In a virtual conference hosted by The New York Times, Treasury Secretary Janet Yellen gave her nod of approval to the idea of “sovereign digital currencies” to solve the riddle of financial inclusion in America.
According to recent data, approximately 7.1 million, or 5.4 percent of households, in the United States have no access to a bank account and almost 20 percent more are underbanked, leaving tens of millions of people at the mercy of predatory pay-lending services and other means to receive or make payments. While these numbers do seem to be on a downward trend, they are still far above those of most developed countries, such as France and Germany.
Further compromising the positive data is the pandemic’s role in rising unemployment, depletion of savings, and reduced access to credit. Even simple loss of proximity to banking facilities is contributing to the problem, as the biggest banking chains pull out of low-income neighborhoods.
Yellen suggested “that a digital dollar — a central-bank digital currency — could help with” the problem, though she conceded that there were multiple “issues” surrounding the concept of implementing a system of virtual money, such as the “impact on the banking system” and what role the Federal Reserve, which she led between 2010 and 2014, would play at the retail and wholesale levels.
The former Fed chair warned about cryptocurrencies, such as Bitcoin, and the “staggering” amount of energy it requires, calling the blockchain-based token “an extremely inefficient way of conducting transactions,” seemingly unaware of the contradiction that a Fed-controlled digital coin would be based on the same technology. Her biggest concern seemed to revolve around crypto’s use for “illicit finance” as well as its volatility. Nevertheless, Yellen supports researching the “viability” of creating a digital dollar and, if recent movement in the FinTech (financial technology) sector is any indication, a brave new world of virtual benjamins may soon become a reality.
Yellen’s comments can also be read as a tacit acceptance of the fact that the U.S. will soon be facing stiff competition as the world’s reserve currency, stemming from a proposed banking law in China that would create a digital Yuan pegged to a cryptocurrency token issued by the People’s Bank of China. Regardless, all signs are pointing to significant change in the works.
A bank by any other name
On February 19, a financial management software company called Brex filed for a bank charter license in Utah, looking to “expand upon [its] existing suite of financial products and business software” by providing “credit solutions and FDIC-insured deposit products to small and medium-sized businesses (SMBs),” according to the press release.
The proposed bank will be able to work outside some of the federal regulations imposed on commercial banks and will escape Fed supervision altogether by incorporating as an industrial bank, which are state-chartered financial institutions otherwise known as industrial loan companies (ILCs) that are currently chartered in only seven U.S. states.
ILCs differ from regular banks in that they can be owned by non-financial commercial businesses and are prohibited from accepting demand deposits – funds that can be withdrawn at any time. ILCs instead take deposits as “investment shares,” which are then used to provide loans to small businesses or low-income workers who are unable to qualify for credit at “traditional lending institutions” — falling halfway between a payday lender and a full-fledged bank. Notably, federal and state oversight do not extend to the controlling company itself.
Industrial bank charters have been the subject of intense criticism and controversy. In 2005, Walmart filed for an ILC charter for the “purpose of reducing credit and debit card transaction fees,” unleashing widespread opposition from commercial banks, which see ILCs as a threat to the banking industry. The protests resulted in a moratorium issued by the FDIC on all industrial bank applications a year later. In 2020, the Independent Community Bankers of America (ICBA) lobby group released a statement strongly condemning the FDIC’s approval of Square Inc.’s ILC bank charter application (also in Utah) in March of that year.
Square has recently purchased $170 Million worth of Bitcoin, adding to a previous investment of $50 Million, pumping as much as 5 percent of the company’s cash into the cryptocurrency in order to offer Bitcoin transaction facilities to its merchants. Motivated by the wave of FinTech companies moving into the banking space through ILCs, the ICBA published a white paper in 2019 warning about the “dangers of mixing banking and commerce” through what they consider to be a regulatory “loophole” that allows Big Tech firms to take advantage of federal protections while eschewing “legal restrictions and company oversight” as they make their incursions into the banking sector.
Digital money machines
The writing may be on the wall for the ICBA and other independent bank policy and lobby organizations, who in July of 2020 asked for a new three-year moratorium on ILC charter approvals by the FDIC. But, with Yellen signaling her openness to exploring digital dollar alternatives, and the FDIC fine-tuning ILC rules such as requiring their parent companies to always maintain a line of credit or pool of capital available to the bank it owns, the future does not bode well for the keepers of the traditional banking torch.
The FDIC’s approval of Square Inc.’s application may have been the clue that the coast was clear for other FinTechs like Brex to start sailing in. Should its application go through, “Brex Bank” will be led by Bruce Wallace, formerly the chief operating officer and chief digital officer at Silicon Valley Bank (SVB) – one of the largest banks in the U.S., founded in 1982 “over a poker game,” accordingto its Wikipedia entry. One of the early investors in Cisco Systems, SVB has been a major player in the facilitation of venture capital for tech startups over its 35-year existence.
Just “Wise” now
Perhaps a more innocuous sign that banking as we know it is about to go the way of the dodo bird is the name change of one of the largest payment processing startups of recent years. British payments group TransferWise is dropping the “Transfer” from its brand 10 years on from its founding. “We’ve evolved to fix more than just money transfer,” says Wise CEO Kristo Käärmann.
Processing about $6.35 billion in payments every month for its 10 million worldwide customers, Wise is looking to make sure that its name doesn’t interfere with its rapidly scaling business. James Greenfield of Koto branding agency, interviewed by Sifted about the name change, described the difficulties involved in changing the name of a company that might better describe the feelings of traditional commercial banks, which are seeing their domain overtaken by FinTechs like Brex and, potentially, Wise in the near future. “The process of change is hard for a lot of people to go through,” said Greenfield, adding that the “the mourning around a name they have an emotional relationship with is tough to navigate.”
Somehow, it doesn’t seem like Peter Thiel — one of TransferWise’s early backers and founder of his own, quite well-known FinTech (PayPal) — or other Big Tech players who are thinking of entering the banking business will much care about the names they will be putting on their digital dollar-denominated, sparsely-regulated money machines.
Feature photo | A man wearing a face mask due to COVID-19 concerns stands outside a check cashing service center in the Brooklyn borough of New York, April 3, 2020. Bebeto Matthews | AP