January 23, 2009
Reconsidering Retailers as Bankers
Now that
many large banks have put themselves in the position of having to seek
loans from the government to stay afloat, perhaps it’s time to reconsider
whether retailers should be allowed to open their own branches.
Nearly a
year ago, Home Depot announced it was abandoning its bid to get approval
to take over EnerBank USA, an industrial loan bank in
Utah. At the time, Home Depot said it was abandoning its pursuit of the
financial institution to focus on its retailing business.
Home Depot and, before
that, Wal-Mart Stores faced enormous opposition. A coalition of groups
including banks, labor unions and retailers suggested that letting these
large chains get into the banking business would put small banks out of
business and give large chains with banks an unfair advantage over their
retailing competition.
As a result of these
lobbying efforts, the House passed legislation in 2007 that would only
make industrial bank charters available to companies that generate 85 percent
of revenues from the financial business.
Discussion Questions:
Does the banking crisis make the case for letting non-financial companies
into that business? Would owning a bank provide a retailer with an unfair
competitive advantage over its rivals?
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Discussion Questions
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In a free market economy is there really such thing as an “unfair competitive advantage?” It’s not the small banks being put out of business, it’s the large banks that need to be bailed out.
Most small banks did not get into subprime and other risky loans. Small banks don’t generally have the loan losses from lending millions to bankrupt companies. Small banks don’t pay their executives multi-million dollar salaries. While the stock prices at many small banks have fallen, their balance sheets are still as strong as ever. In my opinion, retailers getting into banking are more of a threat to the large banks that are on the verge of collapse. I think retailers and small banks would be partnering up to take over business lost by the large banks.
Bankers have proven that they can’t successfully run banks, so why not let retailers have a try at it? The financial lobby is much too strong to allow that to happen though.
From the perspective of focus, it would be a bit foolish for a retailer to try to also become a bank. Each subject is difficult enough on its on merits–major retailers are failing and major banks are failing–do we really believe that putting them together would create a different result? Retailers have plenty of work to do to modernize their customer experience and channels of distribution, especially when the face of retail is changing and competition for dollars are coming from bricks and mortar, online, and soon mobile.
However, from a margin perspective, if a retailer can use banking to replace the high credit card transaction costs, it would bring value to the bottom line.
I fear that the gigantic financial requirements of a bank would at some point overwhelm the strategic interests of the retailer–better merchandise, better stores, and better customer experiences. The bank’s interests and requirements will always have to win–from both a regulatory perspective and from a shareholder perspective.
The solution may be a hybrid–get a bank to white-label their service under the retail banner to provide integrated experiences without integrating balance sheets and the conflicting strategic goals that banking shareholders and retail shareholders are demanding.
I’ve always believed retailers should be allowed to extend their operations into financial services. With the proper regulation and oversight, they most certainly couldn’t do any worse than what we’ve witnessed over the past year. Along with fresh thinking, merchants would likely bring creative customer solutions, greater efficiency and increased access for the unbanked.
However, it’s precisely because of the events of the last year that merchants probably won’t be allowed into financial services anytime soon. Politicians, consumer groups, citizens and others are either anxious, angry or both about the financial world’s collapse and how no one seemed to be providing even a hint of oversight. All that plays right into the hands of those who want to keep retailers out of financial services. I don’t expect to see any headway on this front for several more years. Hopefully, some years down the road, we’ll regain perspective and be able to take a reasoned look at retail banking.
Every retailer of any size should consider owning its own bank. It’s not so hard nor is it expensive. You can make a profit with only $25 to $50 million in deposits, or the equivalent in loans, and you only need to invest about 10% to 15% of that. That’s right, you can start a profitable bank for $7 million. More than mom and pop’s convenience store has lying around, but not so much for a chain of any size.
Sears, Target, JC Penney, 84 Lumber, Cabela’s: they aren’t stupid. They all own financial service businesses.
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In a free market economy is there really such thing as an “unfair competitive advantage?” It’s not the small banks being put out of business, it’s the large banks that need to be bailed out.
Most small banks did not get into subprime and other risky loans. Small banks don’t generally have the loan losses from lending millions to bankrupt companies. Small banks don’t pay their executives multi-million dollar salaries. While the stock prices at many small banks have fallen, their balance sheets are still as strong as ever. In my opinion, retailers getting into banking are more of a threat to the large banks that are on the verge of collapse. I think retailers and small banks would be partnering up to take over business lost by the large banks.
Bankers have proven that they can’t successfully run banks, so why not let retailers have a try at it? The financial lobby is much too strong to allow that to happen though.
From the perspective of focus, it would be a bit foolish for a retailer to try to also become a bank. Each subject is difficult enough on its on merits–major retailers are failing and major banks are failing–do we really believe that putting them together would create a different result? Retailers have plenty of work to do to modernize their customer experience and channels of distribution, especially when the face of retail is changing and competition for dollars are coming from bricks and mortar, online, and soon mobile.
However, from a margin perspective, if a retailer can use banking to replace the high credit card transaction costs, it would bring value to the bottom line.
I fear that the gigantic financial requirements of a bank would at some point overwhelm the strategic interests of the retailer–better merchandise, better stores, and better customer experiences. The bank’s interests and requirements will always have to win–from both a regulatory perspective and from a shareholder perspective.
The solution may be a hybrid–get a bank to white-label their service under the retail banner to provide integrated experiences without integrating balance sheets and the conflicting strategic goals that banking shareholders and retail shareholders are demanding.
I’ve always believed retailers should be allowed to extend their operations into financial services. With the proper regulation and oversight, they most certainly couldn’t do any worse than what we’ve witnessed over the past year. Along with fresh thinking, merchants would likely bring creative customer solutions, greater efficiency and increased access for the unbanked.
However, it’s precisely because of the events of the last year that merchants probably won’t be allowed into financial services anytime soon. Politicians, consumer groups, citizens and others are either anxious, angry or both about the financial world’s collapse and how no one seemed to be providing even a hint of oversight. All that plays right into the hands of those who want to keep retailers out of financial services. I don’t expect to see any headway on this front for several more years. Hopefully, some years down the road, we’ll regain perspective and be able to take a reasoned look at retail banking.
Every retailer of any size should consider owning its own bank. It’s not so hard nor is it expensive. You can make a profit with only $25 to $50 million in deposits, or the equivalent in loans, and you only need to invest about 10% to 15% of that. That’s right, you can start a profitable bank for $7 million. More than mom and pop’s convenience store has lying around, but not so much for a chain of any size.
Sears, Target, JC Penney, 84 Lumber, Cabela’s: they aren’t stupid. They all own financial service businesses.