Rethinking the Banking-Commerce Divide
TL;DR
Background: For more than a century, the United States has tried to keep banking and commerce separate, barring commercial firms from owning banks and banks from owning commercial enterprises. The idea reflected a distinctly American distrust of concentrated financial power, concern that banks could dominate local economies, and fear that commercial activities could threaten financial stability and the deposit-insurance fund. Laws from the National Bank Act through Glass-Steagall to the Bank Holding Company Act of 1956 turned those concerns into a structural rule for an era of geographically isolated community banks.
But… That world no longer exists. Interstate banking, embedded finance, platform economics, banking-as-a-service (BaaS), and emerging tools like agentic AI have blurred the line between banking and commerce. Meanwhile, national and global competition has increased pressure for a more efficient financial system.
The separation has always been imperfect. Today, it is increasingly one-sided: technology firms offer bank-like services, while chartered banks remain bound by rules written for a different era.
However… Modern regulation no longer depends on rigid structural barriers. Consolidated supervision, risk-based capital, stress testing, affiliate-transaction limits, and near real-time reporting can address the conduct that actually threatens stability and competition. Other advanced economies permit much greater integration without sacrificing financial stability. Rather than trying to preserve an obsolete divide, policymakers should regulate risk directly and judge firms by what they do, not by whether they fit outdated legal categories.
KEY TAKEAWAYS
A Wall Made of Old Fears
The separation of banking and commerce did not arise from economic science. It reflected a political culture deeply suspicious of concentrated financial power.
From the fight over the Banks of the United States through Jacksonian populism and the Progressive Era campaign against the “Money Trust,” policymakers repeatedly favored dispersed credit over concentrated banking. They accepted the resulting inefficiencies as the price of limiting private financial influence.
The fear was practical, not theoretical. Todd Zywicki compares it to the company store, where employers paid workers in scrip redeemable only at employer-owned shops, giving them control over wages, credit, and retail. States responded with “anti-truck” laws requiring payment in lawful currency. Banking policy followed the same logic: lawmakers feared that institutions controlling credit could also control commerce.
Financial crises reinforced that instinct. The National Bank Act of 1864 responded to the instability of the “Free Banking Era,” when state-chartered banks issued their own notes and “wildcat banks” often issued currency that proved worthless. Rather than centralize banking, Congress preserved what Jamie Grischkan calls a “geographically segmented and peculiarly fragmented financial structure” that limited competition in service of democratic ideals.
The New Deal cemented the modern separation regime. The Senate Banking Committee’s “Pecora hearings” exposed conflicts of interest at depositor-backed institutions. The Banking Act of 1933 (better known as Glass-Steagall) separated commercial and investment banking and created federal deposit insurance. The Bank Holding Company Act of 1956 extended the separation to bank holding companies, creating one of the world’s most complex banking regulatory systems.
The Wall Has Holes
Structural separation began eroding decades ago. Interstate-banking liberalization culminated in the Riegle-Neal Act, which eliminated geographic limits. The Gramm-Leach-Bliley Act dismantled much of Glass-Steagall’s wall between commercial and investment banking.
Today, banking and commerce are deeply intertwined. Retailers extend credit. Technology platforms route payments and hold balances. BaaS lets fintechs own the customer relationship while supervised banks hold deposits and bear the regulatory burden. The Bank Holding Company Act’s categories of “bank” and “commercial” no longer fit economic reality. The wall has been bypassed, and the institutions most constrained by it are often the ones regulators already supervise most closely.
The original case for separation reflected the limits of an earlier supervisory state. When regulators could not effectively oversee complex institutions, structural prohibitions substituted for direct oversight. That approach also shielded incumbents, limited competition, and left many Americans outside the financial system.
Modern supervision makes that tradeoff less necessary. Consolidated supervision, risk-based capital, stress testing, liquidity requirements, affiliate-transaction limits, advanced analytics, and near real-time reporting allow regulators to target specific risks instead of banning integration outright.
The Wall Is Optional
The United States is unusual. Most advanced economies allow universal banking and closer bank-commerce ties without the systemic crises that separation’s defenders predict. That does not make integration risk-free, but it does show that structural separation is not the only path to financial stability.
The real risks—credit misallocation, self-dealing, and improper access to the federal safety net—are conduct problems. They should be addressed directly through tools such as Sections 23A and 23B of the Federal Reserve Act and Regulation W, rather than by banning particular ownership structures.
A modern framework should regulate risk, not legal labels. Congress could begin by amending Section 4(k) of the Bank Holding Company Act to permit de minimis commercial activities subject to quantitative limits, disclosure, and supervision. A modernized Regulation W could extend arm’s-length rules to equivalent platform arrangements, protecting insured banks without prohibiting integration.
Portability Beats Prohibition
Today’s biggest concern is not that a bank might own a hardware store. It is that digital platforms might use network effects and closed ecosystems to lock in customers.
The better response is openness, not separation. Interoperability, data portability, and low switching costs preserve consumer choice and competitive pressure without banning integration. Data governance should likewise regulate how data is used, not who owns it, while supervision should scale with the risks a firm actually poses.
Banking and commerce already interact. The real challenge is not keeping them apart, but ensuring they compete fairly, innovate responsibly, and protect consumers and financial stability.
For more on this topic, see the ICLE white paper “Tear Down This Wall: Rethinking the Separation of Banking and Commerce” by Todd J. Zywicki.