Coming soon to a Wal-Mart near you?

NEW YORK (CNN/Money) - First Wal-Mart conquered retailing. Is retail banking next on its agenda?

That's certainly the fear among regional and community banks throughout the U.S. as bankers rushed in droves to protest Wal-Mart (Research)'s application to obtain a limited banking charter.

In late July, the company filed an application with the Utah Department of Financial Institutions and the Federal Deposit Insurance Corporation to operate an industrial bank. The company said the bank would process the company's credit, debit and electronic check payments and save the company millions of dollars in fees that Wal-Mart currently pays out to other banking institutions. Those savings will be passed on to consumers in the form of lower prices, said Wal-Mart spokesman Marty Heires.

Heiers said the company has no plans to create branches or provide lending services to consumers. He added that the bank itself, located on the sixth floor of a Salt Lake City building "will never be seen by consumers" and the company plans to continue to attract independent, community banks to open branches within its stores. Wal-Mart currently has 1,100 branches in its stores.

But those assurances are doing little to appease critics. The FDIC has received over 1,500 letters since Wal-Mart filed its application in July with the majority of respondents vehemently opposing Wal-Mart's foray into banking, said FDIC spokesman David Barr.

Barr said the FDIC is analyzing the response and will consider requests to hold a special hearing to discuss the matter before any decision on the banking charter is rendered. Given the enormous response and long analytical process ahead, Barr said that the FDIC won't be in a position to decide whether or not to approve Wal-Mart's application before spring of 2006.

Why the brouhaha over Wal-Mart's banking aspirations? Critics fear that if Wal-Mart is given the chance to enter banking in any form, it's only a matter of time before the carnivorous company sets its sights on clobbering smaller banking institutions to declare itself king of the community banks.

Wal-Mart already has the reputation of putting small businesses out of work when it enters a community by providing lower prices. Detractors fear that Wal-Mart will use the same principle in banking if given the chance.

"Wal-Mart has a distinct cost advantage over local community banks," said Bart Narter, senior analyst at research and consulting firm Celent LLC.

He said the company, which is "remarkably efficient" about costs, could offer consumers better savings rates and checking account deals than local community banks. That could cause consumers to switch their money to a Wal-Mart bank.

With lower deposits, community banks may have a tougher time offering loans to consumers, which could put pressure on local businesses. A number of the letters the FDIC received were from consumers. One warned that Wal-Mart "represents a dangerous, unprecedented and unnecessary risk to the general welfare of the general public" while another asserted "please don't let Wal-Mart take over everything."

Despite Wal-Mart's firm denial, Narter said the company has "already taken step after step in moving towards financial services" by cashing checks, issuing money orders credit cards and ATM debit cards.

And this isn't Wal-Mart's first attempt to dip its toes into banking, Narter added. In 1998 Oklahoma's State Bank and Trust Co. -- a bank owned by the Walton family which also founded and controls Wal-Mart -- converted itself to a national thrift from a bank charter, opening the doors for unlimited branching opportunities. The thrift planned to place its first branches in Wal-Mart. This attempt was eventually halted by the Gramm-Leach-Bliley Act in 1999, which restricts the ability of a commercial entity to enter banking.

In 2002, Wal-Mart attempted to purchase Franklin Bank of California but this was also blocked by the California legislature. Wal-Mart at the time said the company was hoping to buy the bank to help reduce debit card fees.

Kevin Fitzsimmons, associate director at Sandler O'Neill, said while it's not surprising that "mom and pop banks" may view Wal-Mart as a competitive threat given its scale, he isn't expecting any major changes in Wal-Mart's current business plan.

"A charter isn't necessarily a signal that Wal-Mart is getting into the nuts and bolts of banking overnight," he said. "They've tried to go down that road before and regulators stopped it so I think this is probably more of a step to do some processing."

While regulators did put the kibosh on its previous attempts, the company's application with the FDIC is a first. Specifically, Wal-Mart is asking permission to run an industrial loan company. An ILC isn't a traditional bank and can't accept general deposits, open branches or make loans, said the FDIC's Barr. In Wal-Mart's case, the company is asking for a backroom operation charter.

If its charter application is approved without any amendments or additional restrictions placed on it, Wal-Mart would have to refrain from providing any banking services outside of its debit and credit card transactions for 3 to 5 years, Barr said.

After that period, however, the company doesn't have to come back to the FDIC for approval to change its business plan.

And that loophole is driving fear in the hearts of banking experts.

Celent's Narter said that there are no guarantees that, if given the opportunity, Wal-Mart won't expand into retail banking after the 3-year period is over.

He cited the company's own application package in which Wal-Mart said it has no plans to relocate the main office within the first three years of its operations but makes no mention of its plans afterwards. The application also said Wal-Mart will offer certificates of deposits to individual investors generated through deposit brokers -- another decidedly bank-like function.

But Wal-Mart spokesman Heires said the controversy is overblown.

"A lot of people are reading an awful lot into this very narrowly cast application," he said. "There is no threat here at all."