Brye Steeves

English

Research Papers in Economics

13 SPRING 2008 • TEN
bout  10  years  ago,  Flying  J  opened 
Transportation  Alliance  Bank,  which 
offers  personal  banking  services  such  as 
checking  and  savings  accounts,  retirement 
and investment options, debit and credit cards, and even 
leasing and financing. It’s the only bank that focuses solely 
on trucking and therefore understands the industry’s needs, 
according to the company. Keeter’s drivers are able to get 
pay advances while on the road through Flying J. Keeter, in 
turn, directly pays Transportation Alliance Bank. 
Transportation  Alliance  Bank  is  not  a  bank  in  the 
traditional sense, but is an Industrial Loan Company, or 
ILC. ILCs are state-chartered institutions based in seven 
states around the country. A growing number operate via 
the Internet and other nontraditional means rather than 
from a brick-and-mortar storefront. ILCs have nearly all the 
For Paul Keeter, the Flying J 
is more than just a place for his 
Colorado-based drivers to gas 
up and grab snacks for the road. 
The chain of truck stops is also a 
place––designed especially for those 
who live a life on the road––to do 
some banking when away from 
the home office or local branch.
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ssame powers as banks, with one big difference: 
They can be owned by commercial companies, 
such as General Electric, BMW or Toyota. 
Although ILCs aren’t new to the financial 
industry,  Wal-Mart  and  Home  Depot’s 
recent attempts to open and acquire an ILC, 
respectively, are causing a stir, say Ken Spong 
and Eric Robbins, both policy economists at 
the Federal Reserve Bank of Kansas City. Spong 
and  Robbins  recently  examined  this  blend 
of  banking  and  commerce.  They  researched 
ILCs’  legal  framework,  re-emergence,  forms 
of ownership, business conducted and related 
public policy issues.
In recent years, both Fry’s Electronics and 
Target created ILCs with hardly an eyebrow 
raised.  But  with  more  than  3,000  stores 
and  supercenters  and  millions  of  financial 
transactions  each  week,  Wal-Mart’s  massive 
presence crossing over into the banking sector 
has many critics. 
In response, the Federal Deposit Insurance 
Corporation (FDIC) placed a moratorium on 
commercial firms opening or acquiring ILCs. 
Before the moratorium ended, both Wal-Mart 
and Home Depot withdrew their applications. 
(Wal-Mart  also  had  previously  tried  to  buy 
a bank in Oklahoma and an existing ILC in 
California.) 
The withdrawal of these two applications 
relieves pressure on the FDIC and Congress, 
which  has  been  working  to  clarify  ILC 
ownership rules as the banking industry pushes 
for  restrictions.  The  U.S.  Senate  Banking 
Committee  is  working  on  a  bill,  but  the 
prospects for this legislation are uncertain.
Current  law  leaves  ILCs  as  the  only 
option  for  commercial  firms  to  enter  into 
banking. Without new legislation, commercial 
companies, including Wal-Mart, could apply 
again.  Both  Ford  and  Chrysler  have  ILC 
applications pending with the FDIC.
In  general,  points  of  opposition  to 
commercially  owned  ILCs  include  potential 
conflicts  of  interest,  competitive  concerns, 
safety and soundness issues, and implications 
for  federal  deposit  insurance  and  similar 
protectors. Bankers say this type of ownership is 
a threat to the system should those companies or 
their banks fail. Advocates say ILC activities are 
conducted and supervised in a sound manner, 
and furthermore better serve niche groups. 
“Our review of operations of ILCs owned 
by large financial and commercial firms shows 
a  record  of  sound  performance,  innovative 
approaches  and  strong  parent  company 
support,” Spong says. “But an important issue 
raised by the broader ownership of ILCs is how 
far public authorities should go in extending 
the federal safety net.”
Background
ILCs first emerged in the early 1900s to 
provide  small  loans  to  industrial  workers.  A 
few decades later commercial banks and others 
took over, leaving ILCs a small segment of the 
consumer lending market.
Within  the  last  decade  or  so,  though, 
ILCs  have  re-emerged,  allowing  commercial 
and  financial  firms  to  offer  banking  services 
without being subject to ownership restrictions 
that apply to other depository institutions.
“This growth likely is driven by business 
and financial factors––ILCs allow commercial 
businesses to offer deposit services and financing 
to their customers, clients or dealers,” Robbins 
says. “An auto manufacturer, for example, can 
use ILC lending to help support its car sales. 
ILCs also can attract and retain customers for 
the parent company.”
ILCs generally are authorized to perform a 
full range of credit services and other standard 
banking  activities,  but  not  all  states  allow 
ILCs to offer demand deposit accounts, such 
Our review of operations of ILCs owned by large financial and commercial firms shows a   
  record of sound performance, innovative approaches and strong parent company support. ”
“ 
14 SPRING 2008 • TENILcs only hold about 1.8 percent 
of  all  insured  depository  institutions’ 
assets.  These  ILcs  typically  operate 
with capital levels at or above banking 
industry averages. The five largest ILcs 
each hold nearly $20 billion or more 
in total assets and, when combined, 
account for about 71 percent of all 
ILc assets. 
There  are  three  general 
categories of ILcs:
traditional:  owned  by 
individuals,  or  bank  or  thrift 
organizations;  focus  on  providing 
credit  and  deposit  products.  Thirty-
seven ILcs have traditional ownership, 
the  largest  of  which  is  Fremont 
Investment & Loan, with nearly $13 
billion in assets. 
financial services: owned by 
securities firms (Morgan stanley Bank, 
Goldman sachs Bank usA), insurance 
companies  (usAA  savings  Bank) 
or credit card companies (American 
express  centurion  Bank);  most  offer 
deposit or credit products to customers 
of  the  parent  company.  These  ILcs 
now make up the vast majority of ILc 
business.  Merrill  Lynch  Bank,  which 
has $67 billion in total assets, is the   
largest ILc.
Commercial:  owned  by 
businesses;  most  offer  a  range  of 
financial  services  that  support  the 
parent company.
Fifteen  ILcs  are  owned  by 
commercial  companies,  many  of 
which are automotive companies. 
GMAc  Automotive  Bank  has 
become  the  largest  commercial  ILc 
with almost $20 billion in total assets. 
Much of its lending now consists of 
residential mortgages. 
As of early 2007, there were 58 ILcs. Forty-five have 
utah or california charters; the others are located in 
colorado, Hawaii, Indiana, Minnesota or Nevada.
ilCs under financial or commercial ownership
 
ilC  parent company
Merrill Lynch Bank usA  Merrill Lynch 
uBs Bank usA  uBs AG 
American express centurion Bank  American express 
Morgan stanley Bank  Morgan stanley 
GMAc Bank  cerberus/GMAc 
Goldman sachs Bank usA  Goldman sachs 
usAA savings Bank  usAA  
capmark Bank  capmark Financial Group/GMAc 
Lehman Brothers commercial Bank  Lehman Brothers Holdings Inc. 
BMW Bank of North America  BMW Group 
Ge capital Financial Inc.  Ge (General electric) 
Advanta Bank corporation  Advanta 
Fireside Bank  unitrin Inc. 
Merrick Bank  cardWorks, LP 
Volkswagen Bank usA  Volkswagen 
Pitney Bowes Bank Inc.  Pitney Bowes 
Transportation Alliance Bank  Flying J Inc. 
exante Bank  unitedHealth        
Toyota Financial savings Bank  Toyota 
5 star Bank  Armed Forces      
enerBank  cMs energy 
eaglemark savings Bank  Harley-Davidson 
First electronic Bank   Fry’s electronics
Target Bank  Target corporationas checking or savings accounts. Nor do some 
states welcome commercial ownership of ILCs. 
California, for example, passed a law in 2002 
prohibiting as much after Wal-Mart’s attempt 
there. There are, however, many “traditional” 
type ILCs in California.
  ILCs  customarily 
operate  under  their 
own  regulatory   
and  supervisory 
system  (state 
chartered  and 
examined  by  state 
authorities), but oversight 
is  similar  to  that  of  state-
chartered banks. Legislation in 
the late ’80s made all ILCs eligible 
for federal deposit insurance, which 
would require these ILCs to be supervised by 
the FDIC.
Under  federal  law,  ILC  owners  avoid 
restrictions  on  conducting  commercial 
activities that apply to banking organizations, 
as well as consolidated supervision that applies 
to bank and thrift holding companies. But, this 
law also closes other avenues some commercial 
firms had used to get into banking.
“Some ILC owners face one less layer of 
regulation compared to other companies that 
own  depository  institutions,”  Robbins  says. 
“This puts ILCs in a unique position within 
the financial system.”
The debate
The  Bollingers  are  probably  the  very 
type of customer Flying J had in mind when 
the  company  established  its  Transportation 
Alliance Bank a decade ago.
David  and  Kristal,  a  Kansas  City-based 
husband  and  wife  truck-driving  team,  often 
visit the truck stops when on the road. And 
now they bank there, too. 
“It’s easier and more convenient,” Kristal 
says. 
The  young  newlyweds 
drive  together  (along 
with pets Buddy and 
Tigger),  alternating 
10-hour  shifts  as 
they traverse from 
the  Midwest  to 
the  East  Coast, 
Wal-Mart’s atteMpts to Create a Bank of sorts (known 
as an ilC) to process its customers’ electronic payments has 
strong  opposition  even  though  other  commercial  businesses 
have ilCs.
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s17 SPRING 2008 • TEN
and  sometimes  into  Canada.  The  Bollingers 
can be away from home for months at a time, 
but  because  their  paychecks  are  deposited 
directly into their accounts with Transportation 
Alliance Bank, David and Kristal say accessing 
and managing their finances isn’t a hassle while 
on the road. They each have a card that can be 
used as debit or credit, which is their primary 
form of payment.
It’s  this  type  of  existing  customer  base 
of  the  parent  companies  that  ILCs  hope  to 
also snag as banking customers. And it’s this 
crossover that opponents say is unfair.
“If  they  break  down  the  wall  between 
banking and commerce, then we should be able 
to sell tomatoes,” says Guy Berry, president of 
American Heritage Bank, a small community 
bank in Sapulpa, Okla.
Others  echo  Berry’s  sentiment,  though 
Spong  and  Robbins  say  recent  attention  on 
ILCs doesn’t raise new issues in the banking 
and commerce ILC debate.
“Many of the public policy concerns now 
at the heart of the ILC debate have been part of 
a long-standing discussion on whether banking 
and commerce should be mixed, and what role 
commercial firms should have in the financial 
sector,” Robbins says.
Wal-Mart’s ILC proposal was to process 
electronic  payments  (debit,  credit  and 
check  images)  made  by  its  customers––not 
traditional bank-like services such as deposits 
or withdrawals. By using its own bank, Wal-
Mart would have kept fractions of a cent from 
these transactions that would’ve added up to 
$5 million to $10 million a year, and meant 
lower prices for consumers, according to the 
company. Critics say this could lead to Wal-
Mart  using  its  ILC  charter––and  extensive 
network of stores––to establish retail banking 
operations in communities everywhere.
Wal-Mart already has entered the banking 
industry abroad with its Banco Wal-Mart de 
Mexico Adelante. The corporation has nearly 
1,000  supercenters,  restaurants  and  Sam’s 
Clubs in Mexico, and is the second chain to 
open banking operations there. In the United 
States, Wal-Mart is now leasing space to existing 
banks to open branches inside the stores.
 In comparison, Target Bank was chartered 
in late 2004. With $14.2 million in assets, it is 
relatively small. It operates from one office in 
Utah that isn’t publicly accessible and primarily 
issues  private  label  credit  cards  to  business 
owners for use in Target stores. Target Bank 
doesn’t accept retail deposits but funds much of 
its lending through a line of credit and deposits 
from the parent company to ensure compliance 
with federal banking laws.
Opponents  argue  allowing  this  type 
of  ownership  would  open  the  flood  gates, 
encouraging companies to establish extensive 
retail banking networks, lend directly to their 
customer  bases  and  upset  the  competitive 
balance  in  some  local  banking  markets. 
Although speculative, a number of large firms 
are likely to have some interest in using ILCs to 
get into banking, but they would still have to 
prove themselves against a variety of competitors 
in retail banking markets, Robbins says. 
 As far as overall performance, ILCs owned 
by financial firms and commercial companies 
generally  have  been  successful  in  serving 
specialized customer bases. High earnings levels 
can be in part attributed to limited staffing, 
minimal  office  facilities  and  reliance  on  the 
parent company to generate business. 
“Consequently, whether this performance 
record  will  continue  likely  depends  on  the 
success of the parent companies in their main 
lines of business,” Spong says.
If they break down the wall between banking and  
    commerce, then we should be able to sell tomatoes. ”
“ Issues to consider
“The operations of ILCs currently owned 
by businesses may provide a clue to what might 
be expected if other, large retailers were allowed 
to  set  up  their  own  ILCs,”  Robbins  says. 
“Are there conflicts of interest that might be 
detrimental to the ILC, its customers, or safety 
and soundness?”
Spong  and  Robbins  say  increased  entry 
and continued growth in the ILC industry by 
commercial  firms  raises  a  number  of  issues, 
including:
•	 soundness:  Because  commercial 
organizations  owning  ILCs  can  avoid  the 
consolidated  supervision  placed  on  banks 
and  thrifts,  opponents  say  ILCs  could  be 
vulnerable to risks that develop in other areas 
of  the  organization.  Many  have  said  these 
ILCs and their parent companies are operating 
with a “supervisory blind spot” and should be 
subject to the same supervisory framework as 
bank and thrift organizations, although such 
oversight could be costly and pose difficulties 
for supervisors, Spong says.
•	 conflict  of  interest:  In  a  few  cases, 
commercially  and  financially  owned  ILCs 
might  sacrifice  their  own  interests  in  favor 
of  the  parent  company  or  its  customers. 
Examples include lending to an affiliate or its 
customers at a favorable rate or without regard 
to creditworthiness in order to directly boost 
business, or refusing to lend to competitors of 
the parent company. However, laws, regulations 
and  the  marketplace  itself  can  help  control 
many possible conflicts, Robbins says.
As an example, provisions of the Federal 
Business entrepreneur paul keeter works with flying J’s 
ilC for the benefit of his truckers, but isn’t convinced any sector 
needs specialized banking. 
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18 SPRING 2008 • TENReserve Act limit the amount of transactions 
that can take place between an ILC and its 
parent company, and require these transactions 
to have comparable terms to transactions with 
unrelated parties.
Because ILC loans to affiliate organizations 
are secured and deposits of ILC customers can’t 
be used to fund these transactions, they are safe, 
says George Sutton, legal counsel for the Utah 
Association of Financial Services, a proponent 
of ILCs. 
It’s the regulatory efforts that ensure there 
is no adverse influence on the ILC from its 
parent company, Sutton says.
•	 competitive  effects:  Most  commercial 
ILCs  serve  specialized  customer  bases  and 
have not attempted to establish a network of 
retail  banking  offices.  There  is  some  belief, 
though,  that  competition  would  be  harmed 
by  the  emergence  of  large,  commercially 
owned ILCs, but in some instances, the entry 
of  commercial  or  financial  firms’  ILCs  has 
increased competition.
Berry,  of  American  Heritage  Bank,  says 
banking and commerce should be segregated 
because it gives large commercial entities an 
unfair  size  and  regulatory  advantage  over 
community banks. 
“If  an  ILC  comes  in  (communities  in 
Oklahoma),  it  will  wipe  out  hundreds  of 
banks,”  Berry  says,  adding  he  doesn’t  think 
American Heritage, a $500 million asset bank 
with a presence in 10 small towns statewide, 
would “be able to survive this onslaught. … 
Some of us will make it; most of us will fail.”
However,  Sutton  argues  banks  won’t  be 
displaced, but rather ILC presence would create 
a more diverse financial industry.
•	 federal  safety  net:  Commercial  and 
financial  ILC  ownership  could  lead  to  a 
further  extension  of  the  federal  safety  net, 
which  includes  deposit  insurance,  access  to 
Federal  Reserve  credit  and  other  regulatory 
tools. The primary purpose of this safety net 
is to prevent financial panics and protect small 
depositors.  With  commercial  and  financial 
ILC ownership, funding and lending activities 
formerly conducted in private capital markets 
are being shifted into ILCs protected by the 
federal safety net. This raises the question of 
how far that safety net should be extended, and 
how it should be most fairly used, Spong says.
“There are no quick and easy answers to 
these  supervisory  and  safety  net  questions,” 
Robbins  says,  “but  they  play  a  role  in 
determining  how  the  entire  financial  system 
should be structured and supervised.”
Spong  adds,  “The  ILCs  owned  by 
commercial  and  financial  companies  have 
helped  add  innovation  and  competition  to 
the  marketplace,  but  many  questions  still 
remain about how the ILC industry should be 
structured.”
Although  Paul  Keeter  spent  nearly  two 
decades in the cab of his big rig and for the 
past 13 years has run the carrier service Keeter 
Enterprises LLC, he’s not convinced any sector 
necessarily  needs  specialized  banking––just 
good customer service.
Keeter works with Transportation Alliance 
Bank to accommodate some of his truck drivers 
who use those services, but does the majority 
of  his  own  banking  with  a  small  financial 
institution that has a local branch in Boulder. 
It’s not affiliated specifically with trucking, 
but  “they’re  interested  in  our  business,”   
Keeter says.
19 SPRING 2008 • TEN
further resources
“industrial loan CoMpanies: a groWing 
industry sparks a puBliC poliCy deBate”
By Kenneth spong and eric robbins
www.KansascityFed.org/TeN
CoMMents/Questions are welcome  
and should be sent to teneditors@kc.frb.org.
By Brye steeves, seNIor WrITer
T

Industrial loan companies: commercial businesses face head-on opposition to entering the banking sector

http://www.kansascityfed.org/publicat/TEN/pdf/spring2008/ILCs.pdf

Industrial loan companies: commercial businesses face head-on opposition to entering the banking sector

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Research Papers in Economics