Square Wins FDIC And Utah Approvals for Its ILC, Sparking Heated Banking Opposition

The federal government and the state of Utah this week cleared the way for a controversial industrial loan corporation to be set up by Square Inc. that could help the payments company cement ties with its merchant base. But the approvals also drew fierce opposition from banking groups concerned about a possible flood of nonbank applicants for ILC charters.

The FDIC on Wednesday approved an application from Square Financial Services for deposit insurance related to its ILC. Square announced the banking unit, which is based in Salt Lake City, has also won a charter from the Utah Department of Financial Institutions. The bank is expected to begin operating next year and will offer commercial loans to clients of Square Capital, a small-business lending operation aimed at helping merchants and other businesses that use Square’s point-of-sale services. It will also offer deposit products.

“We’re now focused on the work ahead to build out Square Financial Services and open our bank to small business customers,” said Jacqueline Reses, Square Capital lead and executive chairwoman of the board of directors for Square Financial Services, in a statement. Square has been planning its banking venture for several years. In 2018, it withdrew its original application for deposit insurance, but refiled in December that year “after having constructive dialogue with federal and state regulators,” says a Square spokesperson. “We amended and strengthened some areas of our application for Square Financial Services in that time.”

News of the FDIC and Utah approvals drew a strong rebuke from banking-industry groups, which have historically opposed the entry of commercial entities in the banking business. Some are also puzzled by what they see as precipitous action by the FDIC in the case of Square. The agency is drawing up new rules regarding ILCs, but hasn’t finalized them.

The Washington, D.C.-based Independent Community Bankers of America, which has opposed the Square application from the start, is concerned the new ILC will allow Square to discriminate among commercial clients in ways traditional banks don’t. The new charter is “mixing commerce and banking,” says Chris Cole, executive vice president and senior regulatory counsel with the ICBA. “Once these commercial entrants own banks, there will be incentives for the banks to favor certain industries over others. We think that’s dangerous.” The FDIC proposed new rules this week governing ILCs.

Cole says the ICBA expects many more ILC applications, especially from technology companies, now that Square’s effort has won approval. “It will be a wide range of companies [applying], but primarily tech,” he predicts.

But for Square, the advantages of its new banking venture will be substantial, observers say. “Having a charter will allow them to offer a full suite of lending products to their clients, which is both a revenue opportunity as well as a strong defensive move against traditional banks and other fintechs,” says Thad Peterson, a senior analyst at the Aite Group, a Boston-based consultancy. “They will be able to broaden their offerings beyond lending with this charter and I would expect that they will explore those options over time.”

Others see further advantages. “With their own charter, they will have the opportunity to cut out bank lenders who act as middlemen and add to Square’s cost structure,” says Sarah Grotta, director of the debit and alternative products advisory service at the Mercator Advisory Group, a Marlborough, Mass.-based consultancy. 

But she cautions more opposition to Square’s banking move will likely emerge over time. “Bankers, both those who would have partnered with Square to provide services and also those who consider them a competitive threat in the area of small business lending, are not cheering this announcement,” she adds.

Square’s new ILC will be managed by Lewis Goodwin, chief executive of Square Financial Services, and SFS chief financial officer Brandon Soto, Square said Wednesday. Both men have long experience in banking and in running ILCs.