It seems the banking industry is worried about American Express and Wal-Mart getting in the uninsured deposit business. See Amex and Wal-mart are offering Bluebird prepaid cards in an effort to gain the business of the unbanked. Prepaid cards differ from debit cards because they aren’t linked to a checking account. Instead, prepaid card users load money onto the cards and then use their plastic to buy things, just like conventional credit cards or debit cards.
“That’s ‘shadow banking,’” snarls Andrew Kahr in a piece for American Banker called, “Don’t Expand Uninsured Banking–End It.”
Kahr rips into the idea with this analogy,
To provide even lower “discount prices,” should Walmart rent decaying buildings that don’t satisfy local fire laws and building codes—and offer still better deals to consumers? And why should Walmart have to honor the national minimum wage law, any more than Amex honors state banking statutes? With Bluebird, Amex can already violate both the Bank Holding Company Act and many state banking statues.
Imagine this is a guy defending fractionalized banking. For every dollar you deposit, the bank keeps virtually none of it around and instead lends it out. The hope being that not everyone shows up at once for their money. In the case of IndyMac, a loss of 7% of its deposits led regulators to close it. It was about the same for WaMu and Wachovia when Washington engineered sales of those banks being run on.
This guy has the brass to write that companies providing the service of allowing customers to give them cash and then making the funds available on a credit card are doing something shady. Amex says it’s set aside the money that customers provide for the cards. “Like MF Global did?” Kahr snorts.
Well, at least MF Global was allowed to go bankrupt unlike, say, Bank of America, CitiCorp, or a dozen other too-big-to-fail zombies that are allowed to roam the earth.
Amex plans to offer paper checks to Bluebird cardholders. This makes perfect sense. But the thought leads Mr. Kahr to blow a gasket.
[Dan]Schulman [of American Express] irrelevantly asserts that Amex has state money-transmitter licenses. These in no way authorize it to offer checking accounts—or prepaid cards. State laws reserve for chartered institutions such as banks the power to offer demand deposit accounts – in the case of the New York Banking Law, Article 3, Section 131, limiting the power of “receiving deposits.” (A spokeswoman for Amex says, “We are confident that we are complying with all state and federal laws and regulations.”)
Kahr concludes that only insured institutions should offer demand deposits. He writes (and I’m not making this up),
Otherwise we might have an unregulated Facebook or Google of payments, even PayPal, quickly becoming both highly vulnerable and TBTF. (It could actually be run by someone wearing a hoodie, without tie or even white shirt!)