Small lenders have urged lawmakers to crack down on Facebook’s plans to offer a new digital currency that would form the basis of a global payments network that could sidestep banks, aligning themselves with liberals like House Financial Services Chairwoman Maxine Waters.
When Japanese e-commerce company Rakuten sought approval to establish its own bank in the U.S., bank trade groups fired off a letter to the Federal Deposit Insurance Corp. saying Rakuten shouldn’t be eligible for deposit insurance. Big bank lobbyists are plotting a Hill strategy to further derail other tech companies from following Rakuten’s lead.
The battle illustrates the extent to which the growing distrust of major technology companies has exposed the industry to attacks from all sides in Washington, fueled by the firms’ attempts to gain footholds in more parts of the economy. Bank lobbyists are looking to leverage those concerns.
“The growing antipathy in Washington toward Big Tech definitely gives banks an opening,” said Ian Katz, director at Capital Alpha Partners.
Other rifts are emerging. Amazon, Apple and Google are throwing their weight behind a new Federal Reserve-led initiative to speed up the payments system over the objections of Wall Street firms, which wanted consumers to instead move to a real-time payments network that the banking industry has spent more than $1 billion developing.
“Banks originally viewed themselves as impregnable bastions — just like hotels and taxis and retailing,” said Karen Petrou, who advises bank executives on policy trends. “But enough of the industry has realized that complacency is a really dangerous competitiveness strategy.”
The largest tech companies are stressing that while they may be offering financial services, they are largely trying to do it by partnering with banks rather than becoming banks themselves.
“Technology companies inherently are trying to solve problems with hardware and software,” said Brian Peters, executive director of the Financial Innovation Now coalition that includes Amazon, Apple, Google and PayPal. “They’re providing tools to help their users and their small business customers lead healthier, more productive lives. … They’re more about providing digital tools than they are trying to be a bank.”
Still, the fight between banks and tech is escalating on multiple fronts.
In the clearest example of how tech has stumbled as it has tried to win over an unfamiliar crop of policymakers, Facebook has quickly become a target because of its plans to launch the Libra digital currency.
Zuckerberg argues that Libra would give consumers a cheaper, more efficient way to move money than what is allowed now by the financial industry. But lawmakers in particular were caught off guard by Facebook’s plans, and the social media giant has been recruiting lobbyists with deep experience in financial services to help bolster its case.
Concerns over Libra spurred the Independent Community Bankers of America, which represents smaller lenders, to join forces with Waters, a California Democrat, in calling for a moratorium on the project. Waters’ House Financial Services Committee staff promoted the group’s position in a briefing memo circulated to members before an Oct. 23 hearing with Zuckerberg.
“It’s Big Tech trying to get into banking and the possibility of disintermediation of the whole banking system itself,” said Chris Cole, executive vice president at the community bankers group.
It’s not just small banks undermining Facebook’s invention.
The project initially had the support of Visa, MasterCard and other big payments industry players, but they backed out of joining the Switzerland-based association that will manage Libra as regulatory and political scrutiny reached a fever pitch.
In the wake of the departures, JPMorgan Chase CEO Jamie Dimon knocked Libra as “a neat idea that will never happen.”
Facebook has said it expects major banks to join the Libra effort, but it concedes that others in the finance industry will resist.
“That’s the nature of change,” said David Marcus, the Facebook executive spearheading Libra.
Bank regulators in Washington and overseas have signaled they plan to crack down on Facebook’s plans to launch Libra. A G-7 task force warned of potential “significant adverse effects” from the kind of digital currency that the company is envisioning, and Federal Reserve Chair Jerome Powell said Libra raises “many serious concerns.”
Central bankers worry that, even if Facebook failed, another major company could follow its lead — a fear that has prompted officials to weigh creating their own government-backed digital currencies to maintain control of the payments system.
While some lenders are pointing their guns at Facebook, a broader coalition of big and small banks is gearing up to fight another potential entryway for large tech companies to get into finance.
At issue is a growing concern among bankers that tech companies will try to establish lending arms by winning bank licenses as so-called industrial loan companies — a type of charter available in certain states that enables non-financial companies to open banking units.
The banking industry stopped Walmart from getting a charter more than a decade ago. Now, technology firms are eyeing it as a potential path into finance.
Bank trade groups are urging regulators to reject a bid by Japan’s Rakuten to obtain such a charter so it can operate a U.S. bank. Rakuten already operates an online bank in Japan and a banking service in Luxembourg.
Banks are also plotting a lobbying effort to encourage lawmakers to enact more permanent restrictions to close what they describe as a “loophole” enabling tech firms to engage in banking without the same level of oversight that traditional banks receive across their operations.
“It is imperative that policymakers maintain the longstanding separation of banking and commerce, as well as ensure consistent regulatory treatment,” said Greg Baer, who represents the nation’s largest lenders as president and CEO of the Bank Policy Institute.
Banks are highlighting risks to consumers and the broader financial system if technology companies encroach further on their turf. The Bank Policy Institute and the American Bankers Association this summer warned the FDIC of “significant public policy concerns” of allowing tech companies to pursue banking charters.
“We’re worried about those outside the financial world wanting to capture banking services and products for purposes other than for which they were designed and intended,” ABA Executive Vice President Wayne Abernathy said in an interview.
Bank representatives believe they’re getting traction.
“We have been vocal about our concerns with the Rakuten application and we are hearing from a number of policymakers who understand these concerns and how they translate to the broader discussion happening on big tech,” said Rob Morgan, the American Bankers Association’s vice president of emerging technologies.
In response to the growing backlash, Rakuten Bank America CEO Lee Carter said in a statement to POLITICO that the company will address “growing demand for more robust, internet-based banking” while providing Rakuten’s U.S. customers with “better and more convenient choices.”
For major banks, Rakuten’s plans are a wake-up call.
“Even though JPMorgan may look impregnable,” Petrou said, “nobody thought Amazon would destroy retailing.”