Last November, Missouri’s conservative Defense of Liberty PAC scheduled a high-profile event with a speech by Donald Trump, Jr. On November 9, however, WePay, a subsidiary of JPMorgan Chase that provided payment services for the event, announced the end of these benefits. WePay accused the organization of violating its policy against promoting “hate, violence, racial intolerance, terrorism, financial exploitation of a crime, or items or activities that promote , promote, facilitate or educate others about it”. Although WePay eventually reversed its decision, the organization had to cancel the speech.
WePay’s actions follow a series of similar incidents over the past few years, including the cancellation of former President Trump’s personal bank account, Michael Flynn’s credit cards and at least one Christian organization. non-profit. The fossil fuel and firearms industries have also been targeted. Companies selling controversial materials have had their payment services terminated and consequently shut down. Decisions to cancel these high profile individuals or groups are often reversed after public outcry and dismissed as a “mistake” by providers. But what about individuals who don’t have the public position to fight back?
Once the domain of colleges and social media, cancel culture has come to banking.
Today’s “cancel culture” in the banking industry is mirrored by the Obama administration’s infamous Operation Choke Point initiative. Highlighting the “reputational risk” of certain industries such as payday lenders, gun dealers and suppliers of “racist material”, regulators have relied on banks to “stifle” the financial air that these industries were breathing. It’s no coincidence that controversial industries and organizations favored by the left, such as abortion clinics or vendors of communist propaganda, weren’t on the administration’s list of targets.
Why should anyone care if a “private” company such as Chase chooses to blackball out a particular individual or industry – can’t they just get financial services elsewhere? But therein lies the catch – financial services is one of the most heavily regulated sectors in the economy, characterized by vague and variable regulatory standards articulated in no manual or published rules. The hook for Operation Choke Point and Chase’s decision to terminate Flynn’s credit cards, for example, is the regulatory standard of “reputational risk”, which in practice could amount to little more than the valuation subjective by the regulator of the “awkwardness” of a private individual or industrial. Once unbanked, it is often difficult or even impossible to find someone else to serve you.
Vague regulatory standards bear little resemblance to the rule of law. The same regulators who designed these standards can prevent the entry of new banks that might be willing to serve unpopular individuals and industries. The heaviness of these (and other) barriers to entry is evidenced by the fact that only 44 new banks, including state and federal banks, have been created since the financial crisis. Virtually all of these new banks are small, geographically circumscribed community banks that cannot fill the void left by the megabanks.
In an ideal world of perfect markets, the cancellation culture among the big banks would be of little importance because it would be easy to start a new bank. But we live in the world of ‘second-best’ markets, where competition is significantly distorted by heavy financial regulatory coverage and barriers to entry. Indeed, banks today look more and more like public services as well as real private companies. Policy should be based on a realistic assessment of markets as they actually exist, not on imaginary abstractions.
The combination of thick, discretionary regulation and high barriers to entry raises concerns that the financial services industry is increasingly being used to stifle free speech, democratic participation and access to products and legal services. What if banks, perhaps under social or regulatory pressure, supported decisions by social media platforms to cancel or demonetize certain users by banning payment services to those users, even through alternative platforms such as Substack or Rumble? Paypal, major credit card networks and banks have already stopped processing payments for organizations they consider “hate groups”, but activists are demanding they do more. It is naïve to expect that these prohibitions will not extend beyond the most egregious groups to many others.
Those who are banned from YouTube or Twitter may find other places to talk. Those who are barred from banking services, on the other hand, have nowhere to turn. The threat to freedom of expression is manifest. What can be done, if necessary?
The most direct way to solve this problem would be for regulators to loosen their grip on competition and entry. In 2020, I chaired the Consumer Financial Protection Bureau’s Consumer Financial Law Task Force. In our report, we called for the elimination of unnecessary restrictions on competition and entry in the financial services sector. This would mean not only easier chartering of new banks, but also the removal of barriers for fintechs, industrial loan companies, credit unions and small lenders. It would also allow non-banks to access the payment system. New entrants could carve out a niche outside of stifling federal regulations and mitigate the risk of culture cancellation.
But entry alone will not solve the problem if there is no effective competition or if all new entrants are subject to the same politically correct rules. These concerns led Acting Comptroller Brian Brooks at the end of the Trump administration to announce the Fair Access to Financial Services Rule, which was immediately suspended by the Biden administration. This rule would have prohibited banks from refusing to serve customers on the basis of subjective criteria or categorical judgments on entire sectors and from relying only on an objective, quantifiable and individualized risk assessment. This requirement is similar to the proposal to subject large internet companies to public carrier regulations or to ensure non-discriminatory access to public housing. This spring, Sen. Kevin Cramer (RN.D.) introduced legislation that would effectively codify Brooks’ rule, a preview of future Republican control in Washington.
Brooks’ rule drew the ire of big banks, which objected to limits on their power to choose their customers. And of course, such proposals can lead to unintended consequences and questions about the details. Nonetheless, opposition from the big banks could prove to be short-sighted – they will now face increasing pressure to engage in contentious political disputes and make arbitrary distinctions that will draw criticism no matter what they decide. It further risks dividing society and the economy into ‘red’ and ‘blue’ teams as politicians and conservative citizens retaliate in a reciprocal fashion. Accepting the fair access rule, on the other hand, would tie the banks to the mast of political neutrality and make it easier for them to resist the entreaties of activists and woke employees. These banks would be wise to voluntarily adopt non-discrimination standards before they are imposed from outside.
During the Cold War, it was often observed that the Soviet Union had a long bill of rights that claimed to protect freedom of speech, press, and religion. But what good is it to have the right to print a copy of Milton Friedman Free to choose if the communist regime controlled access to paper, ink and printing presses? What we see today raises many of these same concerns – the right to open a business, voice your opinions or simply earn a living is of little value if you cannot access an account. bank to collect or make payments. It’s time to stop the cancellation culture in banking before it’s too late.
Todd Zywicki is the George Mason University Foundation Professor of Law at Antonin Scalia Law School.
The opinions expressed in this article are those of the author.