BMW is rolling Internet banking products off its assembly line.
The German automaker's Internet-only BMW Bank of North America, which was created in September through an industrial loan company charter in Utah, has $179 million of assets - mostly car loans transferred to its books from the seven-year-old BMW Financial Services. In operation just a couple of weeks, it is gearing up to become a much bigger nuisance to banks and, in the process, push the limits of the rarely used ILC charter.
Next week Salt Lake City-based BMW Bank will begin a direct mail campaign pitching credit cards, savings accounts, and FDIC-backed negotiable order of withdrawal accounts to the roughly one million BMW owners in North America.
"We felt that we have a very attractive customer base and that there might be certain value-added services we could provide them in the financial services area," said Robert Devine, managing director of BMW Financial Services, one of Munich-based BMW AG's 15 subsidiaries. "We looked at different scenarios of how to provide that."
The option settled on - an industrial loan company charter - is emerging as a fashionable vehicle for getting into banking. As dictated by the Gramm-Leach-Bliley Act, the door slammed shut May 4, 1999, on unitary thrift charter applications.
Carol Van Cleef, a lawyer in the Washington firm Katten Muchin Zavis, said ILCs are "the only play out there now" for companies aspiring to enter banking.
ILCs were created to allow small-ticket lending and were granted Federal Deposit Insurance Corp. coverage by Congress in 1982. Part of their attraction is that they let companies operate financial services subsidiaries without being subject to all the regulations that apply to regular banks.
Companies with more than $100 million of assets, however, cannot offer checking accounts.
BMW says it can get around this by offering negotiable order of withdrawal accounts, which combine the payable-on-demand features of checks with the investment characteristics of savings accounts. Ms. Van Cleef, a specialist in ILC issues, said she is skeptical about that.
Because of their similarities to demand deposit accounts, Now accounts are not permitted under the laws governing ILCs, Ms. Van Cleef said. The law "says you can't take these kinds of transaction accounts, and the legislative history says that Now accounts are those kinds of transaction accounts," she said.
ILC charters are offered in only three states: California, Colorado, and Utah. Utah's charter is especially attractive because it permits doing business in other states while adhering only to Utah law, which is more lax than many other states'. For example, Utah puts no cap on interest rates.
Mr. Devine of BMW Financial Services said Volkswagen and Volvo, two other automakers with designs on banking, have looked into the Utah ILC charter.
BMW Bank is the type of competitor that makes bankers' heads spin. Besides its upscale customer base, it has a built-in physical presence: 340 U.S. car dealerships. Other Internet banks are discovering they sorely need such access points to build their customer bases.
Though BMW says it does not plan to turn its dealerships into bank branches, BMW Bank will make marketing literature and other banking information available to car shoppers. "We intend to engage our dealers at the point of sale" in an attempt to get customers, Mr. Devine said.
In focus groups, BMW car and motorcycle owners said they would use BMW Bank for personal banking. Products available to them include home equity loans and insurance policies, which BMW Bank is offering through an alliance with Chubb Group.
Bert Ely, a bank consultant in Washington, observed that, while automakers have been in the lending business a long time, "BMW is going to the other side of the balance sheet, saying, 'In addition to providing you a loan, you can also put your money with us.' "
Automakers are the latest in a long line of nonbank companies edging into financial services.
"Who knows where the competition will come from five years from now?" said Trish Jaffarian, a director of online financial services strategies at Yankee Group in Boston.