Square already does a lot of things banks do, like processing card payments and making small-business loans, and now it wants to own a bank.
At least, it wants to own something that looks like a bank and acts like a bank, but is called an industrial loan company. The big difference is that an ILC can be owned by a company that’s primarily in nonfinancial businesses.
Harley-Davidson, Toyota and UnitedHealth Group all own ILCs, so San Francisco-based Square figured it shouldn’t be much of a stretch for a financial-technology company to join them. It applied to Utah for an ILC charter and to the Federal Deposit Insurance Corp. for insurance in 2017.
After fierce criticism from community-bank advocates, Square withdrew the FDIC application last summer for what it said were procedural reasons. It reapplied last month and may get a favorable hearing from a Trump administration that has pledged to loosen financial regulations.
During her confirmation hearing last year, new FDIC chief Jelena McWilliams said ILCs are no riskier than traditional banks, and she pledged to expedite new applications for deposit insurance.
Square’s application reopens a controversy that burned red-hot after Walmart applied for an ILC charter in 2005. Walmart said it was merely trying to cut its card-processing costs, but small banks feared being crushed by a big new competitor. The FDIC placed a moratorium on new ILC applications, which Congress extended until 2013.
Now the upstart applicant is not a behemoth retailer but a financial technology company that positions itself as a friend of small business. Square, best known for its small card reader, also has made more than $3.5 billion in business loans, and it would like to fund those loans with bank deposits.
Square’s application set off alarms at the Independent Community Bankers of America. The trade group, which represents 5,700 banks, argues that Square would gain an unfair advantage by not being supervised by the Federal Reserve, as other bank holding companies are.
Christopher Cole, the group’s executive vice president, also argued in a 2017 letter to the FDIC that approving Square’s application would invite Amazon, Google and other technology companies to open banks. This “would not only result in an enormous concentration of financial and technological assets but also would pose conflicts of interest and privacy concerns to our banking system,” Cole wrote.
James Barth, a finance scholar at Auburn University, says the FDIC should bring on the competition. He has studied ILCs and says they are better capitalized and more profitable than traditional banks. “There’s no particular reason to exclude nonfinancial firms from getting into banking,” he says.
Most other countries allow nonfinancial firms to own banks, and Barth says the behavior that opponents worry about — like a bank taking risks to help its parent’s business — is already barred by traditional safety-and-soundness regulations.
“The major argument against it is that a lot of community banks don’t want more competition,” Barth says.
Barth wouldn’t even mind seeing an Amazon Bank or Google Bank if they’re willing to abide by banking regulations. “Is the FDIC willing to retard progress by preventing fin-tech firms from offering better banking services at lower prices?” he asks.
Square argues it’s proposing exactly that sort of innovation, giving underserved firms access to credit they couldn’t otherwise get. The FDIC should give its application a fair hearing, without letting past worries about Walmart or future ones about Amazon get in the way.