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The US House of Representatives has voted overwhelmingly – 371-16 – in favor of legislation that would prevent non-financial services companies such as Wal-Mart from owning industrial banks, which as federally insured institutions that can take deposits, make loans and issue credit cards.

The issue became important last year when Wal-Mart applied to the Federal Deposit Insurance Corporation (FDIC) for approval to open just such a bank, which it said that it planned to use solely to reduce the transaction fees it pays to outside banks on credit and debit card payments made at its stores. However, the application caused a firestorm of protest from within the banking industry, which said that such an approval would blur the lines that separate commercial and financial services companies.

The FDIC, being a government institution, punted. It simply set a moratorium on consideration of such applications, and Wal-Mart eventually withdrew its proposal last March…though statements by company officials suggest that they have not given up on the idea that owning an industrial bank would be good for business.

The bill approved by the House would also affect Home Depot, which has a similar application before the FDIC.

However, passage by the Senate – necessary before it can be sent to President Bush for consideration – is by no means a certainty. A similar bill passed the House last year, but stalled in the Senate.
KC's View:
No matter what the bankers say, we continue to believe that they worked overtime to block the bill because they didn’t want to compete with Wal-Mart, which they feared would bring its “always low prices” to the financial services sector…and therefore upset the rather profitable apple cart these guys have been pushing around for years.

Discount department stores didn’t get protection from Wal-Mart. Nor did supermarkets, or convenience stores, or craft shops, or gas stations or drug stores – all industries that have been significantly hurt by Wal-Mart’s aggressive expansion strategies.

We do think that certain protections would have to be put into place to make sure that Wal-Mart’s influence in financial services didn’t put its competitors at a disadvantage when they need to borrow money or establish a relationship with a financial institution. But by keeping Wal-Mart and its brethren out of the business altogether, we’re not sure that the Democratic-controlled Congress is doing consumers a big favor.