Banking industry renews opposition to Rakuten's ILC application

WASHINGTON — Three bank trade associations have renewed their opposition to the Japanese e-commerce conglomerate Rakuten's bid for an industrial loan company charter, arguing again that it would “not present a viable business model on a stand-alone basis.”

The groups' stance, outlined in a letter Tuesday to Chairman Jelena McWilliams of the Federal Deposit Insurance Corp., comes as the agency weighs a second application for deposit insurance from Rakuten. With an ILC charter pending in Utah, Rakuten first applied to the FDIC for deposit insurance last year before withdrawing in March and reapplying in May.

“We believe that the revised application has not materially changed and does little to address the fundamental question of mixing banking and nonfinancial activity as raised by the initial application, including concerns involving the use, privacy and security of customer information,” according to the letter, signed by policy executives of the American Bankers Association, Bank Policy Institute and Consumer Bankers Association.

In the letter, the bank trades reiterated their opposition to the Rakuten application, pointing to McWilliams’ own words in March, when the FDIC issued a proposal to codify how it approaches industrial banks in the digital era. McWilliams said, according to the letter, that decisions about businesses that mix banking and commerce involve “complicated policy trade-offs that are best addressed by Congress.”

“We agree with the FDIC that the Rakuten application’s precedent-setting nature warrants deferral to Congress,” the letter said. “Therefore, unless and until there is federal legislation that specifically addresses this issue, the FDIC should shelve, or alternatively, disapprove the Rakuten application.”

In a statement, a spokesperson for the proposed Rakuten Bank America said it was "confident that the revised application is stronger and is responsive to the FDIC’s feedback. Rakuten Bank America is committed to transparency with our constituents and to cooperating with federal and state agencies during the regulatory review process."

The U.S. banking sector has opposed Rakuten Bank America’s application for deposit insurance since it materialized last year, arguing that the firm would compromise America’s traditional separation of commerce and finance. Many large U.S. corporations own ILCs today, such as General Motors and Home Depot, but banks have warned for years about the risks of a large commercial companies using company banks to finance below-market loans and possible trigger a credit crisis.

Although many banks’ concerns about Rakuten have not changed, the prospects for new industrial banks have improved considerably in the past year. In March, the FDIC approved the first ILC for deposit insurance since 2008 when it signed off on applications for the small-business payments giant Square and Nelnet, a student loan servicer.

The trade group letter sent Tuesday was signed by Timothy Keehan, vice president and senior counsel at the ABA; Dafina Stewart, senior vice president and associate general counsel at the Bank Policy Institute; and Jenna Burke, vice president and associate general counsel at the Consumer Bankers Association.