FDIC eases path for Amazon, Facebook to become lenders
Amazon.com, Facebook Inc., Walmart Inc. and other corporate giants may soon give Wall Street a run for its money as a key U.S. regulator smooths the path for nonbanks to get into lending.
TheFederal Deposit Insurance Corp. this week approved a final rule governing so-called industrial loan companies that will allow major businesses to seek banking charters while escaping capital and liquidity demands faced by dedicated financial firms.
The measure will “provide transparency to market participants regarding the FDIC’s minimum expectations for parent companies of industrial banks,” Chairman Jelena McWilliams said.
The new rule formalizes years of agency practice with the ILC charters, which were created to let commercial firms make small loans to workers but have morphed to become a back door into big-time banking.
The proposal released earlier this year sparked alarm in the banking industry over the prospect of competition against massive companies that could leverage their huge customer bases and guaranteed consumer traffic to gain meaningful toeholds in banking. And they could offer customers financial services backed by the government, including FDIC deposit protections, with fewer regulatory demands.
Bankers, in an unusual alliance with Democratic lawmakers and consumer groups, have called for a halt in approving new charters until Congress closes a loophole that allows what they see as an unfair advantage.
The FDIC cleared two ILCs earlier this year when it granted conditional deposit-insurance approval for mobile payments firm Square Inc. and student lender Nelnet Inc. But an effort by Japanese online retailer Rakuten Inc. to set up its own bank is seen as a major test case for a non-financial firm to break down the traditional barrier between banking and commerce.
“If the FDIC approves Rakuten’s application, it will set a precedent for every other Big Tech company (Amazon, Facebook, Google, etc.) to enter banking through an ILC charter without consolidated supervision,” the Bank Policy Institute, a Washington-based industry
lobbying group, wrote in a blog post last month.
Facebook declined to comment, and Amazon and Google didn’t respond to emails seeking comment.
The FDIC said in a rule notice released Tuesday that the agency is obliged to implement federal law as it exists today, citing an increased urgency to clarify the application process as more companies express interest in seeking charters.
Industrial loan companies have existed since the early 20th century, and were initially used to provide credit for workers underserved by commercial banks. ILC growth exploded after Congress in 1987 exempted them from the definition of “bank” under the Bank Holding Company Act, freeing companies from business restrictions faced by traditional lenders and supervision by the Federal Reserve.