Finovate Blog

This week eBay reported that PayPal’s volumes were above $8 billion for the first time, and the Federal Deposit Insurance Corp. (FDIC) agreed to hold hearings this spring on whether to issue FDIC insurance to Wal-Mart Stores Inc. as part of the retail giant’s application to get a Utah industrial loan corporation.

Both companies are being watched almost microscopically by banks and other payment providers who are afraid that these companies are going to somehow walk away with their payments franchise. Our advice: Relax.

Sure, PayPal is doing well: Net revenues this past quarter grew 48 percent over the same period last year—they were $298 million—and gross volume was up 45 percent by the same measurements. But unnoticed amongst all the heavy breathing was that PayPal user accounts grew 51 percent in the same period. In other words, the growth in volumes and revenues was proportional to the growth of eBay’s core business, not some indication of a sinister plot for world domination.

The hysteria surrounding Wal-Mart’s moves is even worse. The suspicion in the payments industry, of course, is that once Wal-Mart has the license and the insurance, it’ll begin pushing into community banking, driving all those small institutions into the famous Wal-Mart meat grinder and emerging a coast-to-coast financial services colossus. And considering Wal-Mart’s history, it’s easy to succumb to those anxieties.

But we believe Wal-Mart when it says it only wants the license so it can be its own payment card acquirer. For one thing, the move makes sense for it: According to our calculations, it’ll save Wal-Mart at least $650 million a year, based on its 2004 revenues of $172 billion (see Electronic Payments Week, July 26, 2005). And for another, Wal-Mart’s application to the FDIC says on page one that this is their reason for wanting the bank, and we are skeptical that Wal-Mart executives would willingly commit perjury in such a closely-watched event; there’s absolutely no evidence that these guys are stupid.

There may be some logic to our view, but our belief, touching though it may be, hasn’t prevented over 1,500 comment letters to have been sent to the FDIC on the matter, nor has it discouraged the House Committee on Financial Services from scheduling hearings about Wal-Mart’s plans. And the FDIC has already agreed to delay any decision on the insurance application until the issue has been fully aired.

Those hearings will make interesting viewing on C-SPAN, but in our view, banks and payments processors would be better served in the case of both companies by studying what they’re doing, and drawing useful lessons from them. We can understand why the success of PayPal, and the motions of Wal-Mart, would arouse anxieties within the industry: It’s being swept by transformative change, and both companies represent what Harvard professor Clay Christensen calls disruptive technologies.

But aside from finding any irony in the spectacle of capitalists trying to stifle competition, there’s the deeper concern that the industry may be losing faith in itself. Banks began as counting houses, and unless they do something unreasonably boneheaded, they are unlikely to be driven out of their inner redoubt as long as they meet that competition head on.

Our recommendation: Remember what U.S. Grant said at the Battle of the Wilderness. Robert E. Lee had whipped the Union twice before on the same ground, and Grant’s staff was beside itself wondering how Lee would whip them again. “Stop worrying about what he’s going to do to you, and start thinking about what you’re going to do to him,” said Grant. That campaign ended with Lee's surrender at Appomattox.