If the banking sector earned the nickname too big to fail during the financial crisis, an Amazon bank would only strengthen it. Regulators in the US are opening up to deposit guarantee for non-banks, paving the way for new virtual institutions, possibly including the giant. Increasing the number of electronic entities could help the unbanked. But between data access and Amazon’s size, it could create more problems than it solves.
It may bring financial services closer to unbanked Americans, but it would elevate your data dominance
Competition in the traditional sector has been declining since the financial crisis. The number of businesses insured by the Federal Deposit Insurance Corporation (FDIC) has halved in 20 years, to about 5,000. Since 2008, existing companies like JPMorgan have only grown, with deposits increasing 60% to nearly $ 1.6 trillion in 2019.
Technology has allowed the entry of new players. Some of them, like Jack Dorsey’s (Twitter) online payments firm Square, are taking advantage of figures known as Industrial Lending Companies (ILCs). They can offer banking services, while their parent is allowed to carry out other types of commercial activities.
The FDIC’s willingness to grant them deposit insurance opens new doors for them. After a hiatus of more than 10 years, the agency approved an application for Square’s ILC in 2020, which will originate and underwrite loans and offer unspecified deposit products. The FDIC is reviewing a similar offering from Japanese ecommerce Rakuten.
Bank lobbies warn that big tech could be next. The Independent Community Bankers of America and other organizations say ILCs, which bypass Fed oversight for their parents, pose a risk.
The FDIC has put some guardrails on the recent ILCs, which are generally reassuring for the overall financial system. For example, Square’s new bank must maintain a minimum leverage ratio, which measures capital against total assets without taking its risk into account, of 20%, which is much higher than the standards of the largest US banks. Dorsey’s firm also expands access to banking to parts of the country that do not have a local branch.
Amazon could argue that it is similarly helping pockets of population that are often ignored. But its mastery of data is more difficult to tackle. In Washington, there is already concern about how Amazon is promoting its white label with the help of the information obtained. A bank would give you even more data, for example about its 140 million Prime members in the US, on how people spend money.
Regulators could try to force a Chinese wall between the banking and e-commerce branches, but it would be difficult to monitor, as scandals such as Facebook have already shown. That could create an Amazon-sized problem for both consumers and watchdogs.
The authors are columnists for Reuters Breakingviews. Opinions are yours. The translation, by Carlos Gómez Abajo, is the responsibility of CincoDías
