Competitive Environment - - In Cyberbanking, When Do Non - Banks Become 'Banks'?
The cyberbanking phenomenon has created an onslaught of electronic alternatives to conventional forms of money and banking by financial intermediaries operating outside of the traditional bank regulatory framework. The rapid development of on-line banking, stored value cards, digital cash, and other electronic forms of money and money transfer systems raises interesting questions as to whether the entities offering these new financial services are "banks."
In order to answer this question, one must know what a bank is. Unfortunately, our sophisticated bank regulatory system does not include a simple definition of the term "bank."
Definition of "Bank"
Under the Bank Holding Company Act, a "bank" generally includes any FDIC- insured bank or any institution that accepts both demand deposits (or deposits that the depositor may withdraw by check or similar means for payment to third parties) and engages in the business of making commercial loans.1
Under the Federal Deposit Insurance Act, a "bank" includes, in addition to institutions chartered as banks, any other "banking" institution that is engaged in the business of receiving deposits.2
Under the National Bank Act, core "banking" functions generally include the receiving of deposits, paying of checks, or making of loans.3
Whether a provider of electronic money or money transfer systems would be deemed to be issuing "deposits" and thereby be a "bank" will depend on how these terms are interpreted not only by the federal banking agencies, but by the U.S. Department of Justice. The Justice Department enters into the picture under a little known section of the Glass-Steagall Act, Section 21(a)(2), which prohibits any entity from taking deposits without being regulated like a bank.4 Criminal penalties for violations are prescribed.
The Justice Department interpreted Section 21(a)(2) in the early 1980s when it considered whether Merrill Lynch's "cash management account" (CMA) constituted the taking of deposits in violation of the Glass-Steagall Act. The Justice Department concluded that a CMA customer had an equity interest rather than a debtor-credit relationship that it regarded as the defining characteristic of a deposit.
The 50 states also will have a role in determining whether non-bank providers of electronic money services are 'banks." State laws typically prohibit entities other than banks from receiving deposits or transmitting money.5
Notwithstanding these prohibitions, many instruments for storing and transferring monetary value have existed outside the banking system without having been found to run afoul of Section 21(a)(2) of the Glass-Steagall Act, the Bank Holding Company Act, or other banking regulations. Examples of these include travelers checks, money orders, payment orders, thrift notes, and brokerage accounts.
Recently, the Federal Reserve Board approved "money transmittal" services as a permissible nonbanking activity.6 While the Board did not specifically address whether the money transmission service involved the receiving of deposits, it did note that there would be no agreement between a customer and a bank to accept money in an account for use by the bank and that a customer could not use the service to transmit funds to any bank account maintained by the customer or a third party. Thus, the Board concluded that the service would not be used to collect deposits by banks affiliated with the company.
The Board concluded that money transmission services do not involve the paying of checks because, although the third party would receive money by means of a check drawn on an account maintained by the company, the receipt of funds in check form is not the payment of a check. Similarly, the service did not involve lending money because only funds provided by the customer were transmitted to a third party.
The Office of the Comptroller of the Currency (OCC) also has determined that a national bank can accept money from non-bank affiliates for the purpose of transmitting the funds to a foreign country without the affiliates being deemed to be receiving deposits and thus branches of the bank.7
Based on these and prior applications of the law, the federal banking regulators do not seem inclined at the moment to find that non-bank providers of electronic money alternatives are engaged in the business of issuing or receiving "deposits" and thus should be treated as "banks." If the non-bank money alternatives begin to create undue competitive pressures on regulated banks or systemic risk concerns, the banking regulators could develop a different attitude.
A corollary to the question of whether non-bank electronic money services involve the issuance of "deposits" under the banking laws is whether they involve the issuance of "securities" under the securities laws. Frequently, if a financial instrument is not a deposit, it is found to be a security. But that issue is a subject for another article.
1.. 12 U.S.C. § 1843(c).
2.. 12 U.S.C. § 1813(a).The term "deposit" is defined very broadly to include the unpaid balance of money or its equivalent received in the ordinary course of business for which the bank is obligated to give credit, any outstanding draft, cashier's ch eck, money order, or other officer's check issued in the usual course of business for any purpose, and such other obligations as the FDIC find s to be a deposit liability by general usage. 12 U.S.C. § 1813(1).
3.. 12 U.S.C. §36(f). See Clark v. Securities Industry Association, 479 U.S. 388 (1987).
4.. Section 21(a)(2) makes it unlawful "any person, firm, corporation, association, business trust or other similar organization to engage, to any extent whatever with others than his or its officers, agents or employees, in the business of receiving deposits subject to check or to repayment upon presentation of a pass book, certificate of deposit, or other evidence of debt, or upon request of the depositor, unless such person, firm, corporation, association, business trust, or other similar organization (A) shall be incorporated under, and authorized to engage in such business by the laws of the United States or of any State, Territory, or District, and subjected, by the laws of the United States, or of the State, Territory or District wherein located, to examination and regulation, or (B) shall be permitted by the United States, any State, Territory, or District to engage in such business and shall be subjected by the laws of the U.S... to examination and regulations or, (C) shall submit to periodic examination by the banking authority of the State, Territory, or District where such business is carried on and shall make and publish periodic reports of its condition, exhibiting in detail its resources and liabilities, such examination and reports to be made and published at the same times and in the same manner and under the same conditions as required by the law of such State, Territory, or District in the case of incorporated banking institutions engaged in such business in the same locality." 12 U.S.C. § 378(a)(2).
5.. For example, Section 131 of the New York Banking Code provides: "No corporation ... other than a national bank or a federal reserve bank, unless expressly authorized by the laws of this state, shall employ any part of its property ... for the purpose of receiving deposits, making discounts, receiving for transmissions or transmitting money in any manner whatsoever, or issuing notes or other evidences of debt to be loaned or put in to circulate as money ...." McKinney's Consolidated Laws of New York Ann., Ch. 2 , Art. III, § 131.
6..Norwest Corporation , 81 Fed. Res. Bull. 1130 (1995). In October of 1995, the Board approved Norwest's application to offer a service through a non-bank subsidiary under which a customer could place an order to transmit funds to a third party by paying cash and a fee to a representative of the non-bank company. The representative would issue a receipt and deposit the customer's cash in a bank account maintained by the representative solely for the purpose of receiving funds in trust to be transmitted to third parties. The representative would not have any agreement to accept deposits on behalf of the bank in which it maintains its account. On a daily basis, the company would collect funds deposits in each representative's account through an ACH or similar transaction and deposit an amount equal to the amount to be transmitted into an account maintained by the company at a bank located near the third party receiving the funds. The third party would be notified that the money is available at a local disbursement site, which co uld be a bank branch or a non-bank office of a consumer finance company or check cashing office. The third party could collect its fund s almost immediately by a check drawn on the company's account. The customer generally would not be permitted to leave money on deposit with the company but could use the service solely to transfer money to a third party.
7.. Unpublished letter from Peter Liebesman, Assistant Director, Legal Advisory Services Division, May 15, 1990.