Frank Says ILC Legislation Still Necessary Even After Wal-Mart Withdrawal

Despite Wal-Mart's withdrawal of its application for an FDIC-insured ILC charter, Rep. Barney Frank, Chairman of the House Financial Services Committee, thinks federal legislation regarding Industrial Loan Corporations is still necessary. In a statement posted to the committee's website, Frank said:

I appreciate the constructive step by Wal-Mart not to pursue an ILC
charter, but it does not in my judgment, remove the need to legislate in this area.

In addition, the committee now lists the March 22, 2007 hearings on H.R. 698, the Industrial Bank Holding Company Act of 2007 on its website, although no information on witnesses is provided.

I wonder if Wal-Mart was invited.

Wal-Mart Withdraws Application for Bank Approval

Wal-Mart withdrew it's application for an Industrial Loan Charter today. The retailer issued the following press release:


BENTONVILLE, Ark., March 16 /PRNewswire-FirstCall/ -- Wal-MartFinancial Services President Jane Thompson released the following statement today: "We notified the FDIC today that Wal-Mart has withdrawn the application we made in July 2005 for an Industrial Loan Company (ILC) charter. "This action follows January's FDIC decision to extend the moratoriumon a number of pending ILC applications. "Unlike dozens of prior ILC applications, Wal-Mart's has been surrounded by manufactured controversy since it was submitted nearly twoyears ago. At no stage did we intend to use the ILC to establish branchbanking operations as critics have suggested -- we simply sought to reduce credit and debit card transaction costs. "Wal-Mart's financial services already save customers over $245 milliona year so they can live better. Since the approval process is now likely totake years rather than months, we decided to withdraw our application tobetter focus on other ways to serve customers. We fully intend to continueto introduce new products and services that champion those who deserveconvenient, lower priced financial services."

Philly FRB Examines "Cost Hurdles" to Increased Acceptance of Prepaid Cards

The Payment Card Center at the Federal Reserve Bank of Philadelphia has released a discussion paper entitled General-Use Prepaid Cards: The Path to Gaining Mainstream Acceptance. Authored by James C. McGrath, this though-provoking paper examines the prepaid card market, where it works, where it hasn't been as successful, and offers some ideas as to particular applications have fallen into the second category rather than the first.

Clearly, general-use prepaid cards show promise, both to reduce costs and inefficiencies in existing applications and to provide cost-effective and flexible financial service alternatives to a large market of underserved consumers. At the same time, they face some unique challenges that must be addressed as the product matures. Some of these challenges stem from the newness of the product: Consumer protections and regulatory oversight remain in the early stages. Other gaps pertain more to the business model. For example, while prepaid cards may provide attractive options to many paper-based applications, many programs are themselves quite complex and costly and require operational and technological sophistication. Last, some functional limitations need to be addressed in order to improve usability and spur adoption.

The paper will address these challenges in turn. First, it will note the perceived vulnerability of prepaid cards to money laundering and will discuss other relevant regulatory issues. It then examines the profit function within the business model, looking at factors affecting costs and revenues. Finally, it addresses two issues that may accelerate consumer adoption: payroll card portability and improved and extended reloadability options. Generally, the paper finds that initiatives are already underway or that others likely to be implemented will address many of these challenges. Doing so should strengthen the value propositions underlying a number of the product applications discussed and lay the groundwork for future prepaid innovations.

This paper follows on a paper released by the PCC last month which examined money laundering risks associated with prepaid cards: Prepaid Cards: Vulnerable to Money Laundering?

Ohio Rep. to Reveal Secret -- Wal-Mart Wants a Bank

Today's New York Times reports that Rep. Paul Gillmor (R-OH) is planning to release information which reveals Wal-Mart has a grand plan to begin providing financial services to the public. Well, kinda sorta. What he has is a copy of undated email which suggests that Wal-Mart was revising leases with tenants that are banks to reserve the right to offer financial services itself.

In an interview last night, Mr. Gillmor said the Wal-Mart was including a clause in some tenant leases that would allow the company to some day expand its banking operations. Wal-Mart currently offers branded credit cards, check cashing and other services through partnerships with financials [sic] institutions.

The retailer claims that nothing nefarious is going on.

A Wal-Mart spokeswoman confirmed last night that the company had updated some of its tenant leases late last year to include the language in question but implied that it had been an option all along.

“There is nothing new here,” the spokeswoman, Mona Williams, said. “While we recently updated language in our leases, similar language has been in our agreements for at least five years.”

Gillmor's bombshell comes before next week's hearings before the House Financial Services Committee on the subject of corporate ownership of Industrial Loan Corporations. Emoolaw reported on those hearings earlier this week. Unfortunately, there's still no witness list posted on the committee's web page, so we don't know what exactly what subjects those hearings will cover.

There are valid safety and soundness reasons for keeping general commercial firms out of the business of banking. But dozens of big corporations already own ILCs and have been approved for FDIC insurance. There are perfectly legitimate reasons for a retailer like Wal-Mart to want to own an FDIC insured ILC -- most notably, the ability to "acquire" credit card transactions on its own. Retailers currently pay banks a hefty fee for access to the credit card networks, even though the bank often just turns the business over to a processor. By being its own bank, a retailer can significantly reduce the cost of accepting credit cards. It's unclear to me why Wal-Mart should be denied that business opportunity while many other big corporations get direct access to this important payment mechanism.

The hearings next week should focus on the legal and economic issues and avoid the drama of psuedo-spectacular revelations like Gillmor's email. The policy discussion here should be about access to payment systems, supervision of financial institutions and the modern definition of "the business of banking." Let's hope that House members can avoid the "Is Wal-Mart Good or Evil" debate.

Sen. Chris Dodd Suggests Legislation Necessary to Curb Credit Card Abuses

In a speech on Tuesday to the National League of Cities, Senator Chris Dodd (D-CT) suggested that legislation would be necessary to curb abuses of credit card issuers.

I'm a strong advocate of credit cards; don't misunderstand me. But the abuse by the financial institutions in making it impossible for people to get out from underneath these financial problems is causing us serious, serious problems. We've already had hearings on this, and my hope is that we'll pass legislation that'll prohibit some of the practices that have made it so difficult for people to manage their financial affairs in a more solid and safe way.

It will be interesting to see what action Dodd takes on this issue in the Senate.

Rep. Frank to Hold Hearings on ILCs

The American Banker reported on Monday that the Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, will hold hearings on March 22 on whether to close "the loophole" that allows general commercial firms to own a type of financial institution known as an Industrial Loan Corporation. At the time of this writing, there is no mention of the hearings on the Committee's website.

Frank and Rep. Paul Gilmour (R-OH) have introduced the Industrial Bank Holding Company Act of 2007 (H.R. 698) which would put an end to the practice. Frank and Gilmour proposed similar legislation in the prior Congress, but the issue has taken on new steam with the recent application by Wal-Mart to purchase an ILC. That request prompted the FDIC to extend a moratorium on applications by ILCs for deposit insurance. In explaining its actions, the FDIC noted:

In 2006, the FDIC received more than 13,800 comment letters regarding the proposed Wal-Mart Bank’s 2005 deposit insurance application. Most of these comments expressed opposition to granting deposit insurance with respect to this particular applicant; however, some commenters raised more universal concerns about industrial banks. Over 640 of the more general comments were specifically focused on the risk posed to the deposit insurance fund by industrial banks owned by commercial companies or by holding companies without a Federal consolidated bank supervisor.

For its part, Wal-Mart has expressed an interest in owning an ILC in order to provide cheaper and more convenient financial services to its customers. Business Week covered the story well when Wal-Mart first expressed interest in entering the banking world back in 2005.

Kmart Settles with FTC Over Gift Card Practices

The Federal Trade Commission announced yesterday that it had entered into a consent order with Kmart regarding certain of the retailer's practices regarding its gift card program. This is the FTC's first law enforcement action concerning gift cards.

The FTC alleged that Kmart failed to disclose a dormancy fee it charged holders of its gift card. After 24 months of nonuse, Kmart levied a $2.10 per month service fee for each inactive month, retroactive to the issuance of the card. That means if you didn't spend your card in 2 years, Kmart would "zap" $50.40 from the balance of the card. This retroactive dormancy fee was often not disclosed before purchase, or was explained in tiny type or in text obscured by packaging. In addition, Kmart advertised that their gift cards function like cash and "never expire."

Under the consent decree, Kmart agrees to clearly and prominently disclose expiration dates and fees associated with its gift cards. In addition, Kmart will not attempt to collect dormancy fees on any cards issued prior to the consent order and will create a mechanism by which consumers who were charge such fees make seek reimbursement. The consent order does not constitute an admission of guilt by Kmart.

The consent decree was approved by the Commission on a 5-0 vote. Commissioners Harbour and Leibowitz, however, wrote separately stating their opinion that the order does not go far enough and that Kmart should be required to disgorge profits it made collecting the dormancy fees.

The FTC will accept public comments on the consent order through April 10, 2007 after which it will decide whether to make the order final.