by Josef A

Created on: May 11, 2009

The answer depends widely on the perspective you take. Taking on a corporate view the answer tends to be yes, Wal-Mart should get involved in banking. They would not be the first ones. Industrial giants such as General Electric and most car producers exploited their mere size and frequent client contacts to generate profits by adding a financial arm to their core business. Wal-Mart certainly has the size and the market position do so as well and could easily win over costumers distrusting traditional banks. Having said this, I will show that stronger arguments against an involvement of Wal-Mart in banking exist both from a corporate point of view and in particular taking a broader look at the whole economy.

The world has learned again, they painful way, how risky and volatile the banking business is. To mention a prominent case, the troubles of its financial arm have cost General Electric its long held triple-A rating. It demonstrates that problems in a finance subsidiary can easily spill over to the core business and endanger the vitality of the company as a whole. For this reason stock market participants are quite critical when it comes to being exposed to any kind of credit risk and their reaction may well mitigate the positive effects mentioned before via a decreased valuation at the stock markets. In general, diversification can decrease the volatility of a company's earnings, but it is questionable if this holds for diversifying into the banking industry.

Moreover, Wal-Mart employs more then two million people and is the biggest private employer in the world. The business it does is stable and profitable and involves a limited amount of risk. It even profits from a recession and provides a resort for many less educated who are often let go first when times get rough. The economy is endangered enough by the mere existence of the modern, highly sophisticated, and interconnected banking system. It is not necessary that companies with little expertise enter the business as it is hard enough to control the existing institutions. Wal-Mart could be tempted to commit similar mistakes as other actors did before and take on too much risk. It also might be harder for regulators to clearly distinguish between the financial arm and traditional retailing. And the consequences of a failure of Wal-Mart may be much more dire than the job losses in the automobile industry. It is just not reasonable to take on such risk without any need.

To emphasize the main point, it does not make sense for every strong actor to enter the financial business even though he could. This secures both his own future and makes the economy as a whole less risky. A famous saying tells us a cobbler should stick to his last. That is exactly the advice that can be given to Wal-Mart as well.

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