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The application enables the mobile point-of-sale (mPOS) giant to form a Utah-based bank, per PYMNTS. The approval, which was conditional and will mandate Square to maintain capital at a higher rate than other FDIC-insured banks, will enable the brand to begin developing the bank in earnest. The bank is expected to launch in 2021, and will focus primarily on issuing loans to small- and medium-sized businesses (SMBs) as well as deposit products.
Square's process to become a bank has been a long road. The firm initially filed for an industrial loan company (ILC) bank charter in September 2017 but faced considerable backlash from the Independent Community Bankers of America (ICBA), which opposes these licenses because of concerns that they allow nonbanks to skirt regulation, and ultimately withdrew.
After withdrawing, the brand went into talks with regulators, revised details of the application, hired new staff, and reapplied in late 2018 in the hopes that these improvements would help its chances. Those improvements look to be successful now that the bank has been approved and Square can begin to launch Square Financial Services.
Launching the bank could ultimately bolster Square Capital - a core segment of the firm's business - in ways that deepen and extend its customer acquisition channel. Square doesn't expect the launch of Square Financial Services to have a material impact this year, but that could change next year, setting the brand up for long-term success.
Square Capital, the firm's lending segment, is a lucrative offering for the firm, which makes bolstering the platform valuable. In Q4 2019, Square Capital facilitated 97,000 loans worth $671 million - a figure that is up 42% annually. The segment is also set to continue to grow as the firm adjusts risk models that improve the way Square determines creditworthiness, which could keep losses down and improve success rates, in turn growing the whole program.
Because Square Capital is a big contributor to the brand's subscription and services-based revenue segment - a profit driver for Square - extending loans could help the company maintain profitability. Additionally, extending working capital and business loans has historically improved a business' overall performance, meaning that more lending might boost Square's core processing sector as well.
Extending lending might help Square further improve its competitive positioning in ways that help it attract customers. Square is operating in a very competitive space, with a number of providers, including Clover (owned by Fiserv, formerly First Data), PayPal, Poynt, and Stripe angling to serve businesses with full-suite solutions that go beyond payments.
Improving lending and offering more bank-like services could make the brand increasingly attractive - especially to larger sellers, which are more likely to need capital - because cash flow and access to capital is already a major hurdle for sellers and could be set to worsen as the coronavirus pandemic continues.
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