Introduction

What do Ford, GM and Rakuten have in Common?

What do Ford, GM and Rakuten have in Common?

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Last month, Ford Credit Bank, Salt Lake City, UT submitted an application for deposit insurance to the FDIC with the intention of opening a new Industrial Loan Company (ILC) in Utah.  This is not the first time Ford has sought to open an ILC.

A 2006 application was withdrawn due to a “technical error”. Not long after that, the FDIC placed a moratorium on all ILC applications. Once the moratorium was lifted (18 months later) Ford was back in line, but to no avail. Comments on this latest proposal will be accepted through August 24th.

Any comments regarding Ford Credit Bank should take into consideration that 4-Star BMW Bank of North America, UT has operated an ILC since 1999 and 4-Star Toyota Financial SB, Henderson, NV has done so since 2004. Is it fair that Ford and GM not be allowed to do the same? It’s not that simple.

GM (General Motors) was labeled an “Exceptional Assistance Recipient” from the Troubled Assets Relief Program (TARP) in 2008. It received  $51 billion from the Treasury to help it stay afloat. Of that, the Treasury recovered $39.7 billion. While Ford never took any money from TARP, it acknowledged that it benefited from the rescue in other ways. The $9.3 billion spent to keep the U.S. automobile business afloat is actually estimated to have saved money in the long-run.

In December 2020, GM submitted  applications to both the FDIC for insurance coverage and the state of Utah for an ILC. Both are still sitting in the pending file. GM and Ford are not the only companies hoping to open ILCs in Utah. Others pending include:

  • Rakuten Bank America,
  • Edward Jones Bank, and
  • Thrivent Bank.

Rakuten, a Japanese online retail company, has been waiting the longest, since July 26, 2019. To understand the delay, you must first understand that, unlike other banks, ILCs are allowed to exist without consolidated supervision and without consolidated reporting requirements. That means that any problems at the parent could trickle down into the arena of FDIC-insured deposits.

The 2006 moratorium was instituted primarily to prevent Walmart and Home Depot from opening their own ILCs. Community bankers opposed those ILCs, but for a different reason. They feared they wouldn’t be able to compete with a Walmart Bank. They may be right, but the bigger problem is the potential risk to the FDIC-insurance fund.

Walmart has been trying to offer its clients financial services since last century. It partnered with 5-Star Green Dot Bank, Provo, UT last year to offer prepaid Walmart MoneyCards. Then in January, Walmart announced plans to partner with challenger bank ONE.  ONE is a financial services app with a banking partner/provider. Deposits at ONE are FDIC-insured at 4-Star Coastal Community Bank, Everett, WA.

Coastal Community Bank is a Washington state chartered bank owned by Coastal Financial Corporation, a small bank holding company. As such, the parent is required to file its financial reports semi-annually with the Federal Reserve. As it grows, filing will be required quarterly and eventually consolidated reports of condition will also be required. These are the crucial missing steps for an ILC. And this is why these transactions have to be considered extremely carefully.

This new wrinkle of Bank—Fintech partnerships is growing increasingly common (see JRN Blog Post dated April 18, 2022). These ventures bring younger generations, self-employed individuals and others who were previously unbanked into the bank fold. The banks provide the FDIC-insured deposit coverage, issue credit cards and often provide name recognition. Fintechs bring enhanced virtual capabilities and added cybersecurity. We would much prefer to see more of these partnerships than more big ILCs.

It’s not up to us though. Congress is looking at ways to close the loophole that allows new ILCs to form. It should also consider sales of existing ILCs to non-banks. That’s another popular way of skirting the laws that prohibit the comingling of commerce and banking. It should also consider the role of Fintechs since two of the new banks opened since the first of January 2020 have been Fintech ILCs.

On page 7 you will find two lists this week. The first includes all active Industrial Loan Banks (we believe). The second has all de novo banks, those that have opened their doors since January 1, 2020. Note that two of the banks (highlighted) are included on both lists. Those are the two Fintechs mentioned in the previous paragraph.

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