An industrial bank is a state-chartered depository institution that can be owned by non-financial entities. Industrial banks are subject not to oversight by the U.S. Federal Reserve, but rather by the states in which they are formed. Customer deposits are insured by the Federal Deposit Insurance Corp. (FDIC), which also supervises them.
Industrial banks solve the problem of when corporations want to engage in banking activities without becoming a bank or financial holding company themselves. Industrial banks serve limited purposes for the parent holding company, such as allowing an automaker to service auto loans. Industrial banks are only allowed in seven states throughout the U.S., with over 93% of industrial banks headquartered in Utah.
Here’s more about what they are, how they work, and how they’re different from commercial banks.
Definition and Example of an Industrial Bank
Industrial banks, also known as industrial loan companies (ILCs), are state-chartered financial institutions that offer operational flexibility to non-financial companies. Nonfinancial companies can charter and operate industrial banks in states that allow them when deposits are insured by the FDIC.
They must follow the same banking laws and regulations that other banks do. They are regulated by the state in which they operate, and are supervised and insured by the Federal Deposit Insurance Corp. (FDIC).
What distinguishes an industrial bank from a commercial bank is the ownership and operational flexibility it is allowed.
- Alternate name: industrial loan companies
- Acronym: ILC
An example of an industrial bank is BMW Bank of North America. BMW Bank is an industrial bank that offers in-house banking services to BMW and BMW MINI Cooper customers, dealerships, and affiliates. This comes in the form of indirect automotive financing, consumer lending products like credit cards, and personal insurance. In other words, when you finance a car with BMW Bank of North America, you’re dealing with an industrial bank.
How an Industrial Bank Works
An industrial bank operates much like other commercial banks; however, many limit the scope of their business to a narrower customer base, such as only offering auto loans or construction loans.
Industrial banks are permitted in seven states:
- Colorado (although its last industrial bank became inactive in 2009)
Over 93% of industrial banks have headquarters in Utah, a state known for its business-friendly policies.
To be considered to start an industrial bank, the corporation must apply for a charter through a state that allows them.
To apply for a charter, according to research economist Levi Pace of the Kem C. Gardner Policy Institute at the University of Utah, “Prospective FDIC-insured industrial banks' applications must demonstrate acceptable practices for business planning, capitalization, staffing, and information security.”
For example, payment services provider Square Inc., in early 2021 completed the chartering process to form a new industrial bank, Square Financial Services in Utah. Square Financial Services’ goal is to offer direct business loans and deposit products to underserved populations. The company’s stated belief is that bringing banking in-house will allow it to operate more nimbly.
The origins of industrial banks can be traced to 1910. Originally, the purpose of an industrial loan company (or ILC) was to help industrial workers, usually employees of the same company, obtain banking services. For the next 20 years, loans obtained by these workers were the largest source of credit for this segment of borrowers.
By 1966, 254 ILCs were in operation (the peak number of ILCs to date). Their market share later began to decline as banks began to offer more consumer lending options for a greater number of customers.
In 1982, Congress made all industrial banks eligible for deposit insurance and in 1987, made an exception to the Bank Holding Company Act that allowed parent companies to own and control industrial banks without being subject to the same federal regulations as a bank holding company.
This opened the door for non-financial companies to own industrial banks in the states that allowed them.
Industrial banks, driven by expansion in Utah, grew from the late 1990s through the mid-2000s. What stopped the growth (and effectively paused the creation of further industrial banks from 2008 to 2020) was the Dodd-Frank Act, which was enacted in the aftermath of the financial crisis. New charters for insured industrial banks were put on hold.
There are a number of large financial institutions that started as industrial banks and transitioned to commercial lending. Some notable examples have included:
- Goldman Sachs
- American Express
- Merrill Lynch Bank USA
- Morgan Stanley Bank
- GE Capital Bank
- GMAC Bank
Many of these chose to base their original bank operations in Utah to take advantage of the state’s industrial bank charter and later transitioned to become a commercial banks.
Industrial Banks vs. Commercial Banks
The difference between industrial and commercial banks isn’t just in the structure, it also applies to their offerings. Industrial banks serve a different function from commercial banks.
|Industrial Banks||Commercial Banks|
|Longer repayment periods, often for 15 or 20 years||Financing and repayment periods are typically shorter periods of time|
|Do not offer checking accounts. May focus on a single product line, such as auto loans or credit card payment processing||Customers can open savings, checking, or money market accounts and certificates of deposit|
|Offer limited services, usually installment loans for consumers and small businesses||Earn profits from interest-bearing loans they offer to customers, such as mortgages, personal loans, business loans, and more|
|Most industrial banks are located in Utah||Located throughout the U.S.|
|Many do not have traditional branches||Traditionally offer a number of in-person branches|
|Limited to states that permit them||Exist in all U.S. states|
- An industrial bank is not federally regulated, although deposits are FDIC-insured and that agency does supervise industrial banks.
- Industrial banks may have a narrower scope of business than a traditional commercial bank, such as only servicing auto loans.
- Industrial banks can be owned by nonfinancial companies.
- 93.5% of industrial bank assets are located in Utah.