Rakuten backpedals on plan for credit union charter

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Kiyoshi Ota/Bloomberg

Rakuten has withdrawn its latest bid for a federally issued charter after submitting an application to the National Credit Union Administration earlier this year.

The Japanese conglomerate, which specializes in e-commerce, technology and financial services, applied to the NCUA for a credit union charter on May 15 and rescinded its submission just a few months later on Sept. 5, as confirmed by an agency spokesperson. The NCUA offered no further details.

This was Rakuten's fourth attempt to become a licensed financial institution in the U.S. Executives of the tech giant explained in a July 2019 press release that pursuing an industrial loan company charter under the Federal Deposit Insurance Corp. was necessary for bolstering its growing presence in the U.S. and strengthening its suite of e-commerce services. The proposed bank, named Rakuten Bank America, sought to offer credit card issuing and acquiring, personal loans and business loans and deposits.

ILCs, which are state-chartered, FDIC-insured depositories, have long been a point of contention among the financial services industry, with many consumer advocate groups viewing the classification as a loophole for nonfinancial companies to blend commerce and banking — while exempt from the supervision of the Federal Reserve.

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Credit unions differ from ILCs in numerous ways, including ownership type, the overseeing regulatory agency, membership eligibility and general mission.

The company withdrew its initial submission in March 2020 to better tailor the pitch using feedback from the FDIC. Successive efforts for an ILC charter in May 2020 and January 2021 yielded little progress, as Rakuten rescinded its second and third attempts for undisclosed reasons. 

Shawn Roberts, head of corporate communications for Rakuten International, stated that Rakuten will "continue to explore options for providing valuable financial rewards to our members in the U.S.," but declined to provide any further comment.

Over the past three years, the certification process has seen organizations such as Ford and Thrivent Financial for Lutherans launch endeavors for obtaining ILC charters and establishing banking subsidiaries.

Regulators with the FDIC approved a final rule in December 2020 requiring that parent companies of ILCs adhere to conditions such as annual reports of the controlled bank and other subsidiaries, 50% maximum representation by the parent on the ILC's board, an explanation of safeguards for consumer information and other requirements.

But industry experts worry that even with the changes, corporations would still exert influence over the direction of the financial institution and would unfairly blur the lines between commerce and banking, said Mickey Marshall, assistant vice president and regulatory counsel for the Independent Community Bankers of America.

"Executives with the ILC always make the argument of having separate management, but at the end of the day you know who your parent company is and what their incentives are. … So, I don't think there's really a good way to get around that conflict of interest that is so obviously there," Marshall said.

Since ILCs aren't classified as banks under the Bank Holding Company Act, commercial parent companies aren't subject to the same regulatory scrutiny as those in charge of traditional institutions. This gap leaves many wondering if the FDIC is best suited for ensuring the safety and soundness of the pseudo banks and the companies that oversee them.

"There wouldn't be the same kind of monitoring of financial health and the ability of commercial parents to serve as a source of strength in the event of a liquidation as there would be with traditional bank holding companies," Marshall said.

While long-term viability is a core focus of those critiquing ILCs, the community impact remains equally important.

Adam Rust​, senior policy advisor for the National Community Reinvestment Coalition, emphasized that the disparity in penalties between ILCs and banks with delinquent Community Reinvestment Act ratings puts the NCRC in direct opposition to new charters.

"The precedent that would have been set for approval as either an ILC or as a credit union would have been problematic. … They're two very different ways of defining a financial institution, and the idea that [Rakuten] could somehow apply for both is also alarming and seems disingenuous," Rust said.

With application approvals remaining a rarity under FDIC Chair Martin Gruenberg, trade groups are paying close attention to Rakuten's next steps.

"I think we're better off with a banking system where banking is banking and commerce is commerce and the two don't overlap," Rust said.