Key takeaways
– An industrial bank (also called an industrial loan company, ILC) is a state‑chartered depository institution that accepts deposits and makes consumer and small‑business loans. (Investopedia; Utah DFI)
– ILCs are chartered by only a few states; Utah issues the majority of U.S. ILC charters. (Investopedia; Utah DFI)
– ILCs are regulated by state regulators and by the Federal Deposit Insurance Corporation (FDIC) when deposits are insured, but many ILCs are not supervised by the Federal Reserve and are exempt from the Bank Holding Company Act’s usual holding‑company requirements. This unusual regulatory posture is the source of much controversy. (Investopedia; FDIC; Federal Reserve History)
– ILC charters have attracted fintechs and other commercial firms seeking bank powers (deposits, lending) with a different federal supervisory profile than traditional bank holding companies. This has prompted industry opposition and legislative proposals to close perceived “loopholes.” (Investopedia; ICBA; Congress.gov)
1. Understanding industrial banks (ILCs)
– Definition and primary functions
• An ILC is a state‑chartered financial institution that can take insured deposits and make loans to consumers and small businesses—functions similar to a commercial bank. (Investopedia)
– Origins and purpose
• ILCs date to the early 1900s as a way to provide credit to workers and small borrowers who could not access lending from mainstream banks. (Investopedia)
– Where they are chartered
• Only a handful of states allow ILC charters; Utah is the principal home for most U.S. industrial banks. (Investopedia; Utah DFI)
2. Regulatory and supervisory framework
– State regulation plus FDIC
• ILCs are chartered and primarily regulated at the state level; deposit accounts that carry federal deposit insurance make the FDIC a key regulator and insurer. (Utah DFI; FDIC)
– Limited federal supervision versus traditional banks
• Unlike banks that are part of bank holding companies, many ILCs are not required to be part of a Federal Reserve‑supervised bank holding company and therefore often avoid Federal Reserve supervision. They also can be owned by commercial (nonfinancial) firms. (Investopedia; Federal Reserve History)
– Implications
• This corporate structure gives owners commercial firms many of the privileges of a bank charter (deposit taking, lending, access to FDIC insurance) without the same supervisory relationship with the Fed or the same restrictions under the Bank Holding Company Act. This creates both business opportunities and regulatory concerns. (Investopedia)
3. Why commercial firms and fintechs pursue ILC charters
– Direct access to deposits and lending capabilities that can be integrated with a firm’s core services.
– Potentially lighter federal oversight compared with being a bank holding company (depending on the ownership and structure), which some firms view as advantageous for innovation and cost management. (Investopedia; Square)
4. Criticisms and controversies
– Mixing banking and commerce
• Critics argue that allowing commercial firms to own banks blurs the longstanding separation between banking and commerce, raising conflicts of interest, competitive issues, and potential risks to the deposit insurance fund. (Investopedia; ICBA)
– Supervisory gap concerns
• Opponents say ILCs give firms the benefits of a bank charter without the same level of federal supervision that would exist under the Bank Holding Company Act and Federal Reserve oversight. (ICBA)
– Historic flashpoint: Walmart’s application
• In 2005 Walmart applied for an ILC charter in Utah seeking to process card transactions and potentially lower payment costs. The proposal sparked strong opposition from banks and regulators. The FDIC placed a moratorium on new ILC applications in 2006; Walmart withdrew its application in 2007 before a decision. Opponents argued that Walmart’s ownership of a bank posed risks to the banking system and the FDIC’s Deposit Insurance Fund. (Walmart; FDIC; Investopedia)
– Recent industry pressure and legislative efforts
• Community bank groups (e.g., Independent Community Bankers of America, ICBA) have pushed for eliminating or restricting ILCs that are owned by commercial firms, calling for moratoria on FDIC insurance for such institutions and for legislation to prevent nonfinancial firms from forming ILCs. In 2019 Senator John Kennedy introduced S.2839, the “Eliminating Corporate Shadow Banking Act,” to prevent nonfinancial companies from owning ILCs; the ICBA supported that approach. (ICBA; Congress.gov)
5. Notable examples
– Walmart (high‑profile, ultimately withdrawn application, 2005–2007). (Walmart; FDIC)
– Square / Square Financial Services: an example of a fintech that pursued an ILC charter and has begun banking operations tied to its payments business. Square announced banking operations via its Utah chartered ILC. (Square; Investopedia)
6. Advantages and risks — at a glance
– Potential advantages
• Faster, integrated product delivery for fintechs and corporate owners (deposits + loans)
• State‑level chartering options (not limited to Federal Reserve supervision)
• Access to FDIC insurance for depositors (if approved) and standard deposit bank powers. (Investopedia; FDIC)
– Potential risks and concerns
• Perceived weaker consolidated federal oversight of a bank owned by a commercial firm
• Conflict‑of‑interest and competitive concerns for incumbent banks and for market functioning
• Political and regulatory risk: moratoria, litigation, or legislation could change the operating environment rapidly. (ICBA; FDIC; Congress.gov)
7. Practical steps — for companies considering an ILC charter
1) Assess strategic rationale
• Determine why your firm needs a bank charter (deposit funding, loan origination, integrated financial services) versus alternatives (partnering with banks, fintech lending platforms, industrial partnerships). Consider total cost and strategic control. (Investopedia; Square)
2) Choose jurisdiction carefully
• Evaluate which states offer ILC charters (Utah historically attracts many applicants) and compare state regulatory requirements, fees, and supervisory tone. (Utah DFI; Investopedia)
3) Prepare for FDIC deposit insurance scrutiny
• FDIC approval is required for deposit insurance. Expect detailed review of capital, management, anti‑money‑laundering (AML) controls, IT/security, and consumer protections. (FDIC)
4) Structure ownership and governance to address regulatory concerns
• Thoughtful corporate governance, ring‑fencing of nonbank activities, transparent reporting, and robust compliance frameworks can mitigate some concerns and ease examiner scrutiny. (Best practice; implied by regulatory expectations)
5) Plan for possible political and industry pushback
• Be prepared for public and competitor scrutiny, including trade‑association lobbying and potential legislative responses. Build communications and legal strategies accordingly. (Walmart case; ICBA)
6) Build supervisory relationships
• Even if not subject to Federal Reserve consolidated supervision, maintain proactive engagement with state regulators and the FDIC; ensure strong onboarded compliance and safety‑and‑soundness practices. (FDIC; Utah DFI)
8. Practical steps — for consumers choosing a bank
1) Confirm FDIC insurance
• Verify whether the institution’s deposits are FDIC‑insured and under what conditions (FDIC website/insured bank disclosures). (FDIC)
2) Review ownership and structure
• If the bank is owned by a nonbank commercial firm, consider whether that ownership is relevant to your privacy, data usage, or conflict‑of‑interest concerns.
3) Check supervisory information and safety metrics
• Use public reports (FDIC, state regulator, bank financials) to evaluate capitalization, asset quality, and enforcement actions. (FDIC; state regulator sites)
4) Ask about consumer protections
• Confirm how the bank treats your data, how deposit and lending disputes are handled, and whether separate safeguards exist between the bank and its corporate owner.
9. Practical steps — for policymakers and regulators
1) Clarify regulatory perimeter
• Decide whether and how ILCs should be subject to consolidated supervision akin to bank holding companies, particularly when owned by large commercial firms. (ICBA; Federal Reserve History)
2) Enhance transparency and reporting
• Require clear disclosure of nonbanking activities and stronger reporting to FDIC/state regulators to monitor systemic or conflict‑of‑interest risk. (ICBA)
3) Evaluate legislative remedies
• Consider whether changes to statutes (e.g., Bank Holding Company Act coverage or deposit‑insurance eligibility) are necessary to align supervision with risk. (Congress.gov; ICBA)
4) Coordinate cross‑jurisdictional oversight
• Encourage coordination among state regulators, FDIC, and Federal Reserve to address supervisory gaps and ensure uniform consumer protections.
10. Conclusion
Industrial banks (ILCs) are a niche but influential element of the U.S. banking landscape. They offer a route for companies—particularly fintechs—to obtain banking powers, including deposit taking and lending. That structure has clear commercial advantages, but also important supervisory and policy questions because many ILCs are not subject to the same Federal Reserve supervision and certain holding‑company constraints that govern traditional bank ownership. The resulting debate involves trade‑offs among innovation, consumer access, safety and soundness, and the separation of banking and commerce. Firms, consumers, and policymakers should weigh these trade‑offs carefully and follow the practical steps listed above when evaluating or engaging with ILCs.
Sources (selected)
– Investopedia. “Industrial Bank (Industrial Loan Company – ILC).”
– Utah Department of Financial Institutions. “Industrial Banks.” (see Industrial Banks)
– Federal Deposit Insurance Corporation (FDIC). “FDIC Places Six‑Month Moratorium on Industrial Company Applications and Notices.” (2006 announcement)
– Walmart Press Release. “Wal‑Mart Applies to Operate Industrial Bank in Utah.” (2005)
– Federal Reserve History. “Bank Holding Company Act of 1956.”
– Independent Community Bankers of America (ICBA). “Industrial Loan Companies: Closing the Loophole to Avert Consumer and Systemic Harm.” (policy paper)
– Congress.gov. “S.2839 — Eliminating Corporate Shadow Banking Act of 2019.”
– Square. “Square Financial Services Begins Banking Operations.” (Square press materials)
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.