Critics lambast Home Depot banking foray
The home improvement giant became the latest retailer to file a bank charter application, and that has community bankers seeing red.
NEW YORK (CNNMoney.com) - First came Wal-Mart. Now Home Depot?
The home improvement giant became the latest retailer to enter the world of banking when the company announced its acquisition of EnerBank, a Utah-based industrial provider of home construction loans early last month. But Home Depot (Research)'s application to take over the industrial bank has some community bankers seeing red.
In the wake of Wal-Mart (Research)'s highly contested application to charter a bank in Utah, critics are concerned that the retail industry is looking to blur the line between commerce and banking. Now one community banking group is challenging Home Depot's foray into banking, actively lobbying the government to curb retailers' abilities to operate banks and have their deposits backed by the Federal Deposit Insurance Corp.
"When you get more and more commercial companies into banking, it's going to change the landscape of the financial system," said Karen Thomas, executive vice president for government relations at the Independent Community Bankers Association (ICBA). "Financial and economic success is based on a system that maintains the separation of banking and commerce."
Home Depot, for its part, insists that the company has no intention of operating a full-fledged retail bank. In a press release, the company said the acquisition was undertaken solely in order to provide Home Depot's professional contracting customers with speedy construction loans. The company has denied that it will offer credit cards or take deposits.
But retail giant Wal-Mart has also publicly denied that it has plans to create branches or provide lending services to consumers -- an assertion critics reject. They point out that the company, which has attempted to buy banks twice before, is already morphing into a financial services provider by cashing checks, issuing money orders, credit cards and ATM debit cards.
Wal-Mart and Home Depot are waiting on both the FDIC and Utah Department of Financial Institutions for charter approval, and representatives from both agencies said the applications are still being analyzed.
Critics contend that big box retailers would be able to offer banking products at much lower prices, crushing competition from local community banks.
The FDIC received over 4,000 comments related to the Wal-Mart application, and most asked the government to reject the application, according to FDIC spokesman David Barr. But he said the FDIC has received no comments related to Home Depot's application, and the deadline to submit comment is Monday, June 5.
Thomas, however, said the ICBA is in the process of readying its comments to the FDIC asking them to hold public hearings - similar to the hearings held for Wal-Mart in April - before deciding on whether to approve Home Depot's application.
Home Depot not a threat
Still, some analysts feel that the ICBA's stance on Home Depot's application may be overblown.
Bart Narter, a senior analyst at Celent LLC, said Wal-Mart heightened the sensitivity towards retailers operating banking institutions, but that Home Depot doesn't present the same kind of threat.
"It only gets threatening when you have an organization that has such a frequency of visits that it can become a retail bank," he said. "Most people don't visit the Home Depot once or twice a week," unlike Wal-Mart stores or Wal-Mart supercenters that attract a large number of daily consumers.
He said that even Target (Research), which actually operates an industrial loan charter (ILC) in Utah, didn't receive the same type of scrutiny or outrage because it doesn't receive the same level of traffic Wal-Mart does.
"The only competitors ICBA needs to worry about are those with high frequency visits, such as big supermarket chains, of which Wal-Mart is now one," he added.
Still, Thomas said that Home Depot's application indicates that the flood gates are opening among retailers -- and Congress will have to act in order to prevent retailers from taking advantage of ILCs, since these charters can give merchants a back-door entry into retail banking.
An ILC isn't a traditional bank and can't accept general deposits, open branches or make loans, said the FDIC's Barr.
When a company is approved for this kind of banking charter, it is restricted from providing any banking services beyond debit and credit card transactions for 3 to 5 years. But after that period, a company wouldn't have to come back to the FDIC for approval to change its business plan.
And that is what concerns critics, who fear that once the blackout period is complete, retailers will move in on community banking business.
Industrial loan charters growing assets
ILC's have already gained in popularity. From 1987 to 2004, industrial bank assets jumped to $108.9 billion from $171 million, said Michael Jones, chief examiner at the Utah Department of Financial Institutions -- one of the government organizations that has to approve a charter application. Currently, there are 34 industrial banks operating in Utah, he added.
And Thomas fears that number will grow rapidly if Wal-Mart and Home Depot's applications are approved.
"There is growing concern in Congress," she said, but she added that the legislative process is slow to make any changes.
In fact, the House of Representatives passed a broad relief package for the banking industry that contained a ban disallowing commercial firms from obtaining ILCs and having their deposits backed by the Federal Deposit Insurance Corp. But last month the Senate Banking Committee passed a version of the relief package that removed that language under pressure from Utah-based Sen. Robert Bennett. The Senate has yet to vote on the bill and it's unclear whether the final bill, if passed, would contain the ban on ILCs.
Home Depot is also attack from shareholders. Click here for more on that story.