Bridging the Gap between Commerce and Banking
Industrial banks, also known as industrial loan companies (ILCs), are unique state-chartered financial institutions often owned by commercial firms. These entities are distinct because they aren’t regulated by federal banking agencies and can offer banking services tailored for consumers and small businesses in a streamlined manner.
Empowering Communities with Financial Opportunities
Originally established in the early 1900s, industrial banks aimed to provide low-to-moderate-income industrial workers with access to credit, which traditional lending institutions often denied them. Owing to their distinct corporate structure, these banks are able to sidestep some of the regulatory challenges faced by traditional banks, attracting financial technology companies and investment firms keen on availing themselves of reduced regulatory hurdles. However, being state-regulated and overseen by the Federal Deposit Insurance Corp. (FDIC) assures a level of financial integrity and security.
While industrial banks possess comparable powers and privileges as traditional banks, the differences in regulatory scrutiny have sparked a nation-wide debate.
Navigating the Controversies Surrounding Industrial Banks
Industrial banks often stand at the crossroad of praise and ire. Advocates see them as pivotal players in modernizing financial services, especially for entities like fintech companies that innovate banking solutions. Yet, this lack of federal oversight brings controversies.
Walmart’s Bold Move: A Turning Point
In 2005, Walmart Inc.’s application to form an industrial bank aimed at slashing credit and debit card transaction fees triggered massive pushback from commercial banks and regulators. This seminal moment led the FDIC to impose a moratorium on industrial bank applications in 2006 that spotlighted the need for clearer regulatory boundaries.
Rise of Fintech and Renewed Scrutiny
Much like Walmart, modern fintech companies seek industrial bank charters to bypass conventional banking restrictions. This has rekindled debates about the potential risks to the banking system. In early 2019, the Independent Community Bankers of America (ICBA) made a significant push for federal oversight, following applications by companies such as Square Inc. to secure state bank charters.
Legislative Moves: Closing the Loopholes
Efforts to legislate and curb the less-regulated operability of industrial banks have gained momentum. In 2019, Senator John Kennedy sought to eliminate the ability of nonfinancial companies to establish these banks through the “Eliminating Corporate Shadow Banking Act of 2019”. Backed by the ICBA, this move aligns with aspirations to fortify the boundaries separating banking and commerce, ensuring a safer economic landscape.
Industrial banks remain a compelling yet contentious component of the American financial system. Navigating their regulatory standing while harnessing their potential remains an ongoing balancing act.
Related Terms: commercial bank, fintech, FDIC, Federal Reserve, moratorium.
References
- Utah Department of Financial Institutions. “Industrial Banks”.
- Independent Community Bankers of America. “Industrial Loan Companies: Closing the Loophole to Avert Consumer and Systemic Harm, April 2022”, Page 3.
- Federal Reserve History. “Bank Holding Company Act of 1956”.
- Walmart. “Wal-Mart Applies to Operate Industrial Bank in Utah”.
- Federal Deposit Insurance Corporation. “FDIC Places Six-Month Moratorium on Industrial on Company Applications and Notices”.
- Federal Reserve Bank of St. Louis. “Industrial Loan Companies Come out of the Shadows”.
- Square. “Square Financial Services Begins Banking Operations”.
- Independent Community Bankers of America. “Industrial Loan Companies: Closing the Loophole to Avert Consumer and Systemic Harm”, Pages 4–5
- Independent Community Bankers of America. “Eliminating Corporate Shadow Banking Act of 2019 (S. 2839)”.
- Congress.gov. “S.2839-Eliminating Corporate Shadow Banking Act of 2019”.
