Yesterday, I looked at three arguments against Wal-Mart's (NYSE:WMT) banking ambitions. Today I will look at the most visible, yet unlikely, argument against Wal-Mart forming an industrial loan corporation, or ILC. ILC opponents paint a picture where Wal-Mart sucks up local banking deposits, decimates the banking industry, and puts local banks out of business. Although Wal-Mart's history of crushing competitors in retail makes this scenario seem possible, I believe that extremely few precedents exist to suggest that a discount retailer might suddenly take over the banking industry.

Would Wal-Mart have an unfair advantage in banking? I believe the answer is an utter and resounding no. Wal-Mart's cost of funds would be the same or higher than Bank of America (NYSE:BAC), Wachovia (NYSE:WB), Wells Fargo (NYSE:WFC), SunTrust (NYSE:STI), or any other bank. Furthermore, Wal-Mart's brand is hardly one that customers would turn to for banking needs. The only major advantage Wal-Mart would have is foot traffic; it has customers in the store, and it could offer convenient banking.

If this were such an enormous advantage, why hasn't it manifested already? After all, more than 1,000 Wal-Mart locations have third-party bank branches in their stores. If Wal-Mart's competitive advantage in banking were so great, these branches -- which already have the "banking" brand -- would be sucking up huge amounts of deposits and putting mom-and-pop banks around the country out of business. Obviously, this hasn't happened, and I fail to see why replacing the third-party bank with a Wal-Mart-branded bank would be any different. If anything, the Wal-Mart-branded bank would have a tougher time attracting customers, because of its unproven brand.

Although it's hard to imagine now, in its heyday, Sears (NASDAQ:SHLD) was just as dominant as Wal-Mart is now. Sears tried using its retailing prowess to get into financial services. In the end, it turned out that customers simply don't like making a shopping list that includes paper towels, shaving cream, and oh yeah, a mortgage and property and casualty insurance. That's why Sears eventually spun off its insurance and brokerage businesses, Allstate (NYSE:ALL) and Dean Witter.

A game of chicken
In the end, I believe the Wal-Mart argument comes down to self-interest, which shouldn't be a surprise to anyone. Banks, capitalizing on Wal-Mart's goliath status, see a chance to slam the door shut on future ILC competition, and they're using the Wal-Mart battle as a way to strike while the iron is hot.

On the other hand, Wal-Mart is using one of the most effective sales tactics: the foot in the door. Wal-Mart wants an ILC charter "just for payment processing." Later on, when everyone forgets that Wal-Mart promised to never, ever, ever go into retail banking, Wal-Mart could expand its banking scope.

The who is always right?
In researching these two articles, I read hundreds of articles, encompassing around 300 pages of news, opinion, and commentary. I was amazed that not a single argument focused on the customer. Almost all anti-competitive arguments center on concerns that a company can use its monopolistic power to price-gouge suppliers. Although Wal-Mart has arguably treated employees and suppliers poorly, no one has ever accused the company of trying to rip off customers. Instead, Wal-Mart uses its considerable muscle to pass cheaper prices onto customers, evidenced by its slim operating margins.

In turn, I don't think anyone doubts that Wal-Mart would pass on ILC cost savings to customers. In fact, Wal-Mart, through third-party providers, is already offering money orders, wire transfers (often used by Hispanic customers to send money back to families in Mexico), and check advances at prices as much as 50% less than competitors. Additionally, the company estimates that roughly one in five of its customers lacks a bank account. Wal-Mart's bank could provide "entry-level" banking services to these un-banked customers, increasing their chances of upward economic mobility.

What does this mean for investors?
I believe Wal-Mart's ILC application means almost nothing for short-term investors, but should be viewed as a "free call option" for long-term investors. If the application is rejected, the status quo remains, and the stock probably isn't affected. If the ILC is approved, Wal-Mart will instantly save tens of millions of dollars for sponsorship fees from electronic payment processing. These savings aren't even a rounding error for a company earning almost $12 billion in net income.

Nevertheless, the ability to cross-sell certain financial products requires almost no incremental capital expenditures, while resulting in huge amounts of free cash flow. Target's credit card operations contributed $645 million to operating income in the last fiscal year, including $124 million of interchange fees, which Target receives when customers use its card outside its stores. Given that Wal-Mart does five times more in revenue than Target, it takes about 20 seconds and the back of an envelope to realize that the long-term potential could become extremely meaningful.

Final thoughts
Although I strongly agree that a Wal-Mart ILC would need careful regulation and restrictions, in a capitalist society, companies need to continually evolve to become more efficient. If banks with century-old operating histories can't fend off a company that makes its living selling underwear and soap at cheap prices, then perhaps those banks aren't providing customers with enough value. Perhaps it's time to introduce some more competition into the equation.

Besides, imagine how silly it would be if I wrote an article asking, "Should Citigroup be allowed to sell groceries?"

Wal-Mart is an Inside Value recommendation . Ask us for an all-access passto the service, and you'll be privy to chief advisor Philip Durell's best picks, which collectively are beating the market by almost 7%. You'll also receive instructive lessons on valuation and company analysis. Give Inside Value a try; it's free for 30 days.

Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the above-mentioned companies. Emil appreciates any comments, concerns, and complaints . Bank of America is an Income Investor recommendation. The Motley Fool has adisclosure policy.