Finance & Tax

García bills would derail tech's financial ambitions

Chuy Garcia

Legislation that Rep. Chuy García (D-Ill.) plans to introduce this week would close off avenues for technology giants to enter the financial services industry, a plan that's beginning to draw praise from bank lobbyists looking for ways to fend off a competitive threat from Silicon Valley.

García, a progressive Democrat who represents western Chicago, has drafted a suite of bills designed to address concerns that consumers and the financial system would face serious risks if major technology firms such as Facebook, Amazon and Google became bigger players in finance. Facebook is a major driver of the fears, thanks to its plans to launch a global, digital currency called Libra.

The bills would limit the revenue that tech companies could make from financial activities and ratchet up regulation to make it less appealing for the firms to pursue banking licenses. García, a member of the House Financial Services Committee and an ally of Sen. Bernie Sanders (I-Vt.), is casting the set of proposals as a way to fight the growth of monopolies, which he said is a source of income and wealth inequality.

"Tech giants like Google, Facebook and Amazon have repeatedly used their access to users’ data to manipulate market outcomes and increase their economic dominance," García told POLITICO. "Facebook announcing Libra raised a big red flag. If Big Tech can operate a bank without being regulated like a bank, the Congress has little ability to protect consumers from harmful business practices."

The legislation is the latest evidence that the tech industry faces major political hurdles as it looks to disrupt the traditional financial services sector.

For skeptical lawmakers such as García, tech's forays into finance have rekindled a long-running debate about where to draw the line between the worlds of banking and commerce.

It's no accident that Tuesday also marks the 20th anniversary of the enactment of the Gramm-Leach-Bliley Act, which made it easier for big banks to engage in a broader range of activities. Included in García's set of bills are new restrictions that would undo provisions from the 1999 law that made it easier for commercial banks to own physical commodities, such as energy products.

"There are a bunch of pieces of this that are cleaning up some unfinished business from what happened before the financial crisis and the subsequent work," said Graham Steele, a a former aide to Sen. Sherrod Brown (D-Ohio) and now the director of the Corporations and Society Initiative at Stanford Graduate School of Business.

García has drafted three bills to tackle his concerns.

One bill would bar Facebook and other large tech firms from developing their own digital currencies. Another would try to draw a brighter legal line between banking and commerce by prohibiting large non-financial firms from deriving 5 percent of their revenue from financial activities and by restricting banks' ability to own commodities.

The third, which García hopes can attract Republican and bank industry support as a stand-alone bill, would expose tech and other non-financial firms to greater regulatory oversight if they establish banking units via state charters for "industrial loan companies." The so-called ILCs for years have benefited from a legal exception shielding their owners from the same level of federal regulation as other banks.

“The ILC loophole is an end-run around the regulations that keep our banking system safe," García said. "I worry that ILCs can be used to preempt state usury laws or otherwise avoid federal and state regulations."

By targeting the ILC charter, García is reviving a long-running controversy.

The banking industry has fought for years to eliminate the federal exception, which allowed manufacturers and retailers to engage in bank-like activities with access to federal backstops like deposit insurance.

The last major flare-up happened in the mid-2000s when Walmart and Home Depot made unsuccessful attempts to acquire the charters. The Federal Reserve asked for the exception to be eliminated. Congress imposed a three-year moratorium on granting ILCs deposit insurance that ended in July 2013.

Technology companies such as Japanese e-commerce giant Rakuten are now seeking approvals to operate as ILCs, prompting banks to ramp up lobbying on the issue again, now with warnings about Amazon getting into banking.

Groups representing large and small banks are already praising García's bill. The Independent Community Bankers of America, which represents the smallest lenders, is reviewing the legislation and so far viewing it favorably, said Paul Merski, executive vice president for congressional relations at the trade group.

“The draft legislation rightly reflects growing concerns about tech firms attempting to exploit loopholes to gain access to consumers’ financial data in addition to personal data that they already control — a potent mix," said Greg Baer, president and CEO of the Bank Policy Institute, which represents the nation's largest banks.

García will likely face resistance from some in his own party.

Fellow House Financial Services member Ben McAdams (D-Utah) hails from a state that's a go-to issuer of the industrial loan company charters. ILCs, McAdams told POLITICO, "are among the safest financial institutions in the country, and are strong contributors to the U.S. economy," with oversight at the state and federal levels.

"I do not support eliminating ILCs, and I expect the FDIC to give future applications a thorough and fair review, as called for under existing law," McAdams said.