Square to Apply for Controversial Bank Charter

Square Inc., best known for its portable credit card payment processor, has plans to become a bank.

The San Francisco-based payments company, co-founded by Twitter co-founder Jack Dorsey, announced its intent to apply for an industrial loan company license under the name Square Financial Services Inc., as reported by The Wall Street Journal earlier this week.

A spokesperson for Square confirmed the company is in fact interested in an ILC, which would put it within the regulatory purview of both the Federal Deposit Insurance Corp. and Utah state banking regulators.

The spokesperson said that lawyers within the department of 40 attorneys led by general counsel Hillary Smith worked with members of its Square Capital team to prepare the application, with the in-house lawyers playing a key role. Currently, Square Capital, Square's online lending platform, operates with a bank partner, Celtic Bank in Utah, in order to legally issue loans. 

If approved for an ILC, Square will no longer have to partner with Celtic and its new unit would offer loans and deposit accounts as a service for small businesses.

The charter application is different than the one filed by mobile banking startup Varo Money, which opted in July to apply for a traditional national bank charter through the Office of the Comptroller of the Currency.

Square chose to apply for the ILC license because it saw it as the best fit since the bank charter is designed for companies with offerings other than banking, according to a company spokesperson.

Another fintech, Social Finance Inc., received backlash from traditional lenders and banks back in June when it applied for an ILC.

Among the critics was Chris Cole, executive vice president and senior regulatory counsel with the Independent Community Bankers of America. In a June interview with deBanked, Cole said it was only a matter of time before a fintech applied for the ILC.

"It's the fact that they're using this loophole so that SoFi, the parent company of SoFi Bank the subsidiary, will not be subject to the same kind of restrictions that the owner of a commercial bank would," Cole told deBanked. "Who's next? I could see Amazon trying to do this and waiting for SoFi to do it first. Who knows? I could see maybe Google and PayPal pursuing this. I could see some big commercial companies exploiting this loophole, and that is why we think it should be closed."

A spokesperson for SoFi did not immediately respond to request for comment. The company's application is still pending, according to the FDIC.

One of critics' biggest concerns about the ILC is that the companies with this license are not subject to the Bank Holding Company Act or to oversight from the Federal Reserve Board.

Alan Avery, partner at Latham & Watkins, told Corporate Counsel it's true that if a company like Square is granted an ILC, it could open a pathway for other commercial businesses to explore the idea of applying for this type of license—as Wal-Mart once did back in 2005. But he thinks that companies like fintechs that have a core business of financial services present different risks for approval than companies like Facebook, Google or Amazon.

He added that regardless, fintechs "will present competition to banks of all sizes."

Bradford Hardin, counsel at Wilmer Cutler Pickering Hale and Dorr, said that "the outcome [for approval] is very uncertain," but noted that companies like Square and SoFi are well established and funded enough to take the risk of applying.

Although it's unclear if the FDIC will in fact grant ILC licenses to Square and SoFi, "if one of these gets deposit insurance there will be a flood of applications" from other fintech companies, Hardin said.

According to The Wall Street Journal, 16 industrial loan companies are licensed to operate in Utah.

A spokesperson for Utah's state banking agency confirmed receipt of Square's application Thursday, and said both ILC applications from Square and SoFi are currently under review. As of Friday afternoon, the FDIC had not received a hard copy of the application, although according to a Square spokesperson, both electronic and hard copies were sent Thursday.

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Stephanie Forshee

Stephanie Forshee is a writer for Inside Counsel magazine. Previously, she has worked for the Puget Sound Business Journal, the San Fernando Valley Business Journal and Auto...

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