WASHINGTON — The debate over the separation of banking and commerce has come roaring back, but instead of Walmart in a spotlight role, many banks have centered on a player they see as the new villain: fintech.
“What these guys want, are all the advantages and not the same kind of regulation, which to me doesn't make any sense,” said Arthur Wilmarth, a law professor at George Washington University. “I'm not sure people would be happy with Google or these other large companies running very large banks.”
The issue was rekindled after the online lender SoFi applied in June for an industrial loan charter, one of the only remaining ways for a commercial entity to enter the banking system.
It gained new urgency when acting Comptroller of the Currency Keith Noreika — who would likely vote on the SoFi application if he is still in office as a board member of the Federal Deposit Insurance Corp. — argued that the separation of banking and commerce should be re-evaluated.
“What I don't like is everyone just assuming the separation of banking and commerce is holy writ, without having an intellectual understanding about why that's the case,” Noreika said in an interview last month with American Banker. “That's why as a lawyer, I'm going to push holes in that argument so that people can justify it to me. If they can't, maybe there need to be some changes.”
His comments angered community bankers who opposed Walmart’s ultimately unsuccessful bid a decade ago and are fighting against SoFi’s application now.
“We steadfastly oppose the integration of commerce and banking,” said Chris Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America. ”Owning a bank creates conflicts of interest. It jeopardizes what we would describe as the impartial allocation of credit.”
The debate over the ILC charter waxes and wanes in direct proportion to when there is a controversial application to own one. Community bankers nearly succeeded in winning legislation to severely restrict who could own such a bank when Walmart applied for one, but instead won only a three-year moratorium that ended in 2013.
Bankers are using many of the same arguments again, though SoFi is at least a financial company, unlike Walmart.
“There is no real need for an ILC,” said Cole. “What we would like to do is end it completely.”
He added that it’s not just fintechs that could buy or charter an ILC, but any large technology company.
“We're not so much worried if Toyota is trying to set up an ILC to make car loans to people who are buying Toyotas,” he said. “That's not the kind of ILC that we're more worried about. [But] the big-box retailers or the huge tech companies that want to get into the business. … We just think it’s dangerous.”
But longtime proponents of ending the ban on mixing banking and commerce have rallied to support SoFi.
“The whole idea of separating banking and commerce now makes no sense under existing law, because banks are permitted to be affiliated with certain kinds of businesses, like insurance or securities, but not with others, like retailers,” said Peter J. Wallison, a scholar at the American Enterprise Institute. “They’re not fighting it on any principles basis. They're fighting it because they want to protect their turf.”
Proponents of ILCs also contend that current banking law already gives authorities the power to regulate transactions between a bank and its affiliates, namely through Regulation W of the Federal Deposit Insurance Act.
“We have commercial firms that own banks today, and we prevent the mixture of commerce through fine-tuned, well-regulated activities,” said Howard Headlee, the president of the Utah Bankers Association. Utah is one of only a handful of states that charters ILCs.
“There are more sophisticated ways of managing and preventing the mixture of banking and commerce than by just taking a sledgehammer and saying, you can't own it,” Headlee added.
Technology companies have seized upon a similar line of reasoning to suggest that the separation of banking and commerce might be obsolete.
“You have a long history of regulation by company type, by institution, rather than regulating by risk and regulating by activity,” said Brian Peters, the head of Financial Innovation Now, a lobbying group that represents large technology companies such as Google and Amazon.
“That general approach to financial services regulation in the United States is anachronistic. [It] does not realize the technological conversion that is happening not just in banking services, but in every aspect of the economy.”
Still, he said, tech companies are not trying to force the issue.
“We're agnostic on it,” Peters said. “We will engage in any discussion with a financial regulator who wants to figure out how to make financial technology more feasible in financial services, and if it's part of a deeper debate about separation of banking and commerce, we will be part of the debate—without pushing it.”
For advocates of a strong separation between banking and commerce, technology companies are concerning in very specific ways.
First, certain firms are already so large and a bank charter could lead to the creation of giant tech-and-bank conglomerates that could hamper competitiveness, some said.
“On the technology side we have an oligopoly of five. On the banking side we have an oligopoly of five or six,” Wilmarth said. “You would inevitably see mergers between them.”
If large banks and tech companies were to combine, he added, they would have an incredible amount of data at their fingertips, which could cause privacy concerns.
“Do you want Google knowing not only all of your shopping data, your personal search data, but now knowing all your financial data?” Wilmarth said.