Senate Banking Committee Chairman Sherrod Brown will introduce a bill Tuesday that aims to close the so-called shadow banking loophole that allows retail and tech companies to offer banking services without the same stringent oversight as other financial institutions.
The bill comes about a month after Twitter’s new CEO Elon Musk shared his plan to transform the social media platform into a payment service and reportedly registered last month with the Treasury Department as a payments processor.
Allowing tech and commercial companies to act as banks without proper oversight “will only open doors for predatory lending, invasions of consumer privacy, and broader financial instability,” Brown, D-Ohio, said in a press release. “To protect consumers’ pocketbooks and ensure a strong banking system for Main Street, we need to ensure all banking institutions play by the same rules,” he added.
Sens. Chris Van Hollen, D-Md., and Bob Casey, D-Pa., co-sponsored the bill. The measure complements a House bill, approved by the Financial Services Committee in June, that would close the loophole for so-called industrial loan companies, or ILCs, by subjecting them to the same regulations as federally insured banks.
Twitter is one of several non-bank companies that sought to enable banking services for users through state-chartered ILCs. Unlike all other bank holding companies, the holding companies of ILCs are not subject to consolidated oversight by the Federal Reserve.
“In principle, you can use a direct messaging stack for payments. And so that’s definitely a direction we’re going to go in, enabling people on Twitter to be able to send money anywhere in the world instantly and in real-time,” Musk told Twitter employees in November.
Jack Dorsey, Musk’s predecessor at Twitter, also was involved in financial services through his separate payments company Square. In 2020, Square reportedly held back 20% to 30% of the money collected from consumers who used it for credit card transactions.
Other companies that have applied for ILC charters include eCommerce marketplace Rakuten, Ford Motor Company and financial services firm Edward Jones. The Federal Deposit Insurance Corporation approved ILC deposit insurance applications for Square and Nelnet, a student financial services company, in 2020.
Supporters of the legislation argue the oversight loophole gives ILCs a competitive edge over traditional banks. The senator’s bill aims to ensure all banking entities receive the same oversight.
Backers of the bill also note that the potential for large companies to purchase banks could pose issues for consumer data privacy and crate conflicts of interest.
“It’s not really good for like local economies, and both from the consumer side and from the banking and financial services side,” a senior Democratic aide told CNBC.
“If a huge company like Facebook or something like that, acquires a bank … they don’t really have an investment in a particular community like a community bank, or even a regional bank does. They’re just looking to monetize their data, and that could be problematic,” the aide said.