Banks and technology companies can form great partnerships, but policymakers should watch how these two industries interact, and intervene if equal access to credit or financial stability is threatened. The country has long benefited from laws that separate commerce from banking; this separation may be more important than ever as the world grows more technologically capable.
Think about Facebook, which is being sued by the Department of Housing and Urban Development for giving real estate and mortgage brokers, among others, the opportunity to advertise to customers according to race, ethnicity and other characteristics. This kind of ad targeting limits the availability of real estate and mortgages, and it is a form of illegal discrimination. Bankers dealt with redlining decades ago; it is shocking to learn it is still practiced in other industries.
Facebook does not own a bank but there are a lot of technology companies active in financial services that would like to own a bank. Google was an early investor in LendingClub. Amazon lends money to companies that sell on its platform. Apple just introduced a credit card to complement its Apple Pay service. These tech companies have access to incredible stores of customer data which help their financial services succeed.
The Bank Holding Company Act prevents most companies from owning a commercial bank, but there is a loophole — the industrial loan company. These are companies that look like banks. State chartered (usually in Utah), they are eligible for FDIC insurance. This is a situation where policymakers should intervene. Commercial companies should not be allowed to own banks or bank-equivalent ILCs, nor, going forward, should the FDIC insure deposits at ILCs.
The mingling of commerce and banking always has posed threats, but the threat is greater today given the depth to which tech companies can penetrate consumers’ lives. What advantage might a tech firm-owned bank have over a traditional bank if the tech firm bank has instant access to mountains of consumer spending habits or real time financial data? All banks have access to some such data, but not the streams of data maintained by the biggest internet firms. A company that monitors your email, for example, has access to troves of personal information about its customers. What are the issues surrounding use of that kind of data? I don’t even want to speculate; policymakers should shut down the possibility immediately.
The ILC loophole should have been closed years ago but the advent of technology and the possibility of its misuse in banking only make the case clearer: No more FDIC insured ILCs.