For several years, the news from Sears, Roebuck & Co. has all been about growth, as the giant retailer added to its insurance and savings bank subsidiaries a brokerage house, real estate company and small bank and established several hundred in-store financial centers to sell all these services. It even introduced a new bank/credit/debit card in a few markets.
Bankers are eager to cut Sears off at the pass before it becomes a nationwide bank offering financial services that other banks can't. Congress is debating who should own banks and where. And Sears is calling the threat to its empire-building a major consumer issue involving, said then-Chairman Edward Telling in March, no less than "the future of the American banking system."
The world's largest retailer ($22 billion in sales last year and over 850 outlets), and the nation's largest retail lender (60 million store credit cardholders), Sears owns the 25th-largest savings and loan (Sears Savings Bank), one of the biggest insurers (Allstate), a major brokerage (Dean Witter Reynolds) and a real estate company (Coldwell Banker). Finally, Sears this summer introduced a multi-purpose "Discover" card, which provides a line of credit at participating retailers, takes deposits into a money-market account at Sears' newly acquired Greenwood Trust in Delaware, offers instant cash from participating automated teller machine systems and will ultimately link together everything in the Sears Financial Network, providing nationwide access to "a comprehensive set of consumer financial services."
Prohibitions on Banks
Banks can do almost none of that. By law (the 1956 Bank Holding Company Act), banks--defined as entities marketing both checking accounts and commercial loans--can't cross state lines, and bank holding companies can't get into those other businesses.
Sears, however, is not a bank holding company, and its Greenwood Trust, which issues the Discover card, makes no commercial loans and is thus considered a "non-bank bank," exempt from the laws against interstate banking. Its non-bank status is also the reason that Sears can have a bank at all: Diversified companies are forbidden to own real banks for fear depositor funds wouldn't be safe from profit-making hands.
Not surprisingly, banks would prefer the opposite situation: They (banks) should be able to cross state lines, and Sears should get out of banking. And lo! That's just what two bills in Congress propose.
One bill (HR 20) would close the "non-bank bank loophole" by defining bank as any institution insured by the Federal Deposit Insurance Corp. By that definition, Greenwood could no longer belong to Sears. A companion bill (HR 2707) would let bank holding companies cross state lines in five years, reversing the traditional containment of bank size and spread.
Sears, needless to say, is fighting for what it calls (with comforting gemutlichkeit) "family banks." Though non-commercial, such purely consumer banks, they say, would obey the same consumer-protection laws as other banks, from insurance requirements to truth-in-lending regulations, and a few more besides. They'd offer no-fee, no-balance checking accounts, control check holds, reinvest 60% of deposited funds in the community and put 60% of the bank's assets into consumer loans. Except for small business and family farms, they'd do no commercial lending.
Sees Benefit in Competition
Moreover, competition is beneficial, they say. Indeed, "as a general principle, the more players in a market, the better for everyone," says Michelle Meier, attorney for Consumers Union in Washington, which supports the basic idea of consumer banks--if not specifically Sears'. "In a lot of markets," Meier says, "banks and S&Ls are not focusing on consumers because they're not big customers." Sears, by contrast, couldn't help but benefit consumers, says David Shute, general counsel for Sears' Dean Witter Financial Services Group, "because Sears banks are not permitted to make business loans and will have to be profitable through the packages they offer consumers."
In banking particularly, it's generally agreed that outside competition has proved valuable. When savings and loans got into checking, consumers were suddenly wooed with some attractive checking packages, and the money-market accounts introduced by brokerage houses (and soon copied by banks) gave ordinary consumers better yields on deposits. Sears even points out that its in-store financial centers are bringing customers into the financial market who are new to such services: 60% of the brokerage accounts and 15% of the savings bank accounts opened at in-store centers have been first-time accounts.