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When you need a new mortgage in the future, will your only options be AmazonWellsFargo or AppleChase? The prospect of a mash-up of banking and commerce keeps people like George Washington University law professor Arthur Wilmarth up at night. “This would mean an end to healthy innovation and startups and competition,” said Wilmarth. “I think it is that dire.”

Wilmarth sees the seeds of a new era of conglomerates in a series of actions by federal regulators and small firms to allow “fintech,” or financial technology companies, to become FDIC-insured banks. In June, SoFi, which offers student loan refinancing and wealth management services for high-income young people, applied for an “industrial loan company” charter in Utah, and early this month, the payment processing company Square followed suit. The Utah loophole has long been a back door for banks to get into ordinary commerce, and it keeps getting worse. The Office of the Comptroller of the Currency has also proposed a second route for fintech firms, through a “special purpose” national bank charter.

In principle, these maneuvers could inject competition into a banking industry controlled mostly by four Wall Street giants, making financial services more accessible and flexible to modern needs. But special charters also let fintech evade critical regulatory scrutiny. And the tentative steps by SoFi and Square seem like a dry run for the day Silicon Valley's giants decide to get in the game, building sprawling businesses the government has aimed to prevent for decades.

It's a well-established principle of efficient capitalism that commerce needs to be separated from finance. Banks get all sorts of privileges from the government—and if banks can also function as ordinary commercial enterprises, they have unfair advantages against other businesses (who are also their clients).

The Bank Holding Company Act of 1956 sought to prevent these advantages, as well as problems in the financial sector from spilling into the broader economy. It barred commercial firms from owning banks, much as the Glass-Steagall Act separated certain types of banking activities. But it included an exception for “non-bank banks” to either make deposits or issue loans. In 1987, Congress closed that loophole, so non-bank commercial firms couldn't own any bank receiving FDIC deposit insurance.

“But Congress never closes a door without opening a window,” Wilmarth said. Utah Senator Jake Garn, then head of the Senate Banking Committee, added an exemption, allowing non-banks with state industrial loan charters (ILCs) to obtain FDIC insurance. Only seven states use ILCs, and the primary practitioner is, you guessed it, Utah. Garn wanted a cottage industry for his state, but he created an end-run around commercial/financial separation, one which major companies exploited.

Dozens of corporations set up shop by opening ILCs in Utah, enabling them to lend nationwide. GMAC became the financial arm of General Motors; GE Capital, for General Electric. This created a form of regulatory arbitrage. Because ILCs are chartered at the state level, they're subject only to state monitoring. ILCs therefore avoid Federal Reserve supervision, or Bank Holding Company Act restrictions that limit banks to the business of banking. But through the FDIC, ILCs get access to safety net services like payment systems and the discount window. FDIC insurance also facilitates access to the cheapest capital funding around: deposits.

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So

ILCs derive all the benefits banks enjoy from the government, without being regulated as stringently.

It's what the Government Accountability Office called in 2012 a “supervisory blind spot.” That’s a recipe for systemic risk. Only GMAC needed government-supplied capital after the first round of post-financial crisis stress tests. GE Capital got an $18 billion Federal Reserve bailout on its commercial paper holdings.

The sums at issue today are even bigger. A recent study by the Bank for International Settlements, a consortium of central banks, reported that non-bank financial houses hold $14 trillion—that's trillion—in off-balance-sheet debt using derivatives.

In 2005, Walmart applied for an ILC and community banks fiercely resisted, fearing an end to their existences. The FDIC, which needs to approve such applications, opted to delay, and Walmart eventually withdrew. No other ILC charters have been approved since then; Dodd-Frank even put a freeze on ILC bids from 2010-2013.

SoFi broke this streak, seeking to offer FDIC-insured bank accounts and credit cards. Square wants to extend its operations in small business and personal loans. An ILC allows fintech firms to avoid using a bank partner to engage in bank-like activities. By operating online from Utah or another ILC state, fintech companies can export relatively lax rules on interest rate caps and other banking rules nationwide. It also means companies wouldn’t have to divest other business lines; for example, Square sells appliances and owns a food delivery service called Caviar.

Terms for the FDIC's leadership expire within the next year, and President Trump’s replacements could be friendly to reopening the ILC loophole. Even if the FDIC resists, SoFi or Square could turn to the OCC, which has been working on creating special purpose bank charters for fintech firms. This would subject firms to OCC supervision but not Federal Reserve scrutiny, while gaining access to the Fed lifeline. It would also pre-empt state consumer protection laws, critics fear. OCC has an ignominious history of using its power to halt regulation at the state level. Acting OCC head Keith Noreika has been questioning the split between banking and commerce, arguing “it’s not the best thing to put all your eggs in one basket.”

SoFi has imploded since June—its CEO resigned over sexual misconduct allegations, and the corporate culture appears even more corrupt and depraved than Wall Street’s. But Square could test the waters for the rest of the tech world, which is already immersed in banking. Amazon has lent $1 billion to small businesses in the past year. Apple Pay has a structure similar to Square. And the constant churn of tech startups getting bought by bigger players presumes that, sooner or later, a bank charter will fall into the heads of one of the giants. “You could have Google Bank,” said Mehrsa Baradaran, law professor at the University of Georgia. “The Trojan horse is a tiny fintech company but Google’s right behind them.”

Because of their size, large firms that can afford to operate a bank would enjoy competitive advantages over smaller rivals, because they can fund themselves with cheap deposits. Tech giants have absorbed or destroyed most of the industry's startups; they don't need more advantages. Plus, the stature of these firms make them indispensable to the greater economy, bringing back the spectre of “too big to fail” that policymakers have spent years trying to limit.

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This will inevitably lead to even more consolidation, Wilmarth believes, citing the rapid development of financial sector conglomerates after Glass-Steagall got overturned. “We have an oligopoly of five in tech, five or six in banking,” Wilmarth said. “Do we really want to allow these guys to combine? Because they will.”

In fact, the co-mingling has already begun. Cloud service providers like Amazon are partnering with banks on data storage. Other financial institutions are using Amazon's Alexa digital assistant as a virtual teller. Banks are increasingly selling their services on Web platforms, staying in the background as the more consumer-friendly websites are the face to the public. You can easily see banks and tech firms argue the need to merge to create more efficiency in an already tangled relationship.

Community banks have already railed against the SoFi and Square bids, warning that the intermixing of banking and commerce “results in a dangerous concentration of commercial and economic power.” While Silicon Valley has begun to supplant Wall Street in the public consciousness when it comes to the dangers of corporate domination, having the two team up would border on intolerable.