A battle over Wal-Mart Stores Inc.’s effort to get into financial services may derail the growth of company-owned banks — as well as Utah’s ambitions to become to such lenders what Delaware is to corporations.

The fight pits Wal-Mart, the world’s largest retailer, and other non-financial companies seeking to establish limited-service ‘industrial banks’ against community banks, locally owned and operated institutions concerned they might be overwhelmed by new, deep-pocketed competitors.

The dispute has also sparked broader policy concerns among regulators about whether industrial banks may endanger the financial system. Federal Reserve Chairman Ben S.Bernanke told the House Financial Services Committee last month he is concerned about the federal government’s lack of authority to regulate companies that own the banks.

Breaking down the divide between nonfinancial companies and banking would lead to “conflicts of interest that we can do without,” former Fed Chairman Paul Volcker said in an interview.

“Wal-Mart’s application would do almost nothing; it’s a question of what precedent it creates,” Mr. Volcker said. “To what extent is it the camel’s nose under the tent?”

The Federal Deposit Insurance Corp., the government agency that guarantees deposits and oversees industrial banks, last month froze all applications to set up new such lenders for six months, saying it needed more time to examine their impact on the banking system.

“The moratorium is damaging,” said George Sutton, a lawyer with Callister, Nebeker and McCullough in Salt Lake City, which represents about half of Utah’s industrial banks, including Volkswagen Bank USA and one run by Wal-Mart rival Target Corp. “It’s creating uncertainty about the charter itself.”

Utah is home to 33 of America’s 61 state-chartered industrial banks, which perform limited services such as processing credit-card transactions. Eleven of the 12 applications affected by the FDIC’s freeze are for Utah banks.

The FDIC moratorium is a victory for the nation’s 8,200 community banks, which collectively control $4.5 billion in assets. Industrial banks have more than $155 billion in assets, up from just $3.8 billion in 1987, according to the U.S. Government Accountability Office.

Lobbyists representing the Independent Community Bankers of America, a Washington-based trade group, are pressing Congress to bar non-financial companies from owning industrial banks. During the group’s annual visit to Washington in May, 300 members blanketed congressional offices on Capitol Hill, raising the issue with lawmakers.

Their specific target is Bentonville, Arkansas-based Wal-Mart; their worry is that it would eventually break into branch banking, overwhelming the market by offering cheaper services, as it has done to local retailers and grocers throughout the country.

“If they open branches in Wal-Mart store locations, it could be a real problem,” said Mark Tenhundfeld, director of regulatory policy at the American Bankers Association, the Washington-based trade group that represents both community banks and big lenders like Citigroup Inc. and Bank of America. Because industrial banks have to comply with fewer federal regulations, they maintain an unfair cost advantage, Mr. Tenhundfeld said.

Industrial banks, like commercial banks, can make loans, issue credit cards and accept deposits. They have access to federal deposit insurance, as well as to the Fed’s discount window and payments system. They can’t offer business checking accounts if their assets exceed $100 million.

Wal-Mart filed with the FDIC in July of last year for deposit insurance for the Utah bank. Financial-services executives at the company say they want only to process some of the 140 million credit- and debit-card transactions the company handles each month.

Jane Thompson, Wal-Mart’s president of financial services, said at an April FDIC hearing that the company “is absolutely and unequivocally committed not to engage in branch banking.” The retailer, she said, is “committed to supporting community banking, not undermining it.”

William Isaac, a former FDIC chairman, says the agency’s subsequent decision to impose the moratorium puts pressure on Congress to step in. Two members of the House Financial Services Committee last month introduced legislation that would bar commercial ownership of the banks. Senator Robert Bennett, a Utah Republican and a senior member of the Banking Committee, is a strong proponent of the banks and is the main obstacle to restricting their growth, Isaac says.

If Congress doesn’t act by January, when the moratorium expires, the FDIC is likely to extend it, says Isaac, who now heads the Secura Group, a Vienna, Virginia-based financial consulting firm. That might force Bennett to negotiate, Mr. Isaac said. For Senator Bennett and other industrial bank supporters, “the status quo is no longer acceptable because the status quo is everything at a stop,” he says.

Emily Christensen, a spokeswoman for the senator, said he won’t take a position on the legislation until a Senate version is introduced.

Utah’s courting of industrial banks has followed the path of Delaware, whose business-friendly policies have lured more than half of all publicly traded American companies to incorporate there.

Utah has a nine-page guide touting the legal and regulatory advantages of setting up shop in the state. Nine years ago it granted industrial banks almost all the powers of state-chartered commercial banks. The state also has no interest-rate caps on consumer credit, and industrial banks may apply those rates to customers in other states.

Consumer advocates question whether the friendly laws and regulators hurt bank customers. “Utah has very minimal consumer protections in the credit market,” says Jean Ann Fox, director of consumer protection at the Consumer Federation of America.

Among industrial banks in the state are those owned by BMW of North America, a unit of Munich-based Bayerische Motoren Werke AG, and New York-based Merrill Lynch & Co., whose industrial bank is the nation’s largest, with $62 billion in assets. The state has also drawn some offbeat businesses such as Medallion Bank, a Salt Lake City specialty lender that finances the medallions, or licenses, for cab drivers in New York and other cities.

Industrial banks provide 1,200 high-paying jobs and tax revenue for Utah, says Paul Allred, deputy commissioner of the state’s Department of Financial Institutions.

Industrial banks got their start a century ago to offer consumer loans to low-wage industrial workers who didn’t qualify for commercial bank loans. In 1987, Congress paved the way for their growth by allowing any type of firm to own an industrial bank without Federal Reserve oversight of the parent company.