Community Bankers Ask the FDIC To Deny Deposit Insurance for Square’s Bank

Citing the heavier regulatory burden borne by conventional banks, the Independent Community Bankers of America trade group on Tuesday asked the Federal Deposit Insurance Cop. to deny merchant processor Square Inc.’s insurance application.

San Francisco-based Square last month announced it would apply for an industrial bank charter from the state of Utah in order to operate its own bank. Such banks, often called industrial loan corporations or ILCs, are controversial because they can enable companies whose main business is outside the banking realm to offer bank services.

The federal Bank Holding Company Act and other regulations place more restrictions on conventional banks than ILC charters. The BHCA doesn’t apply to Utah industrial banks, even though such banks can qualify for federal deposit insurance.

“ICBA’s main objection with Square’s deposit insurance application is its use of the ILC charter to avoid the legal prohibitions and restrictions under the [BHCA],” the Washington, D.C.-based ICBA said in a letter to Kathy Moe, director of the FDIC’s San Francisco regional office. “This is an even more significant problem with the Square application since the holding company of Square and its affiliates already engage in a diverse set of commercial activities, including a food delivery business, a software business, and an online hardware store.”

Square already offers loans to its sellers through a Utah industrial bank, but says its own bank charter would enable it offer business loans  to small merchants, many of whom are underserved by conventional banks. The bank would be part of a Square subsidiary called Square Financial Services.

“Our application reflects Square’s ability to build a bridge between the financial system and the underserved, addressing the needs of small businesses that few community banks even reach,” a Square spokesperson tells Digital Transactions News by email. “We believe each and every ILC application should be considered on its individual merits, not ICBA’s inaccurate view of ILCs. We trust the FDIC, who has direct oversight and regulation of all ILCs, to effectively assess our application’s safety, soundness, and compliance with applicable laws before granting a charter.”

The ICBA also has objected to the deposit insurance application of the financial-technology company Social Finance Inc. (SoFi).

“As we stated in our comment letter regarding the SoFi Bank application, for safety and soundness reasons and to maintain the separation of banking and commerce, the FDIC should deny both deposit insurance applications and impose a two-year moratorium on future ILC deposit insurance applications,” the ICBA’s letter says. “Square should be subject to the same restrictions and supervision that any other bank holding company of a community bank is subject to. Furthermore, Congress should close the ILC loophole because it not only threatens the financial system but creates an uneven playing field for community banks.”

The ICBA added that if the FDIC doesn’t impose a moratorium on ILC charters, “there are thousands of fintech firms already engaged in financial activities, and it is not difficult to envision some of Square’s competitors such as an Amazon or a Google joining their ranks.”