BANKTHINK

JPMorgan, Condoms and the Problem of Reputational Risk

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A recent move by JPMorgan Chase highlights how bank regulators’ growing concern with reputational risk could easily spiral out of control.   

According to Tiffany Gaines, president of Lovability, the bank refused to process payments for her startup, which markets and sells condoms to women, after JPMorgan's risk management department decided the business fell into its "prohibited adult category" and was considered a "reputational risk."

Chase would not say whether or why reputational risk played a part in its decision not to do business with the condom company. (A spokesman did feel inclined to point out "we process payments for a wide variety of merchants.") But, outside of the fact that condoms should be, ahem, the least of JPM’s reputational worries, the citation wouldn’t be all that surprising.

As Peter Weinstock of Hunton & Williams LLP pointed out in a BankThink post back in July, regulators have become increasingly preoccupied with who banks are doing business with. Take, for instance, this letter from the Federal Deposit Insurance Corp, issued back in 2011, urging financial institution to do a better job managing the risk associated with their third-party processor relationships. That sounds fine, except some of the merchant categories listed as "high risk" are obvious choices. "Debt consolidation scams" and "Ponzi schemes," for instance, should be unbankable, while others seem to be there simply because they're icky (tobacco sales?).

Also worth considering is the Department of Justice’s ongoing "Operation Choke Point," which aims to prevent payday lenders and other fraudsters from accessing consumer bank accounts by going after the banks that service them. Again, a laudable goal, but critics may have a point when they say it raises concerns about the government using the banking system, rather than the legislative branch, to outlaw certain activities. 

This type of scrutiny should have everyone – banks, businesses and consumers – concerned. It’s one thing to ask banks not to do business with Iranian terrorists. It’s even conceivable why a bank would want to avoid doing business with porn sites, given they are a high-chargeback business that large swaths of the public frown upon. And, yes, payday lenders aren’t exactly going to win any popularity contests. But cutting off a company that makes contraceptive or prophylactic products puts us in murkier waters.

As Bill Isaac, former FDIC chairman, wrote in a recent BankThink, which addresses the DOJ’s "Operation Choke Point" specifically:

"If government bureaucrats, acting without statutory authority, can coerce banks into denying services to firms engaged in lawful behavior that the government does not like, where does it stop?  The same slippery slope that the DOJ uses today to choke off payday lenders from banking services could tomorrow be used on convenience stores selling large sugary sodas, restaurants offering foods with high trans-fat content or family planning clinics performing abortions."

Gaines says a Chase representative told her other big banks might be equally reluctant to do business with her. She has, however, been approached by other financial firms – "mostly small banks I’ve never heard of" – who have offered to process her payments since her story broke on HuffPo.  

Let’s hope JPMorgan is the outlier here or, even, that its decision sends a message to the government. Because when regulators expect banks to "manage" the risk that someone, somewhere might disapprove of a customer, it's hard to predict which ones will become pariahs.

Jeanine Skowronski is the deputy editor of BankThink. Marc Hochstein is the executive editor of American Banker. The views expressed here are their own

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Comments (5)
As if JPMorgan Chase - investigated and penalized by more regulatory and law enforcement agencies in more countries than any bank since the infamous BCCI - has such a sterling reputation, that it would be besmirched by processing payments for a distributor of female condoms.
The discriminatory nature of banking relationships in the U.S. continues to deny banking relationships to legal businesses and consumers at an increasing rate - ironically, at a time when there is more whining than ever about the so-called unbanked .
The discrimination is exacerbated by a Justice Department that can initiate a witch hunt against small-dollar credit providers, but can't find a way to prosecute so-called "Banksters" for precipitating a global financial crisis, large-scale money laundering for drug cartels and financing of terrorist organizations, using fraudulent "robo-signed" documents in court, rigging energy prices, and a host of other nefarious activities that make payday advances pale in comparison.
Posted by jim_wells | Thursday, March 27 2014 at 9:48AM ET
Holy smokes, one more thing for bankers to worry about. Maybe there will be a "credit death panel" which decides what businesses should get access to reasonable credit rates.

Scott Mills
William Mills Agency
Posted by wmapr | Thursday, March 27 2014 at 10:30AM ET
Operation Choke Point and comparable regulatory efforts are driving us toward "Politically Correct Banking." Is that where a large and diverse country like the United States wants banking to go? Our history and traditions suggest, no. Rule of Law rather than Rule of Gossip should be our standard.
Posted by WayneAbernathy | Thursday, March 27 2014 at 10:31AM ET
I would think that $JPM would prefer to get a condom it could place over the entire organization to kept it from... well you know. As it is, tobacco is fine, foreign dictatorships are fine, Russia is fine, etc. And, when it comes down to it, the hedges they "buy" are loans or gifts, not investments. Hedges are gambling that your gambling will go bad. Female condoms should be the biggest compliance problem they have.

Richard Isacoff
isacofflaw@msn.com
Posted by riisacoff | Thursday, March 27 2014 at 10:39AM ET
While there are certainly enforcement issues that are legitimate, many of the so called fines being levied against banks today are more political in nature and smack of a mere shakedown.
Proof of the political angle is clear as you look at the decisions by the Federal Government through the Justice Department and the regulators to pick and choose which laws to enforce and which to ignore. They use Operation Choke point on legal businesses but are not enforcing federal law on those that are illegal - such as marijuana shops in Colorado -
Posted by Watchdog1 | Thursday, March 27 2014 at 12:07PM ET
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