Walmart's plan to open an in-house banking operation has sent waves of paranoia and fright through the retail banking industry. According to a recent article, published in The News & Observer…

Wal-Mart, always looking for ways to expand its already huge empire, is asking the government for permission to move into an entirely different industry: running its own in-house bank.

On Monday, the world's largest retailer will ask the Federal Deposit Insurance Corp. for permission to open a bank that can process millions of checks and credit-card payments each month. The company said it is not interested in running a consumer bank as well. However, some of its opponents fear such a step could hurt local banks, much like the mom-and-pop stores were hurt during Wal-Mart's rapid expansion.

This is Wal-Mart's fourth bid at running a bank — and its request unleashed an unprecedented flood of comments to the FDIC. In response, the FDIC scheduled its first public hearings on a bank application.

Walmart claims that it can save money if allowed to operate an in-house bank to handle the 140 million credit, debit card and electronic check payments it handles each year. Currently, it pays an outside company to handle those transactions. Walmart is applying for a state charter to open a special type of bank called an industrial loan corporation in Utah. Interestingly, Target (Walmart's biggest rival) operates an industrial loan corporation in Utah to issue credit cards for corporate customers.

According to The News & Observer…

Critics argue that a Wal-mart bank would unfairly concentrate power over retail and consumer and small business lending in one company that is already the largest business in many small towns and rural communities.

"A Wal-Mart bank not only dangerously mixes commerce and banking, but represents a disturbing concentration of capital in the hands of one single corporation, Wal-Mart," said Paul Blank, director of the union-funded political campaign group WakeUpWalMart.com, in testimony filed in advance with the FDIC.

"The issue here is primarily the law and national policy on the mixing of banking and commerce. Depending on your point of view, Wal-Mart is using a valid legal means or the last remaining loophole in banking laws for a nonfinancial institution to obtain a banking charter," said Comizio, formerly with the SEC.

Comizio said federal policy for decades has kept banks under a separate and tougher regulatory framework to limit the risk of collapse in the financial sector, which could spread through the economy faster than the failure of a nonfinancial business.

Comizio's comment is not accurate. Who says that the failure of a financial business spreads through the economy faster than a non-financial business?

One can argue that if Walmart (a non-financial business) failed, Walmart's failure would have a huge effect on the worldwide economy. Millions of employees would be out of work, consumers would be buying more expensive goods, suppliers' business income would decline, and Walmart's suppliers would be forced to lay off employees.

The effects of a non-financial business failing (such as Walmart, Microsoft, IBM, Intel, McDonald's) can be just as significant as the failure of a financial institution.

For example, which one would have a larger effect on the economy….the failure of a state credit union, or the failure of IBM? The state credit union is small and confined to a particular state. Meanwhile, IBM's failure would have an international effect—on employees, customers and suppliers worldwide.

Let's use another example. What about the failure of Bank of America compared to the failure of Cisco Systems? Cisco is a non-financial company. Does that mean that Cisco's failure would have less of an effect on the economy when compared to the failure of Bank of America? Absolutely not. The failure of either company would have a huge effect on an international scale.

So, Comizio's comment is an over-generalization that is not necessarily true.

I feel sorry for Walmart, because they are hugely successful, and it seems they are often penalized for their success. There is too much red-tape, regulation and monitoring of businesses in the U.S….especially large, very successful companies.

Let Walmart open a bank. Competition is good for the economy. Let local retail banks compete for customers. We'll end up with the strongest banks that have the best customer service. If Walmart is one of them, great. If not, the bank will fail and Walmart will have to deal with its failure.

Protectionism (in the guise of federal regulation and oversight) is not warranted.

More on Walmart's banking plans.