The Bluebird (Card) of
Happiness:
Synthetic Banking, Walmart-Style
|
Credit: Gary Larson- The Far Side |
Students of regulatory policy, and any
parents of teenagers, are well aware of the maxim “Any artificial
impediment to a natural inclination breeds circumvention”.
Take a look at the Walmart Money Center ( http://goo.gl/hgRSl
). A street-level, customer-facing synthetic bank is being created
through the bundling of individual third-party financial services providers. The bundler itself, Walmart, while subject to state-level regulation as a money services business, enjoys total freedom from the costly
overhead of Federal prudential bank regulation and supervision that is applied to all chartered banks. It therefore gains a competitive cost advantage.
Scroll down that same screen a tad and look at the
“Money Services” being offered without a bank charter. If
Walmart linked up with a mortgage originator, like maybe a PHH or
Quicken Loans, the menu of street-level, customer-facing retail
“banking” offerings would be substantially complete.
Walmart, of course, does not call what it does
“financial services bundling”, they call it “retailing”, and
retailing is something Walmart has always done and done exceedingly
well. Take a look at this fascinating interview with Daniel
Eckert, head financial services executive at Walmart, done recently
by Sean Sposito, Technology Reporter at the American Banker:
Bankers and banking regulators have always closely followed the
evolution of the money services at Walmart, but the recent addition
of the American Express Bluebird Checking and Debit Alternative seems to indicate that we have crossed the Rubicon in the construction of a synthetic
bank. If financial services bundling becomes popular with other providers, we could be looking at a parallel retail banking system someday.
The English-parsing wizards in the
American Express legal department did a commendable job, in the Member Agreement, navigating
around any terminology that could create an actionable banking nexus
for Bluebird by using terms of art like “Adding Funds” and
“Remote Check Capture” and assiduously avoiding the word "deposit" when possible. But the fact is that this prepaid card
product is being marketed as the functional equivalent of a bank
account.
The Amex marketing department, on the
other hand, apparently didn't get the memo.... like most marketing departments, the
legal niceties are, well, the fine print, right? So in the single
minded pursuit of luring account relationships, the marketing materials
use the terms “deposit money”, “direct deposit”, and “deposit
checks”. Check it out:
Several bank regulatory policy issues
need to be dealt with, in addition to the often discussed issue of
the lack of Federal deposit insurance for funds in these prepaid
accounts. State banking supervisors need to consider the question... At what point do enhancements to state-supervised money services
business products trigger a requirement for a bank charter? In
addition, there is the broader financial regulatory policy question of
how to treat financial services bundlers, like Walmart, who, by
creating synthetic banks, could end up creating a parallel retail
banking system, out of reach of Federal prudential banking
supervision.
In retrospect, maybe best day that
Walmart ever had, was the day it pulled its industrial bank charter
application in March 2007 after realizing that the FDIC was not
inclined to approve it with a banking industry foaming at the mouth
in opposition. The worst day for the banking industry and the FDIC
was that same day. Because on that day they lost an opportunity to
draw Walmart into the hot steamy bosom of Federal prudential banking
regulation.
Given the subsequent payment system
benefits clawed back to retailers by the Dodd-Frank Durbin Amendment
and the upcoming benefits from the pending Swipe Fee Settlement (even though
Walmart opposes it for being insufficient and for its waiver of future liability), and then combine those benefits with the ability to
create a synthetic bank, and you can understand why Mr. Eckert of
Walmart is emphatic about no longer seeking a bank charter.