Who says you can’t have it all? Certainly not the tech giants of Silicon Valley.
Companies like Google, Facebook, and Uber, are increasingly setting their eyes on a prize some 2,500 miles away from their campuses in the suburbs of San Francisco: Wall Street.
It’s time, they say, to “disrupt” the financial services industry. Some lawmakers (and banks), however, aren’t too pleased with the idea of skirting oversight regulations in the name of technological progress.
Google announced plans last Wednesday to offer checking accounts in partnership with Citigroup and a Stanford University credit union. They follow in the footsteps of other large technology companies seeking to enter into the field: Facebook’s Mark Zuckerberg has plans to mint his own currency, Libra; Uber recently started offering debit accounts and a debit card; and Amazon has a small business loan program.
Big tech is moving full-speed ahead into the banking sector, but a new cluster of bipartisan and bicameral legislative proposals that seek to restrict companies like Facebook and Google from entering financial services are gaining the approval of bank lobbyists and progressive oversight groups alike.
Tech companies, they say, are entering into the sector through loopholes that don’t require them to apply for a standard charter, putting them under little regulatory oversight and giving them an unfair advantage over traditional banks.
Innovation or Deregulation?
“These companies have seen a lot of opposition on the Hill,” said Paul Merski, chief economist of the Independent Community Bankers of America. “They’re not doing anything innovative by skirting the regulations that others have to abide by. It’s not really innovation to say ‘rules and regulations don’t apply to me,’” added Merski, who also oversees congressional relations teams and legislative and political action committee initiatives for the trade organization.
Some companies, like Rakuten and Square Capital, are using a rule in Utah that allows them to register as Industrial Loan Companies (ILCs), or financial institutions owned by commercial firms with FDIC insurance that don’t fall under the oversight of the Federal Reserve or other regulatory bodies.
Companies like Target and General Electric have used the so-called loophole in the past, allowing them to skirt both federal and state regulations, while functioning as banks and receiving considerable tax benefits. The Fed, meanwhile, has long fought the distinction, arguing that without oversight, customers of ILCs would be particularly susceptible to economic downturns and the government would then have to pay out significant amounts of money in FDIC insurance.
FDIC Insurance Without Fed Oversight
During the 2008 financial crisis, Congress listened to the Fed and included a three-year moratorium on new ILCs in the Dodd-Frank Act. They have since expired. The three years were intended to give Congress time to shutdown the loophole in full, but that never happened, said Merski, who worked with legislators earlier this year to bring attention to the issue.
“We’ve always had the standard of keeping banks and commercial interests separate in the United States and most policymakers and regulators agree that it’s very dangerous to mix the two,” said Merski. “You want to make sure you’re not extending the FDIC safety net to commerce and that you’re not jeopardizing the impartial allocation of credit that you get from banks. It’s a safeguard principle.”
And so, in response to the fear that tech companies will soon begin to exploit the loophole in mass, Rep. Chuy García (D-Ill.) and Sen. John Kennedy (R-La.) presented bills this week to the House and Senate that would end ILCs and increase restrictions on big tech companies looking to branch out.
Garcia, a progressive, Mexican-born Congressman representing parts of the Chicago area, introduced three bills meant to “slow” big tech’s entry into the financial services industry “and not have it move forward until Congress understands all the implications as they relate to working people and consumers.”
His bills, he said, purposefully coincide with the 20th anniversary of the Gramm–Leach–Bliley Act, which was signed under the Clinton administration and repealed parts of Glass-Stegall of 1933, allowing investment banks, commercial banks, and insurance companies to consolidate into one entity.
“Clearly big tech wants to enter the business of banking,” he said. “In the last year we’ve seen Facebook, Apple, Google and Uber all announce new financial service initiatives. We’re not prohibiting financial innovation or experimentation, instead we’re drawing a clear line between banking and commerce by clarifying the extent to which tech can be involved in financial activity.”
Uniting Against a Common Enemy
Garcia introduced three bills: The Keep Big Tech Out of Finance Act, which would prohibit Facebook and other technology companies with more than $25 billion in revenue from creating their own currency; the Protecting Consumers from Market Manipulation Act, which would only allow financial activities to comprise 5% or less of a “large non-financial firm”; and the third and most popular bill would end the “ILC Loophole.”
Garcia said that he has heard positive feedback on his ILC bill from Senators and 2020 presidential candidates Sen. Elizabeth Warren (D-Mass.) and Sen. Bernie Sanders (I-Vt.), as well as Sen. Sherrod Brown (D-Ohio), who has worked on similar legislation in the past.
“I think members of Congress on both sides of the aisle have serious concerns about the entry of big tech into banking and financial services,” he said. “There is bipartisan concern about that, people are concerned about security, money laundering and how we hold people accountable.”
Over in the Senate, ardent President Donald Trump supporter John Kennedy has submitted a bill quite similar to Garcia’s.
“Companies like Google and Facebook already are so big that they’re countries. If they’re allowed to handle your banking services, they’re going to turn into continents,” he said in a statement. “The Federal Reserve exists for a reason. The Rakutens and the Googles of the world shouldn’t be able to circumvent the Fed.”
Facebook: Unsung Hero?
Tech companies like Facebook, meanwhile, argue that their approach to banking sets out to limit income inequality by serving the underbanked.
“There are more than a billion people around the world who don’t have access to a bank account,” he said, “but [they] could through mobile phones if the right system existed,” Zuckerberg said during his opening statement to Congress last month while advocating for his new currency.
“The current system is failing them,” Zuckerberg continued. “The financial industry is stagnant and there is no digital financial architecture to support the innovation we need. I believe this problem can be solved, and Libra can help.”
But Zuckerberg was unable to address how Libra would help Americans with no money to put in banks or who don’t trust the modern banking system.
“If big tech can operate a bank without being regulated like a bank, then Congress has very little ability to protect consumers,” said Garcia. “We’ve got to protect people from harmful business practices. The grip that these monopolies have across a range of sectors is a source of income and wealth inequality. Google, Facebook, and Amazon have repeatedly used their access to users’ data to manipulate the market outcomes and increase their economic dominance.”
With just 11 working days left in Congress this year—and a spending bill and impeachment on the table—it’s likely that this fight will pick up stamina during the next election-year session, elevating the controversy to a national, possibly presidential, stage.
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