What Is an Industrial Bank? (2024)

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).

• 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:

• California
• Nevada
• Colorado (although its last industrial bank became inactive in 2009)
• Hawaii
• Indiana
• Minnesota
• Utah

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.

Notable Happenings

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.