updated 5/15/2006 3:29:35 PM ET 2006-05-15T19:29:35

Home Depot Inc. calls it a natural fit to expand its business. Wal-Mart Stores Inc. bills it as simply a cost saver. You could call it a new-fangled bank.

It’s an industrial loan corporation, and though little-known, it has become a popular vessel to carry financial ambitions of big companies of all sorts.

While this has been going on quietly for years — there are now 61 industrial loan corporations in the country — Wal-Mart’s bid to establish one has galvanized opposition to the world’s largest retailer. The proposal has riled small-town banks who are worried the retailing behemoth might cut into their business the way it has mom-and-pop retailers with its sheer size, aggressiveness and ubiquity.

When Wal-Mart rolled into town, it brought the closing of 555 grocery stores around the country, 298 local hardware stores, 293 building suppliers and 116 pharmacies, according to the AFL-CIO, one of the numerous opponents.

Last month, a parade of witnesses from groups representing banks, other business interests, unions and community organizations argued against granting Wal-Mart’s request, at the first-ever public hearings on such an application before the Federal Deposit Insurance Corp.

Retailer Home Depot Inc. this week became the latest company looking to own an industrial loan corporation, or ILC. It announced a deal to buy EnerBank USA — which makes home improvement loans — from CMS Energy Corp.

Only seven states grant charters for ILCs. They are federally insured, which means taxpayers would have to pick up the tab for making depositors whole if any of them failed.

That has added to the unease about the growth of these businesses. Twenty-one have failed, though they were mostly small institutions in California that operated as savings and loans.

ILCs, in many cases, lift a taboo against the mixing of banking and commerce, an issue that has been hotly debated by policymakers. They enable companies to cut out the middleman, saving them millions in fees they would otherwise have to pay financial institutions.

“It’s a natural fit,” said Frank Blake, a Home Depot executive vice president. The retailer said the deal is part of its strategy to expand its business with contractors.

Some critics of the banking-commerce mix, including Rep. Jim Leach, R-Iowa, say it leads to a concentration of assets in the hands of a few big companies, stifling competition and hurting consumers.

Other experts, though, say that moves into banking by companies such as Wal-Mart would benefit consumers by lowering fees and prices in an industry in need of more vigorous competition.

Some say ILCs offer a harmless way for big companies to save money through economies of scale.

Target Corp., for example, uses its ILC to issue credit cards for corporate customers of the retailer. General Motors Acceptance Corp., the automaker’s financing arm, has three ILCs, all based in Utah — the No. 1 state for the industrial banks. BMW, Toyota, Volkswagen, Volvo and Harley-Davidson Inc. each have one.

So do document manager Pitney Bowes Inc., giant managed-care company UnitedHealth Group Inc. and some of the biggest U.S. financial institutions, including American Express Co., Citigroup Inc. and Merrill Lynch.

ILCs have been around since the turn of the 20th century, when they were introduced to meet industrial workers’ need for credit. They took their current form in 1987, a little-known institution born of a regulatory loophole that allows commercial companies to own a bank. They have grown astronomically, now with a total of around $141 billion in assets and $98 billion in deposits.

The ILCs are allowed to issue credit cards, take deposits and make loans. What they cannot do is offer standard checking accounts if their assets exceed $100 million.

It was Wal-Mart’s bid to add a bank to its far-flung empire that shone a spotlight on ILCs and prompted the hearings by the FDIC.

A wave of opposition came from banks of every type and size, unions, lawmakers, and consumer and community organizations, as well as associations of convenience stores, grocers, retailers, real estate agents and farmers. Wal-Mart insists that it has no plans to compete with community banks and has pledged to the FDIC to stay out of branch banking and consumer lending. The 300 or so banks that operate branches in 1,150 Wal-Mart stores will stay there, it says.

The opponents aren’t convinced, however.

Wal-Mart wants to set up its ILC in Utah, a state whose laws are particularly friendly toward the industrial banks.

“They’ve staked out an alternative franchise,” said Lawrence J. White, an economics professor at New York University.

Of the 61 ILCs in the country, 33 are based in Utah, accounting for 80 percent of total assets.

Utah is to industrial banking what South Dakota is to the credit card industry. With no cap on interest rates, South Dakota drew Citibank to move its card operations there in 1980, and the business boomed in the state.

And the ILCs keep on coming. Companies joining Wal-Mart in the pipeline for FDIC approval of their applications for deposit insurance include: The Blue Cross and Blue Shield Association, which wants to use the bank to administer the consumer-directed health savings accounts and other plans offered by Blue Cross insurers; automaker DaimlerChrysler AG, and information services provider Ceridian Corp.

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