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Owning a US bank is hard — deliberately so. A long-standing belief that commerce and banking are best kept separate has spawned rules and hurdles that effectively prevent Walmart, Google or Tesla from taking deposits and making loans. But that could change. If it does, customers will get more choice and the financial system will get more risk.
Simply put, a company that owns a bank must be regulated like a bank. But there is an exception. If it buys or creates what’s known as an industrial loan company, the parent company is exempted from that onerous oversight. Most ILCs are based in Utah. They can’t offer demand deposits on a large scale, but they can offer products like “negotiated order of withdrawal” accounts that amount to the same thing.
Many companies would love to own a bank — understandably, since US retail banks can earn returns on equity of 20 per cent or more. The catch has been that the Federal Deposit Insurance Corp, which protects savers with less than $250,000 in the bank, has since 2020 resisted granting that cover to new owners of ILCs in almost all cases. Ecommerce company Rakuten petitioned, and eventually gave up. So did GM Financial, an affiliate of General Motors.
In the new Donald Trump administration, things might be different. For one, the FDIC is likely to pass from Democrat to Republican control. In the past, that has tended to mean a more pro-innovation approach. Tech disrupters are in the ascendant, politically.
That could open the door to all kinds of new bank owners. Google parent Alphabet, Amazon.com or Meta Platforms might all see value in being able to amass data and wealth from their millions of US customers. Then there’s Elon Musk, who has talked in the past about turning social network X into an all-purpose financial platform — and who is now a part of the White House milieu.
This isn’t all bad. America already has about 4,000 banks, but it often lacks innovation and customer-friendliness. New entrants could create a kind of price war where savers get more from their money. Recall Goldman Sachs, which launched its Marcus savings product in 2018 offering generous rates. With slick branding and competitive offers, a Big Tech bank could grow surprisingly quickly.
The catch is that when banks go wrong, it tends to be the general public that picks up the tab. For that reason, regulation is intentionally onerous. Tech moguls at times give the air of Tom and Daisy from “The Great Gatsby”, who smashed things up and “retreated back into their money or their vast carelessness” while others cleaned up the mess. The last thing America needs is to bring that energy to banking too.
john.foley@ft.com
