Wal-Mart entered the grocery business in 1988 to compete with established names such as Kroger, Safeway and Albertsons, which had dominated food retailing for decades.

Today Wal-Mart is America's biggest grocer, with 16 percent of the U.S. retail food market, and its sales continue to climb, even as dozens of grocery chains struggle.

Wal-Mart Stores Inc.'s decision to jump full-force into toys about 15 years ago has had similar results. Its sales overtook leader Toys R Us Inc. -- the inventor of selling toys in big-box discount stores -- in 1998. Wal-Mart now has 28 percent of that market. And it's not just food and toys: Owners of religious bookstores worry about being outpriced by the retailing behemoth. The list of Wal-Mart's effects on businesses goes on and on.

Congressional lawmakers and federal regulators now face a tough question: Should they permit Wal-Mart to use a legal loophole to enter banking and potentially do in that arena what it has done to nearly every other consumer product and service it has touched?

The question rattles bankers from Maine to California, even though the retailer no longer wants a full-service bank, only a limited-purpose one. It has whipped up longtime Wal-Mart critics, including labor unions, consumer groups and some congressmen on both sides of the aisle, who say the company is already too big, with too much power over the American economy, sometimes to the detriment of workers' pay and domestic jobs.

Charles Fishman, author of a new book, "The Wal-Mart Effect," chronicling how the company's growth and low-price philosophy influences the U.S. economy, is undecided: "I don't know if Wal-Mart would be good or bad for banking in the long run. But I'll bet ATM fees would come down pretty quick."

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At issue is the possibility that Wal-Mart and a dozen other nonfinancial firms would be allowed to erode and possibly jettison a prohibition that's been in place for most of America's 230-year history barring commercial firms from owning full-service retail banks, and vice versa. Supporters of the ban say letting commerce and banking mix would foster unfair concentrations of power, create conflicts of interest in how credit is granted and perhaps one day burden taxpayers should the failure of a bank and its affiliate put at risk the Federal Deposit Insurance Corp., the federal fund that insures consumers' bank deposits.

"What's really at issue is the nature of the American economy," says Rep. Jim Leach (R-Iowa), who for two decades has fought efforts by industry to lift the ban. "If such concentrations are allowed, you could have our largest banks combined with our largest retail companies and high-tech companies and create questions about how credit is allocated. It has enormous consequences for competition, and I think America would become less competitive in the world."

But others say low pricing is king. "Wal-Mart sees banking as an opportunity to give the customer a better deal," says Howard Davidowitz, founder and chairman of Davidowitz & Associates Inc., a New York retail consulting and investment banking firm. "That's what Wal-Mart's about. That's why they have demolished the food and toy industries. If it's better for the customers, then that's the way it ought to be."

Sparking the current uproar is Wal-Mart's application to obtain federal deposit insurance, which is required before it can open a state-chartered bank in Utah known as an industrial loan corporation, or ILC.

Congress overlooked the ILC loophole in 1999 when it passed laws to deregulate financial services by allowing bankers, securities brokers and insurers to enter one another's businesses and sell such products under one roof. But despite overlooking ILCs, Congress specifically addressed the issue of commerce and banking: It voted to maintain the ban on mixing the two by closing another loophole that allowed nonfinancial firms such as Wal-Mart to own a savings and loan, a specialty bank.

A handful of states, including California and Nevada but most of all Utah, grant charters for ILCs. Sixty-one ILCs have been granted since 1984, nearly half of them after the 1999 financial deregulation bill passed, and six applications, including Wal-Mart's, are pending. The advantage of an ILC -- aside from the fact that commercial firms are prohibited from owning a traditional bank -- is that it allows its owner to bypass regulation by this country's main bank regulator, the Federal Reserve Board.

Instead, ILCs are supervised by their state regulator and, at the federal level, the FDIC, which in addition to insuring all banks has for decades regulated some state banks. The FDIC has said it has the capability to provide sufficient federal oversight of these state banks. Leach and others disagree, as did the Government Accountability Office, the research arm of Congress, in a report last fall.

The majority of ILCs are owned by financial companies such as securities firms Merrill Lynch & Co. and Goldman Sachs Group Inc. that under deregulation could own a traditional bank but don't want to because that would require they be regulated by the Fed as bank holding companies. The Fed requires holding companies to maintain certain amounts of cash against potential losses, and that's an expense these firms want to avoid. The dozen or so nonfinancial companies that own ILCs -- BMW of North America LLC, Volvo and the like -- do so to finance purchases of their cars and motorcycles.

Controversy has surrounded ILCs for several years, but the debate has been mostly among lawmakers and regulators. Not until Wal-Mart applied to the FDIC did the issue attract widespread public attention.

Partly it's Wal-Mart's sheer size. But it's also because of Wal-Mart's employment and pricing practices. For years, labor unions, employees in dozens of lawsuits across the country and even state legislators have criticized the company for low pay and health benefits. Critics also say the low prices the company uses to dominate industries -- while they may make consumers smile at the checkout -- have put many smaller companies out of business and shipped jobs to cheaper overseas labor markets.

The FDIC has received 1,500 comment letters on Wal-Mart's application, the most it's received on an issue. Many support Wal-Mart's bid to own a bank, but most are from banks and bank-lobbying groups across the country opposing it.

Three dozen members of Congress, evenly divided between Republicans and Democrats, have written the FDIC expressing concern about Wal-Mart's application: Twenty-five members of the House Financial Services Committee, including Leach, and three senators asked the FDIC to hold hearings before making a decision, which it has said it will do in the next few months.

Spencer Bachus (R-Ala.), chairman of the House financial institutions and consumer credit subcommittee, has announced plans to hold hearings on ILCs.

And no less than Alan Greenspan, while Federal Reserve Board chairman, at least twice told members of Congress that ILCs -- especially if given authority to open branches nationwide -- threatened to undermine sound banking oversight by creating a second, parallel system.

"These are crucial decisions that should be made in the public interest after full deliberation by the Congress," Greenspan said in a recent letter to Leach. "They should not be made through the expansion and exploitation of a loophole that is available to only one type of institution chartered by a handful of states."

By contrast, the FDIC, with little fanfare and no headlines, granted retail discounter Target Corp.'s application for insurance for a Utah-chartered ILC 18 months ago . Target is using it to offer a credit card to its small-business customers. Wal-Mart uses Target to press its case in its lobbying of Congress, saying it's unfair to let its rival own a bank when it doesn't.

Wal-Mart officials, in letters to Congress, in the company's FDIC application and in interviews, say it too would use the Utah bank for limited purposes, namely to accept large deposits brokered through third parties and, by removing the middleman, to lower costs of back-room operations by tens of millions of dollars a year in the processing of 2.5 billion credit and debit-card transactions.

That's a change in plan from a few years ago, when the company said it wanted to enter full-service retail banking because that's what its customers want. A spokesman for the company in 2003, for example, said that because Wal-Mart could not find enough banks willing to open branches in its stores, it wanted to do it on its own.

At about the same time, Wal-Mart chief executive H. Lee Scott Jr. said in an interview with the Los Angeles Times that the company wanted to be gung-ho into financial services, including mortgages.

Since then, Wal-Mart has changed its approach, says Jane Thompson, president of Wal-Mart Financial Services. The company has "read the tea leaves," she said. The in-store banks will now be outside partners.

Thompson says the company already works with 300 banks that operate branches in its stores and has embarked on an aggressive campaign to recruit more. Wal-Mart has 1,980 supercenters, 1,150 of them with full-service bank branches. And Wal-Mart has contracts for an additional 250 branches in its stores, including some to be housed in some of the eight superstores it plans to open in the next 12 months in Virginia and Maryland.

Thompson, as proof of Wal-Mart's new direction, points out that its contracts with outside banks are long-term, lasting 15 years if a bank wants. And partnering with outside firms is something Wal-Mart is used to, she said. Wal-Mart credit cards are offered through GE Money Bank, and wire transfers around the world go through MoneyGram Payment Systems Inc.

"People are not looking at the facts," Thompson said of the vocal opposition. "We have no aspirations to have our own branch in our stores. We've said publicly that we have no intent to branch. We're heading the other way."

Critics remain skeptical that Wal-Mart's ultimate goal has changed.

"Why should we believe them?" asked Tracy Sefl, spokesman for Wal-Mart Watch, a coalition of organized labor, community groups, environmentalists and others critical of the retailer's business practices. "Nothing would prevent Wal-Mart, once it's granted a bank charter, from coming back to the FDIC and asking to do more with it."

Even some Wal-Mart supporters think the company's entry into banking would inevitably change the industry. "Typically, when Wal-Mart enters a new product category, all of a sudden, the world goes topsy turvy," says Britt Beemer, founder and chairman of Americas Research Group in Charleston, S.C, a consumer-research firm that interviews as many as 15,000 consumers a week for corporate clients. "It forces the marketplace to charge less for the categories it's into. It would be a good thing in banking because instead of banks talking about customer service, they would actually have to offer it."

Wal-Mart and its supporters say Target's approval will make it hard for the FDIC to turn down Wal-Mart. But some government officials caution that the FDIC's approval process isn't automatic.

The agency must weigh objective measures, such as Wal-Mart's financial soundness. But it also must consider the "general character and fitness" of management, which could provide room for disagreement. Critics who testify at the upcoming FDIC hearings almost certainly will bring up the sexual-discrimination case against the company brought by more than 1.5 million women and other labor problems, including its settlement last year on allegations it broke child-labor laws.

Wal-Mart officials say they look forward to FDIC and congressional hearings as a chance to set the record straight. In the meantime, the company continues to open superstores at a rate of about 22 a month nationwide and searches for banks that will open branches in them.

And customers do love having a bank in the stores. "It works for me," said Darlene Thornhill, shopping at the Wal-Mart supercenter Friday in Culpeper, Va. Like dozens of other folks in the store, she strolled up with her as-yet-empty shopping cart to one of two tellers manning the store's SunTrust branch. The branch was sandwiched between Wal-Mart's customer-service center, where customers could buy money orders for 46 cents or transfer money to Mexico for $8.55, and the Da-Vi Nail Salon on the other.

She said the branch is open longer than the other one on the other side of town. Does she buy more at Wal-Mart because she can -- and now exclusively does -- bank there? "It probably helps," she said. "I usually think, 'Oh well, while I'm here I might as well pick up such-and-such.' "

© 2006 Washington Post Company

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