As the financial services landscape continues to evolve, firms are increasingly seeking new pathways to deliver banking products directly to consumers. One such pathway is through industrial bank and industrial loan company (collectively, ILC) charters. An ILC is a state-chartered financial institution that is permitted to make loans and take certain types of FDIC-insured deposits. Notwithstanding these bank-like attributes, ILCs do not meet the definition of a bank under the Bank Holding Company Act of 1956 (BHCA). As such, a commercial company that owns an ILC would not be considered a bank holding company and would not be subject to supervision by the Federal Reserve Board. This model has attracted interest from firms seeking to expand their capabilities while avoiding the activity restrictions and regulatory burden associated with holding companies of traditional banking institutions.
However, there are notable limitations to an ILC charter. For example, only certain states have laws that allow for the formation of ILCs. Further, the Competitive Equality Banking Act of 1987 (CEBA) limits the ILC exemption from the BHCA to only those ILCs formed in states where the law permitting their formation was in place (or under consideration) on March 5, 1987. As a result, there are currently only 23 ILCs chartered in just five states: Nevada, California, Hawaii, Minnesota, and Utah, with more than half chartered in Utah due to its favorable regulatory environment. Colorado and Indiana also had a law that was in effect at the time of CEBA, thus permitting ILC charters; however, there are currently no ILCs chartered in the states.
While the potential benefits of leveraging ILC charters are significant, ranging from enhanced financial inclusion to accelerated innovation, there are also notable concerns raised by regulators as well as traditional banks. These include concerns about regulatory arbitrage, systemic vulnerabilities, the long-term impact on capital markets, and the separation of banking and commerce. These concerns have been a major impediment to new ILCs receiving deposit insurance application approval from the FDIC. Since 2008, the FDIC has only approved three ILC applications, with the majority of ILC applications being withdrawn.
A recent request for information was issued by the FDIC to facilitate a review of the agency’s process for approving ILC applications, which signals a possible future reshaping of supervisory standards for ILCs. Although no immediate regulatory changes are proposed, firms must be steadfast in their planning to help ensure they strike a balance between safety and soundness and the operational flexibility that ILCs often require.
Background: What Are Industrial Banks?
ILCs are a unique type of financial institution that combines elements of commercial banks with the ability for non-financial firms to control them. Historically, ILCs were created in the early 20th century to provide credit access to industrial workers who were underserved by traditional banks. Chartered at the state level and insured by the FDIC, ILCs can accept most types of deposits, originate loans, and offer payment services much like traditional banks, but they are exempt from BHCA restrictions on commercial ownership. This exemption allows businesses outside of the financial sector to establish or acquire an ILC as a means of integrating banking services into their core operations, providing greater flexibility in offering products and services directly to customers and suppliers.
Strategic Merits of Industrial Loan Companies
In an environment where personalization and real-time financial services are at the forefront of the customer experience, firms are looking to ILC charters to embed banking products and services seamlessly into existing infrastructure. By establishing a state-licensed, FDIC-insured entity, firms gain more control over funding sources, credit offerings, and risk parameters without sharing the economic benefits or ceding brand equity to a traditional banking partner. Firms could be drawn to industrial bank charters for several strategic reasons, including but not limited to:
- Regulatory Flexibility: By obtaining an ILC charter, firms can offer banking services without becoming subject to the BHCA. This allows them to avoid the complex and costly requirements associated with being a bank holding company, such as consolidated capital requirements and activity restrictions.
- Vertical Integration: Firms can integrate banking functions directly into their platforms, creating seamless user experiences. For example, a fintech offering personal finance tools can also provide deposit accounts, loans, and payment services, all under one roof.
- Accelerated Innovation: With direct control over their own banking infrastructure, firms may be able to iterate faster, launch new products more efficiently, and respond to customer needs in real time. This agility can be constrained in partnerships with traditional banks.
- Financial Inclusion: Firms using ILC charters may be able to reach underserved populations with tailored products, such as microloans, low-fee accounts, and alternative credit scoring models. These types of products expand access to financial services for individuals who may be excluded from, or underserved by, traditional banking.
- Revenue Diversification: Owning an ILC allows firms to capture additional revenue streams from interest income, interchange fees, and lending margins, helping enhance profitability and investor appeal.
It is important to keep in context how these benefits can translate into real-world impact. Firms that control their own deposit-taking and lending capabilities can cut funding costs and accelerate product and service rollouts while deepening brand loyalty through tailored, on-platform experiences. From a financial perspective, the availability of interest and fee income, in addition to access to proprietary data, can strengthen performance and has the ability to fuel continual innovation.
Positive Market Outcomes
A broader adoption of ILC charters could reshape individual business models and potentially have impacts across the financial ecosystem as a whole. By empowering different players to enter the market, ILCs could spark competition while elevating the quality of services for consumers. New entrants could act as a foreground for banking innovations from instant payments to artificial intelligence (AI)-powered credit decisions, prompting legacy banks to evolve. At the same time, innovative operational structures and platforms could introduce efficiencies across the banking industry. For consumers, these changes could translate into greater control of their finances, transparent pricing, and more user-friendly tools. Together, these gains could advance the modernization of banking and improve the provision of access to capital.
The broader financial ecosystem could benefit from the adoption of industrial bank charters in several ways:
- Increased Competition: ILCs can challenge incumbents by offering more competitive rates, lower fees, and user-friendly digital experiences.
- Product Innovation: New banking models such as embedded finance, real-time payments, and AI-driven credit underwriting could flourish under ILCs.
- Operational Efficiency: Fintechs and crypto-native firms often operate with leaner cost structures and advanced technology stacks. ILCs owned by such firms could help drive efficiency across the banking value chain.
- Consumer Empowerment: Users could gain more control over their financial lives through personalized tools, transparent pricing, and mobile-first access provided by ILCs.
ILC charters could unlock a new era of competition, innovation, and customer empowerment by coupling commercial agility with banking capabilities. However, despite their benefits, ILCs may introduce complex governance questions, regulatory uncertainty, and risks unique to the combination of commercial and banking ownership, among others. For ILCs to operate in a safe and sound manner, careful oversight, robust compliance frameworks, and the transparency necessary to reduce conflicts of interest are required.
Risks & Regulatory Concerns
ILC charters raise regulatory concerns and potential systemic risks that are not present, or present to a lesser degree, in traditional banks. There is a long-standing policy in the U.S. to maintain a separation between banking (especially in the form of deposit-taking activities) and commerce (in the form of selling goods or services). Permitting commercial firms to own ILCs blurs this policy separation. ILC parents that are more financial in nature have generated less regulatory concern than those whose strategies and operations are more commercial in nature. Nonetheless, because the ILC parent is not subject to the traditional supervision of bank holding companies, regulators are cautious in assessing the potential for heightened risk in the form of potential regulatory gaps, increased interconnectedness across the financial spectrum, and a more poignant blurring of lines between the ILC parent’s commercial growth and prudent risk controls within the ILC. While not a comprehensive list, organizations should be keenly aware of the following potential risks:
- Regulatory Arbitrage: The ILC model allows commercial firms to engage in banking activities without consolidated supervision. This creates a potential loophole where firms can avoid oversight that would otherwise apply under the BHCA. Critics argue that the exemption from the BHCA undermines the regulatory framework designed to separate banking and commerce and reduces the likelihood that the ILC parent will serve as a source of strength.
- Systemic Risk: As ILCs scale their banking operations, they may introduce new vulnerabilities into the financial system. For example, a large fintech could leverage its ILC subsidiary to become a critical node in payment infrastructure or consumer lending without the ILC parent being subject to the same stress testing and capital requirements as a traditional bank holding company.
- Conflict of Interest: Commercial ownership of banks raises concerns about conflicts between profit motives and prudent risk management. A commercial firm may prioritize commercial growth or customer acquisition over conservative lending practices at the ILC, potentially exposing depositors and the FDIC insurance fund to greater risks.
- Market Fragmentation: The proliferation of ILCs could fragment the regulatory landscape, making it harder for agencies to monitor systemic trends and enforce consistent standards across institutions.
- Impact on Capital Markets: If commercial firms incentivize their ILC subsidiaries to engage in aggressive lending or asset origination without proper oversight, such actions could distort credit markets or contribute to asset bubbles. This risk is amplified if such firms operate on a scale that can influence overall investor behavior or capital flows.
- Contingency Risks: The failure of an ILC could expose its commercial parent to reputational and operational risks, even though it is not legally required to support the subsidiary under the BHCA. Unlike bank holding companies, which must serve as a source of strength, ILC parents operate outside consolidated supervision. This regulatory gap may protect the parent from formal intervention but can amplify scrutiny if the collapse is perceived as a governance failure. The risks tied to the sudden exit of an ILC charter could include disrupting services, exposing data vulnerabilities, and triggering liquidity stress, while also damaging consumer trust and relationships.
GENIUS Act Implications
The three-way convergence of banking agency statements supporting bank activities involving fintech and digital assets, the passage of the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, and the FDIC’s request for information on ILCs has placed ILC charters in the limelight. Some fintech and crypto-native firms may view ILC charters as a means to directly engage in traditional banking without exposing themselves to regulatory oversight as a bank holding company.
The GENIUS Act aims to walk a narrow line between the digital economy and traditional banking by preserving the benefits of the technology enabling the speed and efficiency of cryptocurrencies without undermining financial stability. The GENIUS Act promotes the establishment of a cohesive regulatory framework for payment stablecoins, guidelines that adapt to the evolving dynamics of the digital assets marketplace while safeguarding depositors, and consistent regulatory requirements, while reducing fragmentation that could threaten systemic resilience.
In a monumental move, the GENIUS Act explicitly allowed a specific type of cryptocurrency (payment stablecoin) to be included in the traditional banking ecosphere. In doing so, the act defined who may issue stablecoins and under what conditions. The shift compels non-bank institutions considering the issuance of payment stablecoins to secure one of the recognized banking or trust charters before launching, putting digital asset participants on banking-style footing in some cases.
The GENIUS Act recognizes three classes of issuers. First are subsidiaries of insured depository institutions approved by the Office of the Comptroller of the Currency (OCC) to issue payment stablecoins under Section 5 of the legislation. These institutions are generally subject to some of the same safety and soundness requirements as their parent banks. Second are non-bank entities, uninsured national banks chartered by the OCC, or federal branches of non-U.S. banks that obtain approval from the OCC to issue payment stablecoins. Third, entities may pursue the route of becoming a state-qualified payment stablecoin issuer.
These pathways create incentives for stablecoin issuers to align with established financial institutions. By earning federal legitimacy, issuers gain access to real-time payment systems, interbank settlement, and in some cases, deposit insurance. However, this could come at the cost of heightened scrutiny over governance, conflict-of-interest policies, and technology controls, among other areas.
Among the classes of issuers, the ILC charter stands out as strategic, especially for fintech and crypto-native firms. Through an ILC, these firms can engage in both banking activities, including activities such as deposit taking, lending, safekeeping, or custody without the fintech or crypto-native firm coming subject to the regulatory requirements applied to bank holding companies. This flexibility may make the ILC route attractive as a pathway to integrate stablecoin issuance into the broader ecosystem of financial products.
To be a compliant payment stablecoin issuer under the GENIUS Act, an ILC would need to meet a defined set of regulatory standards that promote transparency, financial stability, and consumer protection. Each payment stablecoin must be fully backed by one dollar in approved reserve assets such as U.S. currency, insured deposits, or short-term Treasury securities. The ILC would need to implement clear redemption procedures and provide regular certified disclosures detailing the volume of stablecoins issued and the composition of reserves. In addition, an ILC that issued payment stablecoin with more than 50 billion dollars in circulation would be required to submit audited financial statements.
Why Fintech & Stablecoin Issuers Might Pursue an Industrial Bank Charter
In a landscape where digital innovation intersects with regulatory supervision, firms are increasingly considering industrial bank charters as a strategic path to mainstream finance. Beyond operational efficiency, an ILC charter likely enhances credibility with consumers, institutional partners, and regulators, laying the foundation for widespread market integration. Specifically, ILC charters unlock the following advantages:
- Regulatory Compliance: An ILC charter enables a stablecoin issuer to qualify as an FDIC-insured depository institution, a pathway toward satisfying GENIUS Act requirements, without triggering the BHCA.
- Commercial Ownership: Unlike traditional bank charters, ILC charters allow firms to own banks while preserving existing governance structures and strategic autonomy.
- Stablecoin Issuance at Scale: With direct access to banking infrastructure, stablecoin issuers may be able to better manage reserves, process payments, and maintain liquidity, all under a compliant framework.
- Credibility & Market Access: Operating as a regulated bank may enhance trust among users, institutional partners, and regulators, positioning the issuer for broader adoption and integration into financial markets.
By leveraging an ILC charter, stablecoin issuers can navigate the GENIUS Act’s regulatory perimeter while maintaining the agility and innovation that define fintech-led models. However, this approach also amplifies the need for robust risk management, transparency, and regulatory coordination to help ensure that digital asset issuance does not compromise financial stability.
Master Account Access
Many fintechs and crypto-native firms have sought a Federal Reserve master account. A master account at the Federal Reserve allows a financial institution to plug directly into the U.S. payment system, providing direct access to the Federal Reserve to clear and settle payments through Fedwire, ACH, and FedNow services without the need for a financial intermediary. By transacting directly with the Federal Reserve, an institution can send and receive payments in a quicker and more cost-effective manner. In addition, an institution can hold cash balances directly at the Federal Reserve, helping enhance both safety and liquidity management.
However, master account access is not guaranteed by the Federal Reserve and all institutions requesting an account must meet six criteria to show that they:
- Are eligible under the Federal Reserve Act or other federal statute to maintain an account at a Federal Reserve Bank;
- Do not present or create undue credit, operational, settlement, cyber, or other risks to the Reserve Bank;
- Would not create undue credit, liquidity, operational, settlement, cyber, or other risks to the overall payment system;
- Would not create undue risk to the stability of the U.S. financial system;
- Would not create undue risk to the overall economy by facilitating activities such as money laundering, terrorism financing, fraud, cybercrimes, economic or trade sanctions violations, or other illicit activity; and
- Would not adversely affect the Federal Reserve’s ability to implement monetary policy.
In assessing requests for master account access, the Federal Reserve applies a three-tiered review framework that works as follows:
- Tier 1 consists of eligible institutions that are federally insured. These institutions generally will be subject to a less intensive and more streamlined review.
- Tier 2 consists of eligible institutions that are not federally insured but are subject to prudential supervision by a federal banking agency or are a holding company subject to Federal Reserve oversight. These institutions generally receive an intermediate level of review.
- Tier 3 consists of eligible institutions that are not federally insured and not subject to prudential supervision. These institutions generally receive the strictest level of review.
Since an ILC is a federally insured institution, it would likely receive a less intensive and more streamlined review of its master account request, should it decide to request one. While access to a Federal Reserve master account is not guaranteed, pursuing the ILC pathway may improve a firm’s chance for approval. However, it must pass the regulatory gauntlet of ILC charter approval.
Navigating the Path Forward
ILC charters offer a powerful tool to expand reach, deepen customer relationships, and innovate at scale. When used responsibly, this model can drive meaningful progress in financial inclusion, efficiency, and consumer empowerment. However, the regulatory flexibility that makes ILCs attractive also introduces risks that must be carefully managed to protect the integrity of the financial system. Should the adoption of ILC charters accelerate, then stakeholders should carefully balance between enabling innovation and safeguarding stability.
How Forvis Mazars Can Help
In the heavily regulated banking industry, leaders face more challenges than ever, from striving to meet shareholder and regulatory expectations to pursuing digital innovation. Forvis Mazars can help your financial institution tackle issues inherent to the industry, including market growth, internal control threats, industry consolidation, and compliance. We have the skills and experience in financial services that you can trust, combining a focus on Unmatched Client Experience® with the resources of a global firm. Serving you is our passion and privilege.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.