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Cheat Sheet: Square now has a bank

  • Payment technology firm Square lends billions to merchants using its point of sale technology.
  • The company has just received an industrial bank charter and is moving deeper into financial services.

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Cheat Sheet: Square now has a bank

Square Financial Services has begun operations roughly a year after receiving preliminary FDIC approval.

What's happening: The payments technology firm was awarded an industrial bank charter in Utah. The Salt Lake City, Utah-based Square Financial Services will provide business loans and deposit products to sellers who use its card reader and other point-of-sale services. Square says it will begin its banking operations with underwriting and originating business loans for Square Capital’s existing lending product. Looking ahead, Square will use Square Financial Services as the primary provider of financing for Square sellers across the U.S.

Square Capital facilitated approximately 57,000 loans during the fourth quarter of 2020 totaling $254 million (a 62% year-over-year decline impacted by the pandemic). Square Capital had also facilitated approximately $857 million in Paycheck Protection Program loans to more than 80,000 small businesses in 2020.

Before its launch, Square Capital loans were issued through a partnership with Celtic Bank.


Why become a bank: Square's move answers the question “buy or build” when it comes to fintech banking. LendingClub went with buy, as it acquired Radius Bank last year. Approval of the merger took a better part of a year. Varo Bank went with build, and instead of the industrial route, went through the OCC, becoming the first fintech to get a national bank charter after a three year journey.

Square uses sellers' transaction histories and the data they spin off to facilitate loan underwriting and payments. For payment tech vendors, capital lending is a "logical extension" of their business, Gartner analyst Dayna Ford told CNN.

Why an industrial bank: IBs are state-charted depository institutions and have been around since 1910. They are eligible for FDIC insurance and are subject to similar banking regulations as other bank types. IBs can issue financial products like loans.

Square Financial Services is just the 16th FDIC-insured industrial bank operating in Utah. And it’s the second de novo industrial bank operating in the state, according to Square.

Owners of industrial banks don't have to be bank holding companies -- a key reason why fintechs and other firms interested in getting into financial services pursue creating industrial banks.

Walmart also used the industrial bank structure in its pursuit of a bank license in the early 2000s. The retailer ultimately abandoned the charter path amid a lot of pushback by the industry and regulators. But with its 2 big hires out of Marcus by Goldman Sachs, its fintech joint venture with Ribbit Capital, and the FDIC's willingness to issue more industrial bank charters, it's entirely possible Walmart will apply again to become a bank.

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