The bill was first introduced in 2007 as large commercial companies began exploring banking without being regulated like other parent companies of traditional banks, a senior democratic aide told CNBC. But interest soon died down during the 2008 financial crisis.
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 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 create conflicts of interest.
On Dec. 1, the House Select Committee on the Coronavirus released a staff report about certain fintech companies’ roles in approving fraudulent Paycheck Protection Program loan applications. At least one company, Kabbage Inc. from American Express, is an ILC.
“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 said of lack of oversight for shadow banks.
“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.