WASHINGTON (Bloomberg) — Wal-Mart Stores Inc. scrapped plans to open its own bank, ending a two-year controversy that roiled financial-services companies that feared direct competition from the world’s largest retailer.Wal-Mart said today it notified the Federal Deposit Insurance Corp. it was withdrawing an application to open a so-called industrial bank in Utah. The unit would have enabled the Bentonville, Arkansas company to process credit-card and debit-card transactions internally.

“We hope this gets us out of the spotlight,” Jane Thompson, Wal-Mart’s financial services president, said in a telephone interview. “The controversy around us and whether we wanted to branch wouldn’t die, even though the facts were to the contrary.”

The move represents a victory for banking lobbies that threw up hurdles since Wal-Mart’s application was filed with the FDIC in July 2005. Banks said the retailer would have used the bank to eventually open branches in its stores and dominate the industry.

Wal-Mart made a “wise decision,” FDIC chairman Sheila Bair said in an interview with Bloomberg Television. “The controversy was really hurting them in terms of their public image and their intentions of where they wanted to go with financial services.”

The company would have saved about $30 million a year by doing its own processing of electronic payments, which is not a lot for a company like Wal-Mart, Bair said.

Thompson said Wal-Mart’s announcement was prompted by negative attention to its application and the FDIC’s decision in January to extend for one year a freeze on industrial-bank applications from commercial companies.

The FDIC, which insures deposits at US banks and oversees industrial banks, said the freeze was designed to give Congress time to set policy on the issue. Wal-Mart’s announcement will not affect the one-year freeze since it’s not targeted at any specific application, Bair said.

The House Financial Services Committee scheduled a March 22 hearing on whether to ban new commercially owned industrial banks, including Wal-Mart’s. Industrial banks are state- chartered, limited-service institutions based in a handful of states.

US Representative Barney Frank, the Massachusetts Democrat who heads the Financial Services Committee, and US Representative Paul Gillmor, an Ohio Republican, introduced legislation in January that would ban new industrial banks owned by commercial companies, including Wal-Mart and another applicant, Atlanta-based Home Depot Inc., the world’s largest home-improvement retailer.

“I appreciate the constructive step by Wal-Mart not to pursue” the bank charter, Frank said in a statement. “But it does not, in my judgment, remove the need to legislate.”

Gillmor said the legislation would protect the financial system by ensuring more retailers don’t get into the banking business.

“The bill we’re working on continues to go forward because this was never a bill just about Wal-Mart,” Gillmor said.

Wal-Mart said it never planned to open branches. It won’t be applying for any other bank charter, John Kelly, Wal-Mart’s director of tax and financial services, said in an interview.

The retailer will continue to expand into financial services, Kelly said. Wal-Mart already offers a store credit card, check cashing, money orders, wire transfers and bill- payment services in partnership with outside vendors. Those offerings saved its customers $245 million last year, Kelly said.

Banking groups that fought Wal-Mart’s bid were quick to declare victory.

“We’re popping champagne corks around here,” said Cam Fine, president of the Independent Community Bankers of America, a Washington-based group representing small banks. “We have worked very, very hard for 18 months to achieve this result.”