A bill Sen. John Kennedy, R-LA, introduced Tuesday would halt nonfinancial companies' ability to establish industrial loan companies (ILCs). Advocates for the bill say the legislation would "close loopholes" that allow nonfinancial companies to offer banking services without oversight by the Federal Reserve.
ILCs are financial institutions owned by commercial firms that are not regulated by a federal banking agency. Utah is home to the majority of the U.S.'s ILCs.
"It's just a bad idea for commerce and banking to mix," Kennedy said in a statement. "Not only is it unfair to community banks who have to play by different rules, it's bad for consumers."
Walmart's application for its own ILC in 2005 saw industrywide pushback, resulting in the retail giant withdrawing its application two years later.
At the time, then-Walmart Financial Services President Jane Thompson said the company sought the charter "to reduce credit and debit card transaction costs."
The Federal Deposit Insurance Corp. (FDIC) has not approved an ILC applicant in more than a decade, according to Roll Call, but that's not stopping companies' recent interest, with Japanese e-commerce company Rakuten and Square Capital the latest to draw attention to the issue.
Rakuten filed its application in July and said it plans to establish an industrial bank in Utah to offer credit cards, personal and business loans, and deposits for existing customers.
San Francisco-based fintech Square refiled its ILC application in December, after withdrawing an earlier bid. The company said a bank charter would allow it to provide loans and other financial services directly to its merchants.
Nelnet and Interactive Brokers Group also have pending ILC applications with the FDIC, according to American Banker.
In a statement, Kennedy compared the scale of companies such as Google and Facebook to countries, and said they shouldn't be given the additional power of handling banking services without proper regulation.
"If they're allowed to handle your banking services, they're going to turn into continents," he said. "The Federal Reserve exists for a reason. The Rakutens and the Googles of the world shouldn't be able to circumvent the Fed."
The Independent Community Bankers of America (ICBA) has come out in strong support for Kennedy's bill, saying the legislation would maintain an important separation of banking and commerce.
"Any company that wishes to own a full-service bank should be subject to the same restrictions and supervision that apply to any other bank holding company," ICBA President and CEO Rebeca Romero Rainey said in a statement.
"ICBA and the nation's community banks thank Sen. Kennedy and urge Congress to advance this critical legislation to ensure a level regulatory playing field, maintain the separation of banking and commerce, and avoid risks for the American taxpayer," she said.