As Square launches its wholly-owned bank, it is set to provide FDIC-insured deposit accounts and loans to small businesses. Let’s understand the impact of Square’s move on other fintech players.
Square, the financial payments company run by Jack Dorsey, recently launched its own bank. According to the company’s announcement on MondayOpens a new window , the bank has begun operations after completing the charter approval process with the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions. The company said that the bank will operate as an independently-governed subsidiary of Square Inc.
The Utah-based financial services company is set to provide business loans and deposit products to sellers who use its card reader and other point-of-sale services.
Before the launch of the bank, Square issued loans through a partnership with Celtic Bank. Amrita Ahuja, Square’s CFO, saidOpens a new window , “Bringing banking capability in-house enables us to operate more nimbly, which will serve Square and our customers as we continue to create financial tools that serve the underserved.â€
Square receivedOpens a new window regulatory approval for the bank in March 2020. However, the company had been working on setting up a bank for more than four years. “We do not expect the bank to have a material impact on Square’s consolidated balance sheet, total net revenue, gross profit, or adjusted EBITDA in 2021,†the company said.
Square’s Stock Jump This Week
The fintech industry has risen amid the pandemic as consumers and companies have shifted to touchless or remote financial transactions. Today, it is quite rare for technology companies to get bank charters — fintech firms already offer products and services traditionally provided by banks. Generally, fintechs tie-up with third-party banks to service products such as small-business loans.
Amidst this setup, running its own bank will allow Square to serve its customers and operate in a more agile way. Square is expected to operate as an industrial bank by offering limited financial services to its customers. After making the announcement, Square’s shares jumped as much as 7% on Tuesday. The company’s stock was up 4.6%Opens a new window .
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Square Facilitates Loan Underwriting and Payments
Square is aiming to be a primary provider of financing for its sellers across the U.S. The company uses the sellers’ transaction history data to facilitate loan underwriting and payments. This offers a more streamlined application and approval process than many traditional financial institutions.
Traditional banks generally rely on business reports to get a hint of their performance. However, payment service providers have a constant, near-real-time view into the business performance and perhaps the entirety of their revenue stream. They, therefore, have a constant pulse check on how the business is doing.
Square uses such data to lend to businesses that may be turned away by a typical bank. The company says it has a better record of lending to women and minority-owned businesses than traditional lenders. About 58% of loansOpens a new window through Square Capital go to women-owned businesses, compared to 17% of traditional loans, and 35% of loans through Square Capital go to minority-owned businesses, compared to 27% of traditional loans.
Besides, in Q4 2020Opens a new window , Square Capital facilitated approximately 57,000 loans, thereby totaling $254 million. These figures highlight a 62% year-over-year decline for the company. The company blamed the pandemic for this slump in business.
As of December 31, 2020, Square Capital had facilitatedOpens a new window approximately $857 million in Paycheck Protection Program loans to about 80,000 plus small businesses. With that in mind, the company plans to continue selling loans to third-party investors, limiting the balance sheet exposure.
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How Will This Impact Square’s Competitors?
Square’s new bank could give it an edge over its rivals like PayPal, who also provide merchant services and business lending in partnership with a bank.
Square’s move has opened up a stream of possibilities for other fintechs that may want to nullify the middleman in banking. SoFi, a fintech player, appliedOpens a new window for a national bank charter with the U.S. Office of the Comptroller of the Currency in July 2020. The company eyed a banking license that would enable it to hold customer deposits and make loans without having to rely on a bank partner as it was doing previously.
On the other hand, Square opted to go with an industrial loan charter or ILC version. This has drawn considerable criticism from many bank lobbyists. The banking industry has criticized Square’s approach, as they felt the company chose a way to avoid rules that have essentially separated banking and commerce for decades.
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In conclusion
Currently, Square bank is only offering merchant services. However, the company’s latest move hints at CEO Jack Dorsey’s broader ambition of making the tech company a one-stop-shop for finance. It would be interesting to witness how other fintechs change their modus operandi to cut out middlemen in banking, especially after such a bold move by Square.
Do you think Square’s wholly-owned bank will inspire other fintechs to take a similar route? Comment below or let us know on LinkedInOpens a new window , TwitterOpens a new window , or FacebookOpens a new window . We’d love to hear from you!