Save Money, Live Better

A thorny question for banking regulators has always been who should be allowed to own a bank. Playing a critical role in the economy, banking is fundamentally based on trust. Therefore, regulators should allow only people who are worthy of the public's trust to own a bank, and prohibit those who are not. What criteria should be used to tell the difference? An overly conservative approach risks limiting competition, innovation, and economic growth. However, an overly permissive approach can lead to waste, fraud, self-dealing, or other forms of abusive behavior.

The criteria for ruling on bank applications continue to evolve, as policymakers try to find the right balance between competing objectives. These debates can devolve into mind-numbing details that attract little or no interest beyond the limited confines of the financial regulatory community. But that changed in 2005, when mega-giant retailer Walmart sought government approval to start a bank.

It didn't take long for those opposed to Walmart's application to mobilize. The opponents raised a number of important public policy issues, though many of these issues were disconnected from the criteria used by the FDIC when ruling on a bank application. As the agency navigated its way through the process of ruling on the application, there was a prolonged and contentious public debate.

The Walmart episode was noteworthy in two ways. First, it was an opportunity for the FDIC and other financial regulators to review the mostly ignored issue of commercial firms owning limited-purpose banks. Second, it showcased how advocacy campaigns can influence the direction of banking public policy.

I was deeply involved in the Walmart episode, and while I believe my colleagues and I tried to be fair in handling the application, I eventually came to the conclusion that the process was not the agency's finest hour.

The FDIC was created as an independent government agency, with the objective of keeping political considerations out of its decision making. It is supposed to serve the public interest, but different people have different ideas about what constitutes the “public interest.” At the very least, it means listening to, and being responsive to, various public and private constituencies.

The FDIC receives dozens of applications for deposit insurance every year. They are routine matters that generally draw little attention. The law governing deposit insurance specifies seven factors the FDIC should consider in deciding whether or not to accept an application:

1. Do the organizers have the ability to provide ongoing financial support to the bank?
2. Are the organizers initially contributing sufficient amounts of their own money or capital to support the bank?
3. Given the applicant's proposed business plan, can the bank be profitable within a reasonable period of time?
4. Is the general character and fitness of the proposed bank's management such that they should be permitted to own a bank?
5. Does the application pose undue risks to the deposit insurance fund?
6. Will the applicant meet the convenience and needs of the communities it seeks to serve?
7. Are the activities the bank plans to engage in consistent with the purposes of the Federal Deposit Insurance Act?

The FDIC typically reviews applicants' proposals and informs them as to what more they must do in order to meet these requirements. Applicants then have the opportunity to address any concerns before the FDIC renders a decision. A decision is typically rendered within a few months and rarely attracts attention outside the banking community.

The usual rules didn't apply to Walmart. Its opponents mobilized around the issue of whether commercial businesses should be allowed to own banks. Some argued that there are inherent conflicts of interest that make it necessary to keep banks, the lenders of money, separate from commercial businesses, the borrowers of money. The fear is that banks owned by commercial businesses will not lend money to competitors of their parent company. There are also fears that even if these banks lend money, they will take the confidential information they gather in the loan application process and share it with their parent company.

In addition, a commercial firm could direct its bank to lend to itself or to other companies it owned, either in excessive amounts or at below-market rates of interest. Each situation would pose risks to the bank and create an unfair competitive advantage for the parent company.

The proponents of allowing banking and commerce to mix together point out that there are laws to prevent such abuses. Moreover, they assert that allowing commercial businesses to own banks will benefit the general public by allowing for greater competition, hence better prices and services within the banking industry.

This issue has been debated since the earliest days of the U.S. banking system. Railroad companies owned the first banks and helped finance the development of our country's transportation system. Wells Fargo had a mail delivery business before it ever owned a bank. Over time, the gulf between banks and commercial businesses widened, but the issue was never completely settled.

When Walmart submitted its application in 2005, commercial businesses generally were not permitted to own banks. However, there was one type of bank they potentially could own: an industrial loan company (ILC).

ILCs were created in the early 1900s. They provided loans to low- to moderate-income families who could not obtain loans from traditional commercial banks. ILCs served this purpose for several decades, leading a fairly quiet existence until the late 1980s.

In 1987, Congress passed the Competitive Equality Banking Act, which allowed ILC ownership by commercial businesses. By 2005, 15 commercial firms owned ILCs, including General Motors, Toyota, BMW, and Volkswagen. The automobile companies used their banks for credit card lending and to provide mortgages to automobile dealerships and their owners.

General Electric, Sears, Nordstrom, Harley-Davidson, and Target also owned ILCs. Some offered credit cards. Others had particular niches that other banks did not fill. Transportation Alliance Bank offered banking services to truck drivers at truck stops owned by Flying J, its parent company. Consistent with the purpose of the original ILCs, there was an ILC that provided loans to low- to moderate-income families in the East Los Angeles area. In contrast, financial companies—including investment banks like Goldman Sachs, Merrill Lynch, and Lehman Brothers—owned the other ILCs in existence at that time.

ILCs represented almost 1 percent of all federally insured banks, and about 2 percent of assets. Merrill Lynch owned the largest ILC, with over $60 billion in assets. Only seven states permitted ILCs. Most were located in Utah or California. Walmart's application was submitted to Utah's State Banking Department.

The 1999 Gramm-Leach-Bliley Act placed additional restrictions on commercial firm ownership of banks and thrifts, but ILCs were expressly exempted from those restrictions. Many viewed this as a loophole that needed to be fixed. Others said it was a carefully designed exception. Whatever the answer, it was not within the FDIC's power to decide. Walmart's opponents argued that given the significance of Walmart's potential presence in the banking industry, the issue of whether commercial firms should continue to be permitted to own ILCs needed to be resolved by Congress.

This highly visible, emotionally charged issue fell into the lap of the FDIC's new acting chairman, Martin Gruenberg. Marty had worked on the staff of Senator Paul Sarbanes of Maryland for 25 years. While his was largely a behind-the-scenes role on Capitol Hill, he was an influential player who had been actively involved in all of the major banking legislation of the past several decades.

Marty became the FDIC's vice chairman in August 2005. My impression was that while he liked the idea that he would have a key role in the agency's future, he was pleased that as vice chairman he would have time to learn more about the agency without the immediate pressure that would face a new chairman. That changed in November 2005 when the FDIC's chairman, Don Powell, walked into Marty's office and told him that he was leaving the FDIC and that Marty would become acting chairman. President Bush had asked Powell to lead the administration's relief efforts for the victims of Hurricane Katrina, and the president wanted him to start immediately.

Because of the complex issues raised by Walmart's application, as well as the heightened interest in the matter, Gruenberg decided to ask for public comments and to hold public hearings. Marty asked me to chair the hearings, and I was joined by two other senior FDIC employees: Douglas Jones, the acting general counsel, and Sandra Thompson, the acting director of Supervision and Consumer Protection.

Doug and I had worked closely together for many years, and everyone who worked with him respected his deep knowledge and intellect. He had been instrumental in the 1984 Continental Illinois open-bank assistance transaction, which had been perhaps the most significant event in the FDIC's history. Doug was known for his near encyclopedic knowledge of bank regulatory issues, and even more importantly, for his objective and unbiased approach to issues.

While I was pleased with Doug's selection to the panel, I'm pretty sure he was not. Doug did not like to be in the spotlight, and now he would be sitting up on a stage addressing a key issue at public hearings for all to see.

Sandra Thompson left Goldman Sachs in the early 1990s at the height of the savings-and-loan (S&L) crisis to join the newly created Resolution Trust Corporation (RTC). She had worked on asset sales for the agency and was instrumental in what was then a new way of securitizing commercial loans. When the RTC was merged back into the FDIC in 1995, Sandra joined the FDIC's Division of Resolutions and Receiverships. She moved on to positions of greater responsibility over the years, eventually taking on the position of director of the FDIC's Division of Bank Supervision.

The panel's first step was to find out who wanted to speak at the upcoming hearings. About 70 groups and individuals responded to public notice of the hearings. The group included then current and former members of Congress, including former Senator Jake Garn, Congresswoman Stephanie Tubbs Jones, and former Congressman Thomas Bliley.

Many of the comments were from banking organizations. The American Bankers Association, the Independent Community Bankers of America, America's Community Bankers, and the American Financial Services Association all asked to speak, as did numerous state organizations, including those from California, Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, North Dakota, Utah, Washington, and Wisconsin.

Nonprofit consumer advocacy groups were passionate about denying Walmart a banking charter, and they submitted a number of responses. Unions also joined the battle, as they did not want the nonunionized Walmart to become a larger presence on the retail landscape. Also responding were organizations that had Walmart in their names: WARN (the Walmart Alliance for Reform Now), Wake-Up Walmart.com, Walmart Watch, and Working Families for Walmart.

The wide range of interested parties indicated that this hearing would be unlike anything in FDIC's experience. After some deliberation, we decided that every group that asked to participate would be invited to speak.

Three days of hearings were scheduled in April 2006, two in the Washington, D.C., area, and the third in Overland Park, Kansas, to provide a central location for those who preferred not to have to travel to the East Coast. The Washington, D.C., area hearings were held at the FDIC's new 500-seat auditorium in the L. William Seidman Center in Arlington, Virginia.

The format for the hearings was similar to congressional hearings. Presenters were grouped into various panels, and each presenter was given five minutes to speak. After all the presentations on a panel were completed, there was a 15-minute question-and-answer session.

The press was well represented. CNBC, Bloomberg, Dow Jones, Reuters, the Associated Press, the Washington Post, the New York Times, the PBS Nightly Business Report, BBC-TV, and Al Jazeera International all attended.

I opened the proceedings by reviewing the purpose and ground rules for the hearing. The first presenter was Jane Thompson, the president of Financial Services at Walmart. Her testimony set the stage for much of what would follow. After brief opening remarks, she made a commitment that if Walmart were allowed to open a bank, it would not engage in retail banking. She was letting everyone know that Walmart's bank would not compete with community banks by collecting deposits and making loans. Walmart's bank, she said, would be created only to “sponsor” credit card, debit card, and electronic check transactions conducted in Walmart stores.

While the precise meaning of this pledge may not have been well understood by the general public, here's what it meant in practice: A sponsor bank supervises the process of transferring funds from one party to another in a timely manner when a customer conducts an electronic transaction, such as by credit card. For providing this fairly routine service, a fee is paid to the sponsor bank for each transaction. By owning a bank, and having that bank serve as a sponsor for electronic transactions conducted in Walmart stores, Walmart would pay those fees to its own bank rather than to another bank. A portion of any savings that resulted then could be passed on to Walmart's customers in the form of lower prices.

Walmart already provided some basic financial services to their customers, many of whom did not have traditional bank accounts. Walmart stores cashed checks, sold money orders that could be used to pay bills, and transferred money for their customers throughout the United States and internationally. These were all activities that could be conducted without owning a bank.

Walmart's Thompson said that for other types of traditional banking services, such as providing savings accounts and loans, Walmart would continue to allow independent banks to lease space in their stores. At the time, there were banks in over 1,150 Walmart locations, and some of those banks were concerned that they would be displaced if Walmart formed its own bank.

The limited scope of Walmart's planned banking operations was an attempt to minimize resistance to its application. However, the concession did little to satisfy community bankers and the other critics.

Walmart's critics raised four key issues during the hearings: the mixing of banking and commerce, unfair competition, consistency in regulatory approach, and concentrations of power. For the most part, critics recognized that each of those four issues already had a framework of laws and regulation in place and that there was a tenuous connection between the four public policy issues and the framework the FDIC was legally required to abide by in making a decision on Walmart's application. What they wanted was a change in those laws or, lacking that, a change in how the FDIC looked at those laws.

Terry Jorde, then chief executive officer of CountryBank USA of Cando, North Dakota, spoke on behalf of the Independent Community Bankers of America (ICBA), the trade group representing community banks. She urged the FDIC to deny the application, saying that Walmart would engage in unfair competition with community banks.

After Walmart's three prior unsuccessful attempts to enter retail banking, she and others saw no reason to believe that this more limited fourth attempt was anything more than an effort by Walmart to get its “mammoth foot” in the door to enter branch banking at a later date. As one community banker put it, “All they want is a charter and their camel will have its nose under the tent's edge.” Another speaker said it was a “whole nuther body part” getting under the tent.

Walmart's few supporters thought it was unfair to prevent the company from opening a limited-purpose bank when its competitors, like Target, already had one. These supporters saw the community bankers' attempt to deny Walmart a bank charter as nothing more than entrenched businesses seeking to restrict competition to the detriment of the general public.

One indication of the intense opposition to Walmart was that certain states such as California had already changed their state law to prevent Walmart from opening an ILC. Congress looked to do the same on a national level.

In November 2005, the House of Representatives passed bipartisan legislation sponsored by Representatives Barney Frank and Paul Gillmor that would have restricted the ability of ILCs owned by commercial firms from branching across state lines. The Senate did not pass similar legislation, so the bill was not enacted into law.

Even former Utah senator and Banking Committee Chairman Jake Garn—widely regarded as one of the ILC's most ardent supporters—opposed a possible effort by Walmart to become a retail bank. In discussing the Competitive Equality Banking Act of 1987 that permitted certain states to continue to charter FDIC-insured ILCs, he said, “It was never my intent, as author of this particular section, that any of these industrial banks be involved in retail (banking) operations.”

While those both for and against Walmart's application passionately delivered their various testimonies, the proceedings were surprisingly orderly. The audience was attentive, and the atmosphere inside the hearing room was serious.

Most of the presenters referenced the importance of not mixing banking and commerce. Peter Wallison of the American Enterprise Institute was one of a few presenting a different point of view. He noted that Congress had already addressed this issue in the 1999 Gramm-Leach-Bliley Act when it had determined that suppliers of credit did not need to be separate from the users of credit because it allowed commercial banks to be affiliated with securities firms that are large users of credit. Similarly, there are no restrictions on individuals owning both banks and commercial firms. Others pointed out that there were more than enough banking alternatives to make it unnecessary for a business ever to have to do business with a bank owned by a competitor.

Several commenters noted that there already were clear laws restricting both the amount a bank can lend to an affiliated organization and the terms for that lending. These restrictions are included in Sections 23A and 23B of the Federal Reserve Act. Enforcing those laws is an important part of the bank supervisory process.

Walmart officials sought to mitigate concerns related to the mixing of banking and commerce by making a commitment that their bank would not lend to its parent organization or any of its affiliates. They insisted that they intended to stick to their more limited business plan of sponsoring electronic transactions in Walmart stores.

Another theme that emerged was that the company's parent organization could be subjected to a different type of supervision. This was something the Federal Reserve in particular cared about a great deal. The Bank Holding Company Act requires that the parent organizations of banks be subject to supervision by the Federal Reserve. But ILCs were not considered to be banks under the Bank Holding Company Act. This meant that the Federal Reserve did not have authority to supervise the parent organizations of ILCs.

However, the FDIC and state regulators did have authority to supervise financial interactions between ILCs and affiliated companies, including parent organizations. In this regard, the rules and the supervisory treatment were no different for ILCs than they were for commercial banks and thrifts. As a result, historically, the financial performance, failure rates, and costs to the deposit insurance funds were no different for ILCs than they were for commercial banks or thrifts.

There was a vocal concern about a concentration of power if Walmart were allowed to own a bank. Walmart already had nearly $300 billion in annual revenue, 3,600 domestic retail locations, 1.25 million employees, and 100 million customers per week. The ICBA pointed out, “If Walmart were a country, it would rank as China's 8th largest trading partner, ahead of Russia, Australia, and Canada.” One banker asked, “Where is Teddy Roosevelt when you need him?”

The FDIC must assess whether the applicant will serve the convenience and needs of their local communities. All new banks are required to provide the FDIC with a plan describing how they will comply with the Community Reinvestment Act (CRA), which encourages banks to extend loans to the communities in which they operate—particularly low- and moderate-income neighborhoods. Various presenters pointed out that Walmart had originally submitted a weak CRA plan and upgraded their plan only when they realized it could adversely affect their application. The consumer groups and unions that spoke at the hearings charged that Walmart was a poor corporate citizen and that a Walmart bank would not serve the needs of local communities.

Character and quality of the proposed bank's management is another consideration. The AFL-CIO said, “Walmart is a company that does not play by the rules. That factor alone makes its proposed bank a threat to the taxpayers and the nation's banking system.”

Other critics questioned whether an entity such as Walmart would pose an undue risk to the deposit insurance fund. Some believed that commercial firms posed undue risks, charging that over time a high percentage would go bankrupt. Along the same lines, some pointed out that if Walmart were approved to sponsor electronic transactions, it would have access to the U.S. payment system, and as such could pose a systemic risk. The amount of activity in Walmart stores alone could add up to 140 million transactions a month and $170 billion per year.

By contrast, the Utah Association of Financial Services and the California Association of Industrial Banks saw commercial owners strengthening banks more so than traditional bank holding companies. They pointed out that the typical bank holding company was a relatively weak organization, which provided little financial support to its bank subsidiary. As a result, they said,

A bank holding company is almost always irrelevant if a bank is failing. Hundreds of banks owned by bank holding companies have failed during the past twenty years and the only instance we are aware of when a bank holding company saved a failing bank subsidiary is when the holding company owned other banks that could absorb parts of the failing bank without failing themselves.

Despite these views, the ILC industry itself was not pleased by Walmart's application. The industry's officials did not want all of the attention that was now focused on the once-quiet industry and worried that congressional action could adversely impact their business.

The FDIC received over 13,800 comment letters on Walmart's application. Most of them were opposed. We needed to evaluate the information we had gathered during the hearings and from the public comments. Marilyn Anderson, Bob Fick, Don Hamm, Ann Johnson, and many others provided valuable staff support throughout the process.

As the review process was playing out, Sheila Bair arrived as the FDIC's new chairman. Sheila was smart and politically focused, having spent many years working on Capitol Hill for Senator Bob Dole of Kansas and as senior vice president for government relations at the New York Stock Exchange. Walmart's application for deposit insurance would be her first big decision and political challenge. She later claimed, in her memoir, that when the issue first arose, “I couldn't make a decision. So I punted.”

Her “punt” came in the form of asking the FDIC's board of directors to adopt a six-month moratorium on all applications for deposit insurance and change-in-control notices for ILCs. The board approved the proposal, which marked the first time the FDIC ever declared a moratorium on its regular business responsibilities to evaluate a policy issue. There was some precedent, by government agencies, which had on rare occasion enacted moratoriums for limited periods of time to better assess particular issues. The FDIC's moratorium bought Bair some time, and also gave members of Congress time to decide if they wanted to address the issue.

The FDIC asked for public comment on relevant public policy issues, generating an additional 12,600 comment letters. Many of the letters came from organized campaigns. Congressmen Barney Frank and Paul Gillmor introduced legislation subjecting corporations owning ILCs to FDIC regulation. The proposed legislation also limited the ability of certain ILCs to branch into certain states. However, Congress did not enact any legislation within the six-month moratorium period. Industrial banks had a powerful supporter in the Senate, Robert Bennett of Utah, who saw no “legal or moral reason” why Walmart should be denied a bank charter.

Given the stalemate between the two houses of Congress, 107 members of the House of Representatives sent a letter to the FDIC in December 2006 requesting that the agency extend its moratorium by an additional six months to give Congress more time to consider legislation.

Determining whether to extend the moratorium was a complicated issue for the FDIC. Despite the swirl of public policy issues, the FDIC had a responsibility to respond to applications in a timely manner. Walmart submitted its application in July 2005 and had been waiting 18 months for an answer. Many of the FDIC's career staff, and many observers outside of the agency, were worried that the decision-making process had become too politicized. In their view, extending the moratorium further would push the boundaries of an appropriate use of the FDIC's independence. Several other applications were being held up as well, since the six-month moratorium had covered all ILC applications. The complaints over the FDIC's inaction were steadily rising.

Nevertheless, in January 2007, the FDIC's board of directors extended the moratorium for an additional year. The extension was more limited, applying only to those ILC applications for deposit insurance or a change in control (or ownership) by companies that were primarily engaged in commercial activities. Other ILC applications from parent organizations that were engaged in financial activities would be allowed to move forward. Sheila said that the purpose of the yearlong extension was to give Congress adequate additional time to consider legislation. She also said there would be no further extensions.

Congressmen Barney Frank and Paul Gillmor sponsored new legislation that would prohibit the FDIC from granting deposit insurance to commercial firms for new ILC charters and limiting the ability of some of the existing ILCs to open branch banks. The House of Representatives passed the legislation by a large margin. Getting approval for a bill in the Senate again would prove to be more difficult.

Under the House bill, automobile companies that already owned ILCs would be allowed to keep them. However, automobile companies that did not own ILCs, like Ford and DaimlerChrysler, would not be allowed to form their own limited-purpose banks. They argued that prohibiting them from owning ILCs would put them at a competitive disadvantage, but to no avail.

The prospect of additional automobile companies owning ILCs drew little public protest. The unions and consumer groups that had so vigorously opposed Walmart's application did not voice the same concerns about unionized automobile companies owning ILCs. The silence strongly suggested that what motivated the opponents of Walmart's application was not so much a concern about mixing banking and commerce, but rather a concern with Walmart's size and nonunion environment.

After the additional one-year extension of the moratorium, the earliest Walmart could hope for a response from the FDIC would be two and a half years after the application had been submitted. The company saw no reason to wait any longer and in March 2007 withdrew its application. Sheila issued a statement saying, “Walmart made a wise choice. This decision will remove the controversy around their intentions.”

In October 2007, the Senate held hearings on the ILC issue, and I testified on behalf of the FDIC. But the hearing was anticlimactic. With the Walmart application no longer pending, there was little interest in the issue and congressional support for new legislation dissipated.

Walmart was singled out for special treatment. The standard process for treating bank applications was not followed. Given the company's size, perhaps that was inevitable (although another major retailer, Target, had an ILC application approved in 2004, amid little public scrutiny). Certainly, there was merit in holding public hearings, since in all of my years as a bank regulator I had never seen such a heated outcry over a bank regulatory issue. By holding public hearings, both sides were given an opportunity to air their views.

I question the decisions to grant the moratoriums—particularly the second one. Bank regulators have a responsibility to not only listen but to be responsive to the public and to the industry they regulate. Too often, regulators take the easy way out by not addressing difficult issues, waiting for them (and their sponsors) to go away. Often, such delays are not transparent, so they receive little public attention. Here, at least the FDIC's inaction was on display for the world to see. Regardless, such behavior is an abuse of power that does not serve the public well.

Inordinate delays are bad enough, but the decisions to grant the moratoriums went a step further. They were affirmative steps by the FDIC to not apply the existing laws and regulations. An independent federal agency should consistently apply the laws and regulations that are in place, rather than succumbing to congressional and public pressure and, in effect, lobbying for a change in the law.¹

The FDIC had more than enough time to consider the different issues raised in the hearings and the comment letters. As the Los Angeles Times later editorialized, “There can't be one set of rules for most firms and a separate set, made by political agitators, for Walmart.”

Walmart's application for a limited-purpose bank was not an open-and-shut case. There was an assumption (probably correct) that once Walmart had a limited-purpose bank, it later would want to expand into retail banking. More importantly, there was an assumption that if Walmart were granted a limited-purpose bank charter, the FDIC eventually would allow it to expand into full-service banking. In fact, the FDIC has authority to set conditions around approvals and could have ensured that Walmart was prevented from expanding into retail banking and being in direct competition with community banks.

Shortly after withdrawing its application, Walmart opened a bank in Mexico. There was no public opposition. Mexico's consumers often had complained about the high fees charged by Mexican banks, and over 75 percent of the households there did not have bank accounts. They welcomed Walmart's efforts to better serve Mexico's unbanked population. Walmart made a similar move into Canada, where again there was far less opposition to its initiatives.

Walmart also joined a consortium of retailers who sued Visa and MasterCard for excessively high interchange or swipe fees, arguing that the card companies and a number of banks engaged in price fixing and other antitrust violations. In December 2013, a federal judge approved a $5.7 billion class-action settlement, but Walmart, Target, Amazon, and a number of other firms opted out of the settlement, claiming the amount set aside for damages was insufficient. In March 2014, Walmart initiated its own lawsuit against Visa and a number of banks seeking $5 billion in damages.

The lack of a U.S. banking charter has not stopped Walmart from offering a wide variety of financial products. Walmart offers check-cashing and bill-paying services that are less expensive than most other nonbank alternatives. In 2014, the company introduced Walmart-2-Walmart, a money-transfer service that, for a lower fee than established alternatives like Western Union and MoneyGram, allows customers to transfer up to $900 to and from any of its now nearly 4,000 U.S. locations. Walmart partnered with American Express to issue Bluebird prepaid cards, which have no overdraft fees and no minimum balance requirements. The company also partnered with Green Dot to issue Walmart Money Cards. These reloadable prepaid cards can be used to purchase goods and services from any merchants that accept the cards. Walmart also is part of a consortium of firms that created the Merchant Customer Exchange (MCX), a mobile-commerce platform that will allow Walmart and its partner firms the ability to create payment applications that can be used through smartphones. All of these financial services can be provided without a banking license, and largely benefit the unbanked and underbanked populations.

Looking forward, financial services will continue to evolve. Businesses will innovate and find ways to better serve their customers, or those customers will leave. We are seeing a rapid evolution in how technology can be used to provide financial services that cut costs and better serve the public, but much of that innovation is taking place outside the banking system.

Traditional branch banking is becoming less relevant each year as customers realize they do not need to go to a bank branch for everyday financial services. While the usage of checking accounts remains high, the use of checks is rapidly declining. Reloadable prepaid cards serve as a ready substitute for checks and checking accounts. Smartphone applications can be used as prepaid cards to store value and to make payments as easily as with debit, prepaid, or credit cards.

Alibaba, PayPal, Square, and other nonbank firms are in the business of lending to small businesses. Along with activities like peer-to-peer lending and crowd-source funding, they show that even lending activities will not necessarily remain within the banking system. Amazon, PayPal, Google, T-Mobile, Facebook, digital currencies, and others are actively competing to provide payment services.

The new generation of financial products offers customers convenience and speed. Surveys show that younger customers trust nonbanks more than banks to handle their financial transactions, an amazing development given the inherent advantage banks have by offering federal deposit insurance. As we have seen in Walmart's case, if firms are prohibited from providing better service to their customers or saving them money by one means, market forces will push them to find other means, some of which may be less efficient overall and even less in the long-term interests of incumbent banks.