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Erasing the line in the sand

by Ira Teinowitz | Published February 8, 2012 at 3:13 PM

Amid all the talk about big insurers and other financial companies being driven out of banking because of the burdens of the Dodd-Frank Act, could it be that the time is right for nonfinancial companies to buy banks?

That question is being prompted by dramatic new growth projections for mobile payment systems, the upcoming expiration of a regulatory moratorium on commercial companies' buying what are known as "industrial banks" and last year's surprising approval by the Federal Reserve Board of the $15.7 million purchase by Green Dot Corp. of Bonneville Bancorp, the holding company for Utah's Bonneville Bank.

Commercial firms typically shun the Fed's arduous process for winning permission to become a bank parent company, but owning a bank and processing transactions allows retailers or websites to do their own clearing and reduce fees to processors. Several retailers already own banks.

Typically, these companies have set up an industrial loan company, a type of state-chartered, federally insured depository institution that, while not technically a bank, operates like one. The owners don't have to convert to bank holding companies as Green Dot did.

Still, any potential savings must be weighed against the controversy generated by buying banks, the traditional headaches that go with owning them and new regulatory burdens arising from Dodd-Frank financial reform.

In 2005 Wal-Mart Stores Inc.'s proposal to establish an industrial bank in Utah created a furor and resulted in huge pushback from traditional banks. While Wal-Mart says it didn't intend to offer loans or provide other banking services, rivals expressed fear that the company would quickly push into those areas. The Federal Deposit Insurance Corp. responded by imposing a moratorium on commercial firms' buying industrial banks and kicking the controversy to Congress, and in 2007 Wal-Mart withdrew its application. The Dodd-Frank Act continued the moratorium, which will end July 21, 2013. The approval by the Fed of Green Dot's purchase indicates it might be rethinking this policy.

Green Dot, partly controlled by Wal-Mart and also the long-term exclusive partner for Wal-Mart's MoneyCard program, now owns a full-service bank with a single location, not an industrial loan company, through the purchase of Bonneville Bank.

"The landscape is moving," says bank analyst Chris Whalen. He suggests that the approval could lead to more such deals. Still, Whalen and other bank experts agree that the playing field has changed since Wal-Mart made its original request.

When the Dodd-Frank Act was enacted, it brought with it new concerns for any big companies that might want a banking operations of their own, including, in some cases, Federal Reserve oversight and review of company dividends. That new oversight has prompted some insurers to sell off their banks.

Yet nonfinancial companies see bank ownership as a means to generate lucrative mobile payment fees. A joint paper released in March by the Federal Reserve Banks of Atlanta and Boston, citing the growth of smartphones, found "there is growing evidence that mobile payments will become a significant element in the U.S. payments landscape."

"Imagine all the retailers who parcel out the clearing to banks and what happens if they internalize the transactions," Whalen says. "It saves a lot of costs," He adds that interest may pick up considerably when the moratorium on industrial banks expires.

Ernest T. Patrikis, a partner at White & Case LLP, says buying a bank could be especially attractive to nonbank financial businesses, but he isn't sure it would appeal to all. "I can't see Google or Amazon becoming a bank holding company."

Thomas P. Vartanian, a partner at Dechert LLP, also suggests that nonbank credit card companies, as well as companies that have bank interests and are familiar with the regulations, could be prospective buyers. He pointed to CapGen Financial Group and Castle Creek Capital as candidates.

But Donald Lamson, counsel at Shearman & Sterling LLP, says that concerns about the Volcker Rule and its impact on proprietary trading of banks could cause nonfinancial firms to shy away. "There are a lot of regulatory costs. They won't want to look at problems with affiliate transactions and potentially a lot less freedom," he says.

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Tags: Bonneville Bancorp | Bonneville Bank | Dodd-Frank Act | Federal Reserve Board | Green Dot Corp.

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