Square Applies for Charter to Form Bank

The payments firm wants to offer a one-stop shop for financial needs by operating Square Financial Services under an industrial loan company charter.
Matthew HellerSeptember 13, 2017

Taking a major step toward becoming a one-stop shop for financial needs, payments company Square has applied for an industrial loan company (ILC) charter.

The application, if approved by regulators, would allow Square to form a wholly owned banking unit offering loans and deposit accounts to small businesses and capitalized with $56 million in cash. Square Financial Services would be based in Utah.

Since 2014, Square Capital, the company’s lending arm, has originated $1.8 billion in loans to more than 140,000 businesses through a deal with Celtic Bank, another Utah-based lender.

In applying for an ILC, Square’s “purpose is to empower small businesses and the underserved to participate in the economy,” a spokesperson said. “Square Capital is uniquely positioned to build a bridge between the financial system and the underserved, and further expand access to capital.”

Unlike a regular bank charter, an ILC charter would enable Square to provide banking services while continuing to operate such non-banking businesses as a point-of-sale hardware appliance business and even its Caviar food delivery service.

The parents of industrial-loan companies are also not subject to supervision by federal banking regulators.

The nation’s top bank regulator, the Office of the Comptroller of the Currency, announced last year that it would start issuing bank charters to online lenders, payment companies and other financial technology firms. Since then, online lender Social Finance and mobile-banking startup Varo Money have applied for charters.

“The ability of a fintech company like Square to gain access to federally insured deposits would be viewed by many as a watershed moment for the banking industry,” The Motley Fool said.

But as American Banker reports, “Community banks and others who support a strong firewall between banks and commercial firms swiftly opposed Square’s move, expressing concern it could open the door to larger technology companies seeking the advantages of a bank charter without the same regulatory supervision.”

“If these entities want to be banks, they should apply for banking charters and come under full and unified banking supervision,” said Camden Fine, the president and CEO of the Independent Community Bankers of America.