Against Scale in Banking: The Problem with the WalMart Effect

One of the problems with the financial system leading up to the crisis was not just the interconnectedness of the system, but also the scale of the system. The lead to an inversion of the saying that if you owe a thousand dollars to the bank, you have a problem – but if you owe a million dollars to the bank, the bank has a problem. This turned to the banks owing each other billions of dollars, and being not just dominoes, but huge dominoes that needed to be propped up. One proposal to fix this was to broaden who could open banks, with companies like Walmart trying to open branches, but the problem would be a different one of scale, but on the customer-facing side. You get economies of scale, but at a cost.

If Walmart opened a bank, it would be like the effect Walmart had on other small-town service providers. They would be able to use their scale to be able to undercut existing community banks. They could offer lower rates on loans and higher rates on savings, with the offer of branches in multiple places. Overall, this would be good for individual consumers in that they would save a marginal amount of money or be able to make a little bit more. That’s in theory. I’m not sure how much more already existing mega-banks use their scale to act as a financial supermarket. I am a Chase customer because I was a WaMu customer and everything got passed to Chase a decade ago and switching costs are just a high enough hurdle I haven’t bothered switching to a Credit Union like I know I should.

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I have checking, savings, and a credit card with Chase, and the rates really aren’t competitive. Even after the Fed has been raising rates for a while, the rate on the savings account is essentially at a zero rate, while for some reason the rate I would have to pay on borrowed money has increased in lockstep automatically with every rate raise. It will take a minute to follow the Fed down though. I also have a credit card and savings account with Discover. The benefit of Discover is that they don’t maintain branches, so there is less overhear. And I see that in their offerings, so though the savings account pays less than treasuries, it is close, and the ease of transactions justifies that spread. 

The problem with a Walmart bank would be if the competition with community banks led to the closure of community banks, because what Community banks do in a way that Walmart would have no incentive to do is invest in the community. Where I live, the First National Bank of Brookfield is helping the Library’s new capital project with a three-million-dollar unsecured loan with a good rate. None of the larger national banks would do this, but the Library Director and Board have a good relationship with the President of the bank, and they made a deal. What Walmart has been shown to do is destroy capacity in the towns that they open in, closing smaller shops and making them the only option for whatever service they offer. This is not to love too much on mom and pop stores. They often can be worse employers than Walmart since as small shops they aren’t subject to the same sort of labor laws that Walmart is subject to. However, most people would rather live in a vibrant community with many providers of goods and services than live in a town with a Walmart just outside of city limits with a Main Street fully of empty shops and boarded up windows.