Square Makes Its Big Move On Banking

It seems Square is interested in becoming something more like a bank.

According to WSJ reports, Square intends to submit an application later today (Sept. 7) to form a wholly owned and operated bank in Utah.

That business unit would be called Square Financial Services Inc. — and it would be designed to offer loans and deposit accounts to small businesses. The bank would be capitalized with around $56 million in cash.

The move makes Square the third major FinTech player to make a move on a banking license.  Online lender SoFi made a similar move, as did mobile banking start-up Varo Money Inc. The timing is not quite a surprise — federal regulators have been more open to the idea of new banks recently than they have been at any time since the Great Recession.

To move into banking, Square is applying for a charter to form a so-called industrial loan company. Industrial loan firms have many of the same privileges as traditional banks, but they are allowed be part of a corporation that does things other than banking. Sixteen other industrial banks are currently licensed to operate in Utah.

Square already has an SMB lending arm — Square Capital — which it operates through a deal with Utah-based Celtic Bank. That lending operation has been fairly successful for Square and has lent out over $1.8 billion to more than 141,000 firms.

“As we scale, it’s becoming increasingly important that we have direct relationships with regulators,” said Jacqueline Reses, who leads Square Capital and will be the chairman of the bank. Lewis Goodwin will be the bank's acting CEO. Goodwin recently joined Square from Green Dot, where he was instrumental in leading the banking subsidiary of the firm.

Square's other business concerns — such as installment loans and Square Cash — will remain outside of the bank.

Ms. Reses noted that the choice to apply for an industrial loan company charter as opposed to a traditional banking license allows Square to continue to participate in the parts of its business that are entirely non-financial — selling hardware payment terminals and offering food delivery through its Caviar, for example.  Bank holding companies are prohibited from engaging in non-financial business activity.

But industrial loan charters can be a challenge to secure — Walmart is one of the more public and notable failures. Their attempt at moving toward an industrial loan charter caused a widespread wave of complaints and anger from bank lobbyists and community groups who argued that non-financial companies owning banks would concentrate too much commercial and economic power in one place.

And some of those same complaints have been brought in relation to the new industrial banking charter applicants.

Although SoFi does not presently engage in the type of commercial activities that Walmart engages in, it certainly would be legally free to do so in the future,” wrote Christopher Cole, an executive vice president at the Independent Community Bankers of America, in a letter to the FDIC. “SoFi might even become ambitious enough to set up an online retail company that would compete with Amazon.”



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