It was all very widely reported, and highly politicized. Wal-Mart Stores Inc. US, withdrew its application to operate an Industrial Loan Corporation (ILC). Reports circulated about the Wal-mart conflict with the Federal Deposit Insurance Corporation (FDIC) regulators resulting in an extension on the ILC moratorium that prompted Wal-Mart to withdraw its application to operate an ILC. The issue became politicized because community banks feared for their future.

Could such a situation occur in Canada? No, because this country has a more flexible and open regulatory structure than the U.S. "In Canada the Feds want a more competitive landscape," says Peter O'Neill, COO of Bridgewater Bank. O'Neill who has recently gone through the process of obtaining a banking charter for his own bank adds, "My guess is that the people that Wal-Mart hired to lobby for them came back to advise: 'You guys are dead. Take a graceful sidestep and leave it alone for a while.' Here in Canada we have a different situation. We have got a federal government that has stated any number of times that they have a mandate to try and open up the skies a little bit on the financial competitive footprint. That's one of the reasons small banks like Bridgewater can exist. It has really turned around here. Can you imagine about 18-20 years ago when the concept of anything other than the big 5 was alien. And all the regulations that went to support that with things like massive capital requirements."

Obtaining an ILC license is widely considered to be comparable to operating a bank. According to documents obtained from the FDIC, "Legislation would allow ILCs that cannot currently offer demand deposits to offer their functional equivalent, Business NOW Accounts. This, in essence, makes ILCs full service banks, but outside the scope of the Bank Holding Company Act." (http://www.fdic.gov/news/conferences/future_jordespeech.html).

Other U.S. ILC owners include General Motors Corp., BMW, GE Capital, Sears, Volvo, and Morgan Stanley Dean Witter. The largest, owned by Merrill Lynch, has assets of $65 billion and would rank 17th on a list of the country's largest banks. According to information obtained from the FDIC, pending federal legislation would effectively remove the conditions for the Bank Holding Company Act exemption imposed on ILCs in 1987.
The comparison between a US bank in relation to a US ILC is like the similarities between a Canadian bank and a Canadian trust company. According to O'Neill, “Here the lines between a trust and a bank are blurred. Other than a trust's powers that enable them to offer programs like custodian services, trusts can do everything a bank can do. They are both regulated by OSFI.” “One of the factors," adds O'Neil who arrived after the decision about the kind of charter was made, "that prompted Bridgewater Bank's decision to set up as a bank as opposed to a trust is that banks have no provincial regulatory bodies to report to. That must have played into the decision to obtain a banking charter instead of a trust."

Whether it is by establishing a trust company, loan company, credit union or a bank, organizations in Canada that want to offer financial services can do so and have many options. Robert Elliott, a lawyer at the legal firm Fasken Martineau, feels that while a bank charter can offer many advantages, depending on the business model, other, less regulated, options may make more sense. According to Elliott, Wal-mart's attempt to start an ILC as opposed to a bank made sense because it would have provided them the benefits of a bank with fewer regulatory issues to deal with. Starting a bank in Canada is not always the right option," he adds. "Although Wal-Mart could likely get a banking charter in Canada in the current environment, there are many other structures that may also be suitable and still allow organizations to be able to offer profitable financial services but without all the headache of dealing with OSFI's reporting requirements.” His advice would be, “ to look at all the options.”

Canadian companies setting up financial services often have the same motivation as their US counterparts. In the case of Wal-Mart, one incentive for wanting to set up an ILC was to reduce processing costs. "The reason Wal-Mart wanted to launch an ILC was, to reduce credit and debit card transaction costs," says Jane Thompson, Wal-Mart's Financial Services President.

"Transaction processing fee reductions are also one of the main motivators for Canadian retailers entering the Financial Service Industry," adds Elliott. "For example, it was an important concern with regard to Sears which had 10 million credit card holders. Sears launched a bank in 2002 and in 2005 sold this arm to JP Morgan Chase and Co. for a profit." More recently (October 2005), Canadian Tire Corp launched a bank offering high interest savings accounts and GICs in a two-city pilot (see page 13)-they have 4 million card holders.

Credit card and transaction processing are just one incentive for most companies offering financial services in both Canada and the US. "They (Wal-mart) don't need an ILC to play an important role in expanding access to financial services, they can do so by partnering with banks and others," Sheila C. Bair, US Federal Deposit Insurance Corporation (FDIC) Chairman concluded in her published statement. Thompson basically echoes this sentiment in her published statements which says the company would continue to pursue alternative financial services products, regardless of FDIC approval. "Since the approval process is now likely to take years rather than months," she said, "we decided to withdraw our application to better focus on other ways to serve customers. We fully intend to continue to introduce new products and services that champion those who deserve convenient, lower priced financial services. Wal-Mart has 2 to 3 million transactions a week for its existing financial services."
Thompson points to the potential cost savings of in-house payment processing paled compared with the new business it is growing with financial services. Wal-Mart now offers payroll check cashing, express bill payment, money orders, money transfers and Wal-Mart branded credit cards.
"The kind of financial service organization companies operate is more about understanding your company's individual strengths," advises Elliott. "In the case of Wal-Mart, they are targeting customers who are 'underserved' by traditional banks. Many individuals are unable to afford the fees that banks charge for basic services or unable to maintain minimum balances between paychecks."

“For organizations thinking about offering or extending their financial services offering, there are many reasons why now is a good time to start,” says Elliott, “Especially for organizations with a large installed base of customers. Some of the more recent examples that come to mind are the big national retailers like Canadian Tire and Presidents' Choice, the auto-finance companies such as General Bank, or even insurance companies like Bank West. These companies have come to realize the benefits of leveraging their client base. We have also seen automobile associations, Bridgewater Bank for example, who have succeeded in establishing a banking charter and are running successfully."/