| A Japanese e-commerce company with approximately 1.3 billion members across 30 countries and regions and more than 17,000 employees worldwide has applied for a U.S. banking charter.
Rakuten Inc. announced on July 26 that it had applied for an industrial loan company (ILC) charter from Utah’s Department of Financial Institutions and to obtain federal deposit insurance from the FDIC.
In the U.S., Rakuten operates a membership-based online cash-back site and provides e-books and other technology-based activities. The proposed ILC – Rakuten Bank America – would issue credit cards, personal loans and business loans and would accept FDIC-insured deposits. Currently, Rakuten provides similar retail and commercial banking services throughout Asia and Europe.
Why Rakuten’s Charter Choice Matters
The ILC charter has garnered significant opposition from community banks, community groups, trade associations and others dating back to at least July 2005, when Walmart applied to obtain an ILC charter to process its credit card payments. This longstanding opposition stems from the fact that an ILC charter allows a commercial firm to own and control an FDIC-insured depository institution without becoming subject to the Bank Holding Company Act and the supervision and regulation of the Federal Reserve on a consolidated basis.
Opponents argue this mixing of banking and commerce results in an uneven regulatory playing field, increases the risk of consumer harm and threatens the stability of the U.S. financial system, among other things.
Tom Curry
Rakuten’s ILC application promises to focus renewed attention on large tech firms and fintechs seeking U.S. banking charters and the mixing of banking and commerce. Indeed, the Independent Community Bankers of America, in response to Rakuten’s ILC application, again urged the FDIC to impose an immediate moratorium on approving federal deposit insurance applications for large tech firms and fintechs and demanded that Congress close the “ILC loophole” permanently. The ICBA’s message and opposition has remained consistent dating back to at least the time when Walmart applied for an ILC charter.
The American Bankers Association has now joined the ICBA in raising broad policy concerns about large tech firms and fintechs entering banking through FDIC-insured ILCs. Although the ABA has always been a strong proponent of charter choice, it expressed serious concerns about the implications of a large tech firm obtaining a bank charter.
Jason J. Cabral
“Allowing Rakuten to participate in banking activities would raise important questions about the free flow of credit, consumer privacy and possible conflicts of interest – questions not raised by current ILC charter holders,” ABA President and CEO Rob Nichols said in a statement.
‘Slippery Slope’ a Concern
FDIC Chairman Jelena McWilliams has indicated a new openness to approving ILC federal deposit insurance applications provided they meet FDIC capital and other requirements. Square currently has an ILC federal deposit insurance application pending before the FDIC, which was previously withdrawn and then later re-submitted.
Dan Hartman
The proposed Rakuten Bank America will test the FDIC’s openness to approving ILC federal deposit insurance applications against the competitive, financial stability, consumer privacy and other concerns raised by opponents of mixing banking and commerce. Pending smaller-scale fintech ILC applications for federal deposit insurance – and perhaps pending full-service, FDIC-insured bank charter applications – may face closer regulatory scrutiny or processing delays in light of the proposed Rakuten Bank America application.
Commentators also have expressed concern that granting any fintech FDIC-insured ILC charter is the potential start of a slippery slope towards letting large U.S. “Big Tech” giants such as Facebook, Google and Amazon enter banking.
Initial public reaction on Facebook’s recent launch of the Libra cryptocurrency was largely negative. Libra generated significant pushback from the Trump Administration, Congress, international central bankers and traditional banks over competitive, financial stability, privacy and cybersecurity concerns. A similar reaction has been seen and can continue to be expected with Rakuten’s ILC application and future ILC applications.
Thomas J. Curry and Jason J. Cabral are partners in Nutter’s corporate and transactions department. Daniel W. Hartman is an associate in Nutter’s litigation department. Curry is former U.S. comptroller of the currency and all are members of the firm’s banking and financial services group.
