Small banks do not want to compete with the Amazons and Walmarts of the world when it comes to offering financial services for clients. As of today, they more or less are protected from having to do so by regulations that prevent banks’ holding companies from branching too far outside their core financial services businesses.
But those laws may be up for reconsideration, as Keith Noreika, the acting Comptroller of the Currency, has raised the possibility that those laws are in need of review and possibly revision.
The proposal by the Office of the Comptroller of the Currency (OCC) was made at a banking conference in New York.
Needless to say, the nation’s small banks and their representatives are less than thrilled.
“Mixing banking and commerce is a bad idea that keeps recurring like a bad dream,” said Paul Merski with the Independent Community Bankers of America. “It’s one of our bedrock resolutions to oppose the threat of full-blown mixing of banking and commerce.”
The Bank Holding Companies Act more or less bans banking and commercial activity from being mixed on the argument that customer deposits could be used to fund or subsidize unrelated and potentially risky non-banking business. But tech and retail players have worked around this by offering an ever-greater number of financial services — or financial service adjacent-services — like Apple Pay, Venmo and LendingClub.
Another workaround for tech firms is forming an industrial loan company — which enjoys many of the same rights as a bank (the ability to raise deposits being the critical one) but doesn’t quite make the level of full banking license. SoFi and Square both sought such charters this year. SoFi is already out of the running (due to internal governance issues), but Square continues to push forward.
“It (an industrial loan charter) does allow us to engage more directly with regulatory bodies, so it’s great to hear that comment coming today from the OCC,” said Sarah Friar, the chief financial officer of Square.
Noreika has a reputation for a strong deregulatory preference.
Some bankers said they were comfortable with corporations entering their turf, as long as they were subject to the same rules.
“If Walmart wants to be a bank, that’s fine, as long as they make the appropriate investments to protect the parts of the banking system that are so critical,” said Kelly King, chief executive at regional lender BB&T Corp.
King added that he was “absolutely opposed” to the idea of a limited banking license.
Wells Fargo Chief Executive Tim Sloan said he does not view Silicon Valley as a danger to traditional banking for the simple reason that one would have to assume these firms want to rechannel their focus away from their highly lucrative main businesses in order to get into something that is complicated, lower-margin and highly regulated.
“I don’t think Apple fundamentally wants to become a bank. I don’t think Amazon wants to become a bank,” he said during a CEO roundtable at an industry conference in New York on Tuesday. “They want to use financial services products to help their customers succeed.”
Amazon had no immediate comment, and Apple did not return a request for comment.