US: Wal-Mart's New Jersey ATM sparks cries of foul from wary banks

In Kearny, New Jersey, a 20-minute drive from Manhattan, a Wal-Mart-branded automated teller machine is reigniting fears among small banks that the world's largest retailer wants to drive them out of business.

Wal-Mart Stores Inc. leases space to banks operating 1,100 branches within its 3,230 U.S. discount stores and supercenters. The company pledged when it applied for a bank charter a year ago that it wouldn't open its own branches. The Sound Banking Coalition, a Washington-based lobbying group, and some legislators aren't buying it.

They point to the ATM in Kearny -- part of what Wal-Mart calls a test -- and to Wal-Mart's July 2005 application to open a Utah-chartered bank to lower its cost of processing payments from credit and debit cards. Local bankers like Brad Williams, president of Security Bank of the Ozarks, say ATMs are a wedge that might allow Wal-Mart to start branch banking and terminate local-bank leases.

``Wal-Mart has really hurt the small-town businesses and they will do the same thing with banking,'' said Williams, 59, whose bank based in Eminence, Missouri, has two branches -- neither in a Wal-Mart -- and $50 million in assets.

Representative Barney Frank of Massachusetts, the ranking Democrat on the House Committee on Financial Services, and Representative Paul Gillmor, a Republican on the panel, introduced a bill this week to bar non-financial companies from operating banks. One provision would require companies that received charters after June 1 to divest themselves of banks within two years unless at least 85 percent of their revenue comes from financial services.

The proposal would also bar non-financial companies that already operate banks, including No. 2 discount chain Target Corp., from offering new services. Target opened its bank in 2004 to issue credit cards to small-business customers.

A hearing on the Frank-Gillmor bill is scheduled for today.

Last month, Frank, 66, sent a letter to Wal-Mart asking it to expand to cash machines its pledge not to open its own branches. Frank's office says Wal-Mart hasn't responded.

The New Jersey ATM ``undercuts their argument that they're not interested in banking,'' Frank said in an interview. ``It shows that they have ambitions far beyond just processing their own paper.''

Wal-Mart spokeswoman Tara Raddohl said the Bentonville, Arkansas-based company has no intention of entering retail banking. Wal-Mart says a bank charter makes sense because it will lower the cost of letting customers pay with cards.

Raddohl said Wal-Mart is testing the Kearny machine and others to make services such as ordering gift cards more convenient. Wal-Mart owns and operates the cash machines in its test program, except where state law stipulates it has to partner with a financial institution, she said. She declined to provide the number of machines in the pilot.

The Kearny cash machine bears a green ``Wal-Mart Money Center'' logo. It sits at the front of the store, next to a portrait studio and near the checkout lines.

In addition to processing gift cards, shoppers can withdraw cash from their local accounts for no fee, buy phone cards and pay Wal-Mart credit-card bills. The free cash withdrawals undercut some local banks. People who aren't customers of Security Bank of the Ozarks pay a $2 fee to use the bank's teller machines.

Among the banks leasing space at Wal-Marts are Domestic Bank in Cranston, Rhode Island, and Cornerstone Bank of York, Nebraska. At 98 SunTrust Banks Inc. branches in the retailer's stores, signs say ``Member, Wal-Mart Financial Services Network'' underneath the bank's logo, SunTrust spokesman Mike McCoy said.

Doug Kantor, a lobbyist for the Sound Banking Coalition, a group that favors restrictions on banks owned by non-financial companies, said such co-branding accustoms shoppers to thinking of the retailer as a source for financial transactions.

How easily Wal-Mart can break its bank-branch leases has been a matter of concern for critics. In a May 25 letter to Frank, Wal-Mart's financial services president, Jane Thompson, said 89 percent of Wal-Mart bank leases last for 15 years, with some as short as two years.

Kantor said Wal-Mart's history of expansion indicates it's only a matter of time before it moves into retail banking.

The cash machines ``would be further evidence that they are looking to get into this space,'' Kantor said. His group's members include the Independent Community Bankers of America and the National Association of Convenience Stores.

One of every nine retail dollars spent in the U.S. last year was at Wal-Mart, excluding automobiles. Before a Wal-Mart opened near his bank, Williams said three communities each had several grocery, hardware, clothing and shoe stores. Now, only one grocery store operates in each town, he said.

Wal-Mart's banking-related moves are being closely watched. The company's Utah bid is pending. Its application for U.S. deposit insurance prompted more than 4,000 comment letters to the Federal Deposit Insurance Corp., a record. In response, the FDIC in April held its first-ever public hearings on a bank insurance application.

This year, five states have passed laws restricting the ability of industrial banks -- those owned by non-financial companies -- from opening branches, and seven others introduced or amended legislation to do so, according to the Washington- based community bankers' group.

``All of this, it can fairly be said, was a reaction to Wal-Mart's application,'' Sound Banking's Kantor said.

• 186 Financial Services, Insurance and Banking