Wednesday, March 22, 2006

Big Boxes and Banks

Walmart wishes to establish an industrial bank. This industrial bank would do the credit card processing for the Walmart stores. I think that this would be a bad idea.

I do not like the idea of large retailers having their own banks because such a system would give large retailers an artificial advantage in the marketplace.

As you probably know, credit card companies make their money by placing a transaction fee on purchases. This fee is quite high. The reason credit card companies can give lavish rewards on credit cards is because the fees charged to merchants are substantially higher than the rewards.

If big retailers opened their own industrial banks for credit card processing, they would be able to give themselves a sizable advantage over smaller retailers.

I should mention here that the Walmart bank issue is not simply an anti-Walmart issue. Were Walmart to open an industrial bank; other retailers would be compelled to follow. Yes, the competitive advantage of being able to keep the banking fees is sufficient that other large retailers would be compelled to open banks.

Allowing retailers to open industrial banks creates a negative situation where the big retailers are able to defeat smaller retailers at the monetary level.

A Walmart owned bank would raise the bar of entry for new retailers. Imagine a world where entrepreneurs would have to have sufficient collateral to start a bank before opening a store? Such a system would stifle innovation in retail.

BTW, the reason that banking fees are so high is that the fees were first established when the cost of processing a credit card was higher.

There is a problem with the lack of competition in the banking business to bring down these fees. The banks opened by the big box retailers would not bring the cost of credit card processing back in alignment with costs. A Walmart bank would probably further entrench the inefficiences because it would give a class of super retailers an economic advantage.

Consumers could see a significant drop in costs of goods if credit card fees were lower. Achieving this goal is difficult. Consumers chose their credit card based on the rewards they receive. Consumers tend to opt for credit cards that have higher merchant fees since that increases their rewards.

No comments: