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:

http://bcove.me/61q0tuuf

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:

( https://bluebird.com/?povid=cat1099170-env474392-module474393-lLink6 )

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.