in part so that it can offer financing services to its contractor customers (Digital Transactions News, May 12, 2006).

Bentonville, Ark.-based Wal-Mart, in contrast, said it wanted an ILC only to lower its credit and debit card processing costs. But its July 2005 ILC application roused unprecedented opposition from banks and community groups fearful that the retailer had much larger banking intentions. Opponents gained fodder for their cause last week when they learned that Wal-Mart, in its recent leases with banks that operate branches in many of its stores, reserved the company’s future right to offer an array of financial services, including mortgages and home-equity and consumer loans, according to press reports.

The protests that began in 2005 spurred the FDIC last year to hold its first-ever hearings on ILC charters. It also imposed and then extended the moratorium on ILC applications as opposition in Congress mounted. H.R. 698, offered by U.S. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, and U.S. Rep. Paul Gillmor, an Ohio Republican and ranking member of the House Financial Institutions Subcommittee, would close what the legislators call an “ILC loophole” that lets commercial entities own financial-services companies. A hearing is set for Thursday.

“We’re not in support of that bill,” says the Home Depot spokesperson. “We would hope for a compromise.” In withdrawing Friday, Wal-Mart said the approval process seemed likely to drag on for years. “Unlike dozens of prior ILC applications, Wal-Mart’s has been surrounded by manufactured controversy since it was submitted nearly two years ago,” Jane Thompson, president of Wal-Mart Financial Services,” said in a statement. “At no stage did we intend to use the ILC to establish branch-banking operations as critics have suggested; we simply sought to reduce credit and debit card transaction costs.” She added, “We fully intend to continue to introduce new products and services that champion those who deserve convenient, lower-priced financial services.”

Some merchant-acquiring executives fretted that Wal-Mart might try to take market share or drive down pricing if its ILC took over parts of its transaction-processing operations, but processing-industry analyst Joel Van Arsdale, senior consultant and director of research at Linthicum, Md.-based First Annapolis Consulting Inc., says those fears were unfounded. “I see Wal-Mart’s application, despite its specific scope, was really a broader entry into the banking industry,” he says. “It’s a very rare company that could justify their own bank for merchant-acquiring purposes. Prices are so low that it just doesn’t make sense.”

FDIC Chairman Sheila C. Bair issued a statement saying Wal-Mart made a “wise choice” in withdrawing its application. “This decision will remove the controversy surrounding their intentions,” Bair said. “They don’t need an ILC to play an important role in expanding access to financial services, they can do so by partnering with banks and others.”

According to Van Arsdale, Wal-Mart probably had word that its application stood little chance given the political climate. “You pull your application because of regulators advising you to pull it,” he says.