An industrial bank is a state-chartered financial institution, usually owned by a commercial enterprise, that is not regulated by a federal banking agency. Industrial banks accept deposits from customers and provide loans to consumers and small businesses.

Industrial banks are also known as industrial loan companies (ILC). Industrial banks are only licensed by a few states; the state of Utah provides the majority of charters for industrial banks in the United States

Understanding Industrial Banks

Industrial banks were originally founded in the early 1900s to provide low to moderate income industrial workers who were unable to qualify for credit at traditional lending institutions with a means of accessing in the capial.

Industrial banks are regulated by state regulators and the Federal Deposit Insurance Corp. (FDIC). Due to their distinct corporate structure, industrial banks can be owned by corporations. They are exempt from some of the regulations that govern traditional institutions and do not have to comply with the Bank Holding Company Act. In addition, industrial banks are not subject to the supervision of the Federal Reserve. Due to this lack of regulatory restrictions, many fintech companies and investment firms have begun to apply for industrial banking charters.

While industrial banks have limited nationwide banking powers, they generally retain the same powers and privileges as a traditional commercial bank. Industrial banks are controversial among those who support a firmer division between banks and commercial enterprises. Critics of industrial banks claim they offer corporations the privileges, but not the oversight, of a bank charter.

Criticism of industrial banks

In 2005, Walmart Inc. filed an application to form a new industrial bank in an effort to reduce credit and debit card transaction fees. This sparked widespread opposition and protests from commercial banks and financial regulators. The FDIC finally imposed a temporary moratorium on applications from industrial banks in 2006. At the same time, state-level legislation was passed that would prevent any potential industrial bank from opening branches in different jurisdictions.

Walmart Inc. withdrew its application in 2007 before the FDIC could make a decision on the status of its application. Opponents of Walmart’s request have claimed that the company’s involvement in banking poses a threat to the banking system and to the FDIC’s Deposit Insurance Fund.

In early 2019, lobbyists from the Independent Community Bankers of America (ICBA) distributed a policy paper calling for a moratorium on the provision of federal deposit insurance to industrial banks. Their actions were prompted by a new wave of fintech companies, including payment processor Square Inc., which submitted applications for state bank charters. A banking charter would allow Square Inc. to provide loans and other financial services directly to its merchants. However, the ICBA says industrial bank charters are a loophole that Congress needs to fix. Not only would fintech companies that receive banking charters be exempt from Federal Reserve oversight, but they would also not be required to disclose any non-banking business activity.

In November 2019, Senator John Kennedy of Louisiana introduced a bill, called the “Eliminating Corporate Shadow Banking Act of 2019”, which would effectively end the ability of non-financial companies to form industrial banks. The ICBA expressed support for Senator Kennedy’s bill, saying it would close the industrial banking loophole, create a safer financial system and help maintain the separation of banking and commerce.