In a significant development for the automotive industry, Ford and General Motors are advancing toward establishing their own banks, aiming to potentially offer more competitive financing options to car buyers.

According to the Federal Deposit Insurance Corporation, federal regulators have conditionally approved these automakers to create industrial banks dedicated to delivering auto financing solutions across the country. This strategic move signifies a shift in how these companies may soon manage their financing operations.

The appeal for automakers lies in the opportunity to fund loans directly through customer deposits, a more cost-effective alternative compared to the traditional, pricier borrowing methods they currently use. This change could lead to significant savings and benefits for consumers as well.

“By setting up these entities, automakers like Ford and GM can access much lower funding costs, which can ultimately be passed on to their customers,” explains Patrick Roosenberg, senior director of auto finance at J.D. Power. This development suggests a promising evolution in auto finance, potentially easing the financial burden for future car buyers.

Ford said on its website that the approval will allow it to introduce “additional savings options” to customers and plans to offer products like certificates of deposit through a digital-first bank. GM said its new bank will complement its existing financial services arm by providing “stable and diversified funding” through deposit products.

The approval comes as affordability remains a major pressure point in the new-vehicle market. The average price paid for a new car topped $50,000 for the first time last September, according to Kelley Blue Book, and many buyers are leaning on longer loan terms to keep payments manageable.

In theory, Ford and GM’s new banks should give the automakers more financing flexibility at a time when traditional banks have been gaining market share in the new-car loan market.

“I think it can truly benefit all three parties — the dealer, the lender, and the end consumer,” Roosenberg said. “More competition should bring out more competitive rates with more options.”

Critics caution against mixing banking and commerce

Industrial banks, also known as industrial loan companies, have long drawn pushback from regulators and policy experts who warn they blur the line between banking and commerce.

“The separation of banking and commerce is there for a reason: to avoid conflicts of interest,” said Thomas Hoenig, a distinguished senior fellow at the Mercatus Center who was vice chairman of the FDIC from 2012 to 2018.

The core worry is that a company with its own bank could use its lending power to favor itself or its affiliates, undermining fair competition. Critics also warn that companies could be tempted to make risky loans to boost sales.

The Independent Community Bankers of America, a community bank trade group, opposed the FDIC’s recent approval, arguing that the move could pose risks to the broader banking system.

Back in 2006, the FDIC imposed a moratorium on new ILC applications after intense opposition to Walmart’s effort to set up an industrial bank — a bid the retailer ultimately withdrew.

There are currently 24 industrial banks in the U.S., according to the FDIC. But after years of hesitancy toward new applications, Hoenig said the recent approvals suggest regulators are more open to the idea than they used to be.

It’s a posture he has long opposed.

“I always thought it was a bad idea,” Hoenig said.

It remains to be seen whether the latest approvals will lead regulators to sign off on other applications. Stellantis and Nissan applied for industrial loan company charters last year, while Toyota and BMW already operate industrial banks in the U.S.

Ford and GM’s industrial banks — Ford Credit Bank and GM Financial Bank — will both be chartered in Utah. The companies have 12 months to establish them before the FDIC’s conditional approval expires.