TESTIMONY OF H. RANDOLPH LIVELY, JR. ON BEHALF OF AMERCIAN RETAIL FEDERATION BEFORE THE SENATE BANKING COMMITTEE MARCH 7, 1984
Mr. Chairman, and Members of this distinguished Committee: My name is Randy Lively and I am President of Jewelers Financial Services, a wholly owned subsidiary of Zale Corporation, the retail jeweler. I am also Chairman of the American Retail Federation Financial Services Task Force. Joining me today is Christine Edwards of.sears, Roebuck and Co. The two companies we represent and the membership of ARF reflect not only the diversity of our industry but the companies which are active participants in various elements of the consumer financial services industry. We are here today representing the American Retail Federation whose membership consists of 31 national retail trade associations, 50 state retail associations, the Greater Washington Board of Trade, as well as Corporate members. Through its members, ARF represents more than one million retail establishments. Our interest in appearing before this Committee today is as diverse as the industry and companies we represent. Much of the legislation pending before this Committee under the title "Financial Services Competitive Equity Act" is hot directly of interest to many segments of the retail industry. For others, the interest is paramount. The legislation which is before this Committee has the potential for significant impact on existing operations and business associations of retailers.
In our presentation today we wish to focus on three major points upon which retailers in general have a consensus position. I should add first that several of our major corporate members intend to file separate statements that intend to address their separate corporate concerns. Turning now to the general items of concensus: First, we believe strongly that future options for entry by retailers into various aspects of the financial services industry should be preserved. Second, we do not believe that adverse consequences will flow merely from retailers having an ownership position in various segments of the financial services industry, particularly consumer banks, savings and loan associations and securities firms. Third, we are convinced that retailers* involvement in delivering various financial services products is a healthy evolution in the marketplace. Turning to our first point, the members of the American Retail Federation submit that one of the primary goals in appearing before you today is to appeal for the preservation of a future choice for retailers. This would include flexibility for individual retail companies to add ownership of depository institutions to other services already provided to their customers. S. 2181 includes some provisions which further that goal. Some of the very positive aspects of that bill include the definition of consumer bank and the validation of the concept of a consumer bank as a specific and desirable type of financial institution. In addition, the goal of
preserving future choices is supported by the treatment of the concept of a qualified thrift lender which maintains the lack of activity restrictions on unitary S & L holding companies while preserving their character as home mortgage lenders. Retailers agree with the general approach of this Committee to consider the implications of orderly deregulation. This would include the dismantling of unnecessary barriers which, exist between those companies in general commerce and depository institutions. We strongly disagree with the premise that intrinsic harms will exist merely because of the control by a retailer of a depository institution. For example, the substantial history and record of the ownership of saving and loan associations by diversified, non-banking entities has produced no evidence of unacceptable risks or of harmful practices in those institutions. To the contrary, those companies have acted prudently while fulfilling their fiduciary responsibility to depositors. Both the consumer bank treatment and the qualified thrift lender treatment would permit retailers to own a depository institution with no new restrictions being imposed on the retailers non-deposit activities other than existing measures aimed at safety and soundness considerations. Permitting retailers to participate in the marketplace through these provisions to de-regulate are heartily endorsed by the American Retail Federation.
The third point we would like to make is that retailer involvement in delivering financial services is part of a healthy evolution in the marketplace. This evolution is evidenced in today's marketplace.- To understand this better it may be helpful to review retailers current presence in the financial services industry. Generic financial services are of two broad types - those provided to businesses and those provided to consumers. Retailers today are engaged in both types of services. Some of the financial services activities in which retailers are now involved are as follows: 0 Ownership of depository institutions. 0 The ownership of insurance companies providing a full range of insurance products such as mortgage, life, property, casualty, and credit life. 0 The issuance of national and local credit cards. 0 Providing billing and remittance processing to third parties. 0 Providing credit authorization services and the communications network to third parties. 0 The ownership of ATM's in some states.
0 Joint ventures with depository institutions in the offering of a broad range of services which include ATM's, offering certificates of deposit and providing general financial services to third parties. 0 Ownership of full service securities firms. 0 Ownership of financial intermediaries dealing in commercial paper. 0 Consumer and commercial real estate brokerage and affiliated financial activities. 0 Mortgage banking. 0 Consumer finance lending activities. As is evidenced by these activities, the impact of any legislation on the financial services industry will necessarily include an impact on the present retailing industry. In addition, many of the issues before this Committee are irrevocably tied to the significant strides which have been made in technology and in the mediums available to deliver various financial services effectively and conveniently to consumers and businesses alike. Integration into retail systems of these various technologies for rational business reasons has inevitably identified areas in which our customers can be better served than in attempts to maintain the traditional distinctions. For example:
0 The ATM owned and operated by the retail grocery chain brings a new level of convenience to consumers in obtaining cash for the purchase of the retailer's products or for the cash needs that the consumer may have outside of normal banking hours. 0 The laborious and risky process of cashing checks to provide the consumer with this convenience at a much lower cost to the retailer is being provided by the ATM with its growing acceptance. 0 Other questions which involve who should absorb the cost of these emerging technologies and delivery systems is also a matter of significant concern to retailers. 0 Other issues which this Committee will debate impact on questions of pricing, cost transfers, or on the transfer of subsidies. The American Retail Federation urges that deliberations on these questions should be developed to the fullest extent lest we find pricing configurations which might create competitive disadvantages and cost burdens to retailers as the revolution in the payments delivery system continues. In summary, retailers recognize that with the age of electronics and sophisticated communication and information delivery systems that there may be further revolutionary impact that will require this Committee to
evaluate, on a periodic basis, what these innovations may have evoked in the requirements of statutory and regulatory provisions covering the delivery or the providing of financial services to consumers and to businesses. Let me turn briefly to address two other titles of S.2181 and their impact on retailers. In Title IX retailers have a strong interest in how this Committee will treat the control of fraud activity involving credit cards. In our view, the approach taken in Title IX to protect consumers from loss as a result of the fraudulent use of credit cards and credit card account numbers is the correct one.» It identifies the improper purposes for which account numbers can be used and prohibits disclosure of the numbers for those purposes. It does, however, permit all other disclosure of account numbers. The consumer credit marketplace is, indeed, dynamic. For that reason, it is quite literally impossible to specify every legitimate use that today is made of account numbers. Legitimate uses of account numbers are as numerous as the merchants who use those numbers. It goes without saying, therefore, that it also is quite literally impossible to identify and describe every type of legitimate use that will be made of account numbers in the future. Thus, Title IX of S. 2181 follows the only acceptable legislative path through the thicket of credit card protections: it identifies and
8 prohibits the improper uses of account numbers and permits all other uses. Legislation that would take the opposite approach permit account number disclosure for a few enumerated purposes and prohibit it for all others would have a stultifying effect on the applications of innovative management techniques as well as inhibit creative marketing efforts. Accordingly, ARF could not support any such legislation, but it does support Title IX of S. 2181. Title X of the bill encourages the recent experimentation by the northeastern states in allowing Interstate banking. While retailers would prefer to see this issue addressed on a national basis, we support the states 1 attempts to address the issue through interstate compacts. Such experimentation ultimately will serve to remove arbitrary geographical barriers making it easier and less expensive to provide financial services to American consumers. We wish to make the emphatic point that retailers are not suggesting a total lack of regulation. The need for protection of the safety and soundness of depository institutions through the regulatory and oversight process is required. However, we believe that the need is for a reasonable level of regulation aimed at controlling specific definable risks. Existing regulation of the financial services industry goes beyond these specific needs. S. 2181 takes a positive step to reduce these unnecessary regulations and barriers. Finally, we would urge the Committee not to consider piece-meal legislative solutions in the area, such as a moratorium, grandfathering,
or the closing of so-called loopholes. Our reasons for this stem from the general principles which we have already set forth. There is, as we have stated, absolutely no evidence that the ownership of certain kinds of financial institutions by non-financial entities has produced or is likely to produce any adverse consequences to the public. The issues of retail participation in the financial services marketplace should be approached without preconceived notions. A moratorium which requires divestiture as of an.arbitrary date totally prejudges the issues involved. Moreover, by imposing a moratorium Congress freezes the competitive situation in a very uneven way. This approach would have the impact of less competition in the marketplace and a more limited range of services which may be offered at potentially less competitive prices. In the long run, a moratorium of the type proposed thus far would only adversely affect the consumer by retarding the development of a financial services marketplace. Grandfathering existing situations produces many of the same consequences. Its only advantage is that it does not arbitrarily penalize companies that have lawfully acquired certain kinds of institutions by forcing divestiture before the question of what the legal framework should be is totally resolved. ' Finally, as to closing so-called loopholes, the Committee should satisfy itself that it is actually dealing with loopholes and that closing them is indeed in the public interest. In summary, we feel that the
10 Committee should very deliberately consider the pros and cons of what the finacial services marketplace of the future should look like and deal with the matter in a comprehensive fashion. I would like to thank the Committee for this opportunity to present the views of American Retail Federation. I would be pleased to respond to questions the Committee Members may have.