Ending the separation of banking and commerce myth

There is a pervasive myth that banking and commerce are — and must be — separate in the United States. It’s a polite bit of sleight of hand that tech trends will only further strain as banks effectively become tech companies to provide modern financial services. And as nonbank commercial companies innovate to offer alternatives to many traditional banking products, why can’t they just own banks?

If the United States wants to modernize its financial regulatory framework, it should abandon this fiction and use time-tested prudential tools uniformly.

Banking lore looks to the Bank of England’s charter in 1694 for the principle of a separation of banking and commerce. But banks were not uniformly limited in that way and still aren’t in many other countries today. Today’s financial and technological landscape bears little resemblance to the politics and economics of the early 20th century, when Congress first enshrined the pseudo separation.

U.S. banking organizations spend billions each year on technology as their data, machine learning and artificial intelligence, and cybersecurity needs become larger and more complex. Today’s banks and their nonbanking affiliates are tech companies: They squeeze everything they can into the permissible activity of “data processing.” And to stay competitive, they should.

Bank holding companies can also make noncontrolling investments in many commercial entities, subject to strict conditions. Under merchant banking powers, financial holding companies can own 100% of any commercial entity generally for 10 years, so long as they don’t manage it.

More broadly, the Federal Reserve polices the perimeter between banking and commerce, upholding the separation — except when it doesn’t.

Consider the creative cases of incidental and complementary activities. Banking organizations may offer concierge travel assistance and other travel-related services, and can also manage certain energy contracts. They may also provide mail-order pharmacy and disease management services. It’s fairly broad: They may offer vaccinations, screenings and assessments, health hotlines, digital libraries, and tools to create health plans — weight loss, stress management — provided by doctors and nurses, not bankers. Clearly, there are societal benefits in allowing banking organizations to provide these services.

Commercial entities have some notable exceptions too. Federal law authorizes commercial entities to own industrial banks, subject to certain conditions. Various car companies do. Retailers and others own credit card banks and other limited-purpose banks.

And foreign banks can keep their not-so-separated banking and commerce activities outside the United States as “qualified foreign banking organizations” and through other arrangements.

If iconic U.S. companies could own industrial banks, why can’t today’s top U.S. brands?

Whether the target demographic prefers to shop at big box stores, online retail platforms or both, chances are many customers will be interested in banking with them. Tech companies that develop devices, apps and other solutions are no different.

And as the user experience becomes fundamentally more digital, the separation of banking and commerce washes out. It all starts to look like data processing. Digital assets like cryptocurrencies, stablecoins, digital currencies and the metaverse only continue to blur banking and commerce distinctions.

One solution would be relatively simple and doesn’t involve abandoning the prudential tools that are the bedrock of banking law. And importantly, the same activities would be regulated and supervised in the same way.

Any company, generally, should be able to own a ring-fenced depository institution. Want to gold-plate the ring fencing? OK.

A ring-fenced banking organization more broadly would allow any company to own a bank holding company and its subsidiaries. Imagine a commercial org chart with an intermediate holding company — the true bank holding company — with a bank subsidiary: All the banking and financial activities would be within the ring-fenced structure. The Fed would keep its privileged purview. It could even impose commitments, source-of-strength, disclosure and other requirements on commercial parent companies. Antitrust law would serve as a backstop for other competitive concerns. The federal or state banking regulators could focus on the banks. There would be the same strong capital and liquidity requirements, limitations on transactions with affiliates and loans to insiders — all of it.

It works for the foreign banks, right?