Industrial Bank

Industrial banks are non-traditional banks that offer non-traditional loans to non-traditional borrowers...and if that isn’t the clearest definition ever, we just don’t know what is.

Eh, okay. In order to explain it better, though, we’re going to need to hop into this our DeLorean and transport ourselves back to 1910 America.

During those dark days, it was pretty much impossible to get a bank loan for anything unless you were an upper-class type with a bunch of collateral. So...pretty much the opposite of the person who might most need a loan.

Enter Arthur Morris, the founder of the first so-called Morris Plan bank in 1910. This bank offered loans to working-class folks who maybe didn’t have a huge pile of money or a mansion to offer as collateral. In fact, instead of collateral, Morris Plan banks wanted character references: if the others thought we were a good person, then the bank would likely offer us the loan we needed. It was a good deal, and the popularity of these banks and bank plans spread like wildfire.

Traditional banks eventually realized they were being stupid and missing out on a whole bunch of potential customers. That realization, plus the Great Depression, plus enhanced banking regulations, led to the eventual morphing of Morris Plan banks into what we now call “industrial banks.” They serve kind of the same purpose—they offer loans to folks who maybe can’t or don’t want to go through traditional banking channels—but they’ve become a bit more specialized.

For example, the car dealership down the road that offers in-house financing to its customers is an example of an industrial bank: it might have lower barriers to entry for borrowers, and they might end up getting a better deal on the loan than they would have through their everyday bank.

Example #2: an industrial bank might be set up to loan money to folks within a specific industry...like, say, teaching or welding. They might focus on smaller loans that people in those working-class industries might not otherwise be able to secure.

“Boy,” we might be saying, “is there anything industrial banks can’t do?”

And the answer to that is yes, there sure is. While they can accept deposits, they can’t offer checking accounts, for example. They’re not that kind of bank. They also can’t be chartered just anywhere they please; there are only a handful of states that actually allow industrial banks to call them home. (Utah is the most popular state for industrial bank chartering.) And they typically can’t guarantee the loans themselves, so they contract with a third-party guarantor who can. But despite their limitations, they can still offer quite a bit of financial lending goodness to people who might need it most.