In June, Facebook announced plans to effectively create its own currency, called Libra — and eventually a financial system to go with it. Libra was, of course, cloaked in corporate-speak that promised lower costs and more freedom for consumers and businesses through “innovation” or “inclusion” or “scalability.” But the hubris, from a company with such a mottled record complying with privacy, data and other laws, was so galling that it sparked something rare these days: bipartisan condemnation.
What should really concern critics, though, is that Libra is a small part of a larger, more troubling trend: the blurring line between finance and commerce. This trend, now a few decades old, has significant implications for customer privacy, competition, financial risk, and concentrated economic and political power. Stopping Libra would be a sign that policymakers are starting to take these issues seriously, but unwinding the threat of the industry-finance colossus will be much harder.
In his 1936 message to Congress, President Franklin Roosevelt warned of the risks from “domination of government by financial and industrial groups, numerically small but politically dominant.” With such concerns in mind, our nation has held that it’s critical to separate banking from commercial business — even enshrining this principle in policy. In practice, however, legal loopholes created by lawyers and lobbyists let financial and commercial companies combine under the same corporate structure.
First, industrial companies opened their own banks because, as the robber Willie Sutton once put it, “That’s where the money is.” These “industrial loan” companies are state-chartered banks owned by nonfinancial corporations like Harley-Davidson and Target to make loans, offer credit cards or process transactions. They are allowed to take customer deposits without the same oversight that applies to most banks. For example, their nonfinancial parent companies are not subject to oversight by a banking agency, regulators have fewer tools to address solvency issues, and these banks have fewer restrictions on their activities in the event that they fail to serve the credit needs of their communities. It’s an attractive proposition because deposits are a cheap source of funding, government-provided deposit insurance covers losses up to a certain amount, and retailers are able to drum up business by financing customer purchases.
Industrial loan companies were a sleepy part of the financial marketplace until big retailers like Walmart and Home Depot saw an opportunity and applied to open their own banks, in the face of opposition from community banks, consumer groups and labor unions. In the lead-up to the financial crisis, giant commercial lenders GMAC and GE Capital used their banks to access cheap deposits to fund some of their risky activities, like packaging securities backed by risky mortgages, leading to billions of dollars in taxpayer bailouts.
Unfortunately, instead of eliminating this loophole, the 2010 Wall Street reform law called only for a three-year pause to study industrial bank charters. While there were no industrial charter applications from 2011 to 2016, Big Tech is now looking to come through the door that Congress left open, and regulators in the Trump administration have signaled willingness to entertain their applications. So far, these applications have largely been limited to firms that already offer financial services, such as the $28 billion payment company Square. But companies like Facebook and Amazon probably aren’t far behind. (Amazon founder and chief executive Jeff Bezos owns The Washington Post.)
Meanwhile, the 1999 law that repealed the Depression-era Glass-Steagall Act also allowed banks to own and operate commercial businesses. In congressional testimony, a JPMorgan executive argued that becoming a diversified financial holding company would allow it to offer new conveniences such as opening an in-house travel agency to serve its credit card customers.
It’s one thing for a bank to make a loan to, or hold publicly traded shares in, a company with millions of shareholders. But things get more treacherous when a bank is the owner and operator of a company that gives it special insights, market advantages, and the ability to influence nonfinancial businesses in a way that benefits its own financial positions but costs everyone else. For example, a bank that owns an oil terminal could give its commodity traders special insights on regional oil supplies or even seek to control the flow of oil, depending upon its bets in the oil futures markets. That is why banks are supposed to keep the businesses they own at arm’s length through financial and management firewalls, such as limits on the amount of capital a bank can commit to these businesses and prohibitions against involvement in day-to-day operations.
But investigations in 2013 and 2014 by two Senate committees revealed that banks were regularly exceeding legal limits on ownership and control. Businesses that rely on aluminum, for instance, reported that a metals warehouse owned by Goldman Sachs was driving up the cost of that commodity, raising the price of products such as canned beer and soda. JPMorgan used its energy trading business to manipulate energy markets, making consumers pay higher electricity rates. After these scandals, regulators promised reforms, but five years later, they have done nothing.
This is the real threat of Libra. Facebook could eventually open its own bank and provide a full suite of credit and payment services. Under that arrangement, it could offer favorable credit terms and faster transactions to customers who use its banking services at affiliated retailers. Conversely, Citigroup could open an online retailer, offering lower prices to its bank customers. Either of these scenarios would spell trouble for small banks and retailers forced to compete on an unlevel playing field against big businesses with outsize market power.
Then there’s the question of privacy. Commingling a digital marketplace with all of a customer’s financial information, including purchases and deposits, is bad for consumers and taxpayers. First, it centralizes sensitive information — contradicting the supposed purpose of decentralized cryptocurrencies — giving banks and tech companies the ability to mine customers’ data and determine the maximum price that each is willing or able to pay. Second, concentrating so much customer information in a single entity also makes it extra vulnerable to data breaches and abuse. Third, combining a merchant with banking, payment and credit services has the potential to undermine important consumer protections, including credit reporting, debt collection and wage garnishment, giving a single company powerful leverage over its customers by reporting negative information about them, denying their transactions, accessing their bank account funds and so on.
Finally, allowing nonfinancial businesses access to the federal financial support programs that backstop our banking system could lead to taxpayer-funded bailouts for troubled retailers, tech companies and others. There are supposed to be firewalls preventing this, but those contain holes of their own.
Consider how all of this is already playing out: The largest Japanese online marketplace, Rakuten, has applied for a U.S. industrial loan company charter, prompting the banking industry’s largest trade association to raise concerns about “the free flow of credit, consumer privacy and possible conflicts of interest.” Walmart recently filed a patent application to create its own cryptocurrency, and Amazon is targeting its less-creditworthy customers with a subprime credit card, which has higher rates, that can be used only on its platforms.
Louis Brandeis said of the early-20th-century trusts that “both the financial concentration and the combinations which they have served were, in the main, against the public interest.” Big banks and big tech may rely on fancy algorithms and apps instead of railroads, but his words are just as true today.
Regardless of whether Facebook backs away from its proposal voluntarily or is forced to do so, public officials need to send a clear message that any other companies contemplating a similar scheme should think again. It wasn’t the first company to have this idea, and it surely won’t be the last.