Recently at the JPMorgan Chase investor day conference, CEO Jamie Dimon praised Square Financial Inc., calling that company’s device that attaches to a smartphone or tablet to allow merchants to accept payments “a great idea.” Dimon then acknowledged that Square built off the success of that key device to provide other services to its business customers, such as a wider variety of point-of-sale systems allowing merchants to accept cash or card payments, as well as providing tablets and software allowing merchants to track sales patterns, inventory, and other data. He said, “We didn’t give them that opportunity; Square did. Square said, ‘You know what, since we know this company and they might need an advance this time of year, we might advance them $10,000 or $15,000 or $100,000.’ They did all this stuff we could have done that we didn’t do.”

While the FDIC may not monitor public comments regarding Square, and as we have previously reported, Square has now applied for a charter from the State of Utah for an industrial loan company (“ILC”) and for federal deposit insurance from the FDIC for that company. ILCs are regulated like banks, but their parent companies are not regulated like bank holding companies if the ILCs do not take demand deposits. The FDIC previously called for public comment on Square’s deposit insurance application, and February 19, 2019 was the deadline for such comments.

We have reviewed the comments submitted by the public to see what reactions have been included in those letters.

Square’s bank application is noteworthy in that, in prior years and in prior administrations, there have been moratoriums imposed by the FDIC and by Congress on the approval of such applications. All of those moratoriums have now expired.

There have been 17 public comments filed on the application, 13 in favor and four opposed.

Favorable comments included that by the Albuquerque Hispano Chamber of Commerce and the Mayor of Albuquerque. That letter commented favorably on the historical support that Square has provided to small businesses in Albuquerque. A city council member from Cleveland, who is the immediate past president of the National League of Cities, filed a similar letter of support, as did the market manager of the Flint (Michigan) Farmers’ Market; the Latino Tax Professionals Association; the National Down Syndrome Society; the National Center for American Indian Enterprise Development; and the mayors of Columbia, South Carolina, and St. Louis, Missouri, both of whom praised Square’s providing small businesses access to capital that the small businesses would not otherwise have had.

A letter of support from a small business owner in Webster City, Iowa—a town of 8,000 where the Electrolux factory closed in 2011, but which adopted a plan to start local businesses and now has reduced unemployment to 3%—wrote that traditional financial services companies have turned away from providing small business resources, but that Square’s services have been an important lifeline for her business and others.

Another letter of support from the Ladies of Hope Ministries in the Bronx, New York—which fights for the dignity and “decarceration” of women and looks for pathways to independence for them—suggested that self-employment and small business is such a pathway for women, and the Ministries have found a partner in Square. The letter asserts that persons who have been incarcerated are underserved and often look to start their own businesses as they re-integrate into society. Ladies of Hope Ministries commented that this process is helped by Square’s loan underwriting being based on the success of the business and not on the business owners’ prior personal challenges. The letter further asserts that traditional financial service providers present barriers to entry to such business owners, a class of potentially more than two million people whom Square can help re-enter communities.

Another letter of support came from U. S. Black Chambers, Inc., which cited the existence of more than 2.6 million black-owned businesses in the U.S. generating more than $150 billion in revenue and employing almost one million people. The letter also asserted that black women are the majority owners of more than 1.5 million such businesses with more than $42 billion in sales. The letter decried a chronic problem of access to capital and argued that approval of Square’s application would be a solid step toward solving that problem.

Finally, Village Financial Cooperative, a cooperative credit union and community-development financial institution in North Minneapolis, Minnesota—an underserved, underbanked community—wrote in support of Square’s application. The credit union has worked with Square to streamline aspects of the credit union’s lending program, which provides an alternative to payday loans. Minnesota law permits payday lenders to charge up to 300% interest rates on such loans, but, by using Square’s technology, the credit union is able to make such loans at interest rates of less than 8%. The letter also cites a 2013 study by the Federal Reserve Bank of New York that found that the major constraint limiting growth, expansion, and wealth creation of small firms, especially women- and minority-owned businesses, is inadequate access to capital. The letter argues that advancing technology in the finance industry, in partnership with local community organizations like this credit union, can reverse economic disparities that (it suggests) are prolonged by traditional financial institutions; such partnerships combine high-functioning technology with grassroots service, according to the letter.

Opposition came from the Independent Community Bankers of America (the “ICBA”), which objected to Square’s use of the ILC charter to avoid the prohibitions and restrictions of the Bank Holding Company Act. Those restrictions include consolidated supervision by the board of governors of the Federal Reserve System and a general prohibition against engaging in commercial activities. Square engages in commercial activities such as food delivery and sale of software and hardware. The ICBA suggested that if Square’s ILC application is approved, it might prompt other commercial firms, such as Google and Wal-Mart, to own ILCs. Matthew Lee of Inner City Press/Fair Finance Watch filed a similar comment letter, suggesting instead that fintechs should pursue a specific fintech bank charter.

Opposition also came from 37 community organizations from California (the “37”) that signed a letter asserting that the application represented a circumvention of the Community Reinvestment Act (“CRA”), which requires federal prudential bank regulators to consider, when they act on applications for a charter, deposit insurance, branch, or merger or acquisition, whether a bank has met the credit needs of its entire community, including low- and moderate-income neighborhoods. The 37 also expressed concerns about the small business loan products offered by Square.

The 37 noted the precedential nature of the application and that bank regulators are considering altering CRA regulations, which, the 37 fear, may lead to less reinvestment in communities. Without reference to the small business letters that have been filed in support, the 37 assert a substantive CRA policy issue raised by the application. In particular, they assert that the proposed ILC will take deposits nationally, but reinvest only in the local community where the ILC will be located, i.e., Salt Lake City, Utah. Thus, it appears that funds will be diverted from communities across the nation to Salt Lake City. The 37 suggest that the bank be required to identify 10 to 20 Metropolitan Statistical Areas (“MSAs”) where it has customers, and serve those areas. They add that Square knows where it is likely to obtain bank customers based on where its existing customers reside. The 37 assert that the abolished Office of Thrift Supervision apparently followed such an approach in the case of savings banks that did not operate branch systems, but delivered services on a national or regional basis, as did the Office of the Comptroller of the Currency, which regulates national banks. The 37 further suggest that the bank should explore referring small businesses in those communities to local community development financial institutions and community lenders for technical assistance and even for loan capital if such loans can be offered on more favorable terms than those offered by the bank. They also suggest that the bank should set its benchmark for overall CRA performance higher as a percentage of assets or deposits so that, as it grows, its commitment to local communities also grows. Another CRA suggestion that the 37 make is that, since Square itself is based in San Francisco, the bank should establish deposit-taking ATMs in the San Francisco area, thus making San Francisco part of its CRA assessment area, in addition to Salt Lake City. The community organizations also urge that the bank be required to report publicly the revenues of small business customers, as the 37 believe that would help the public understand whether small business credit needs are being met.

On the subject of Square’s small business lending, the community organizations questioned the pricing of one of its small business loan products. Square apparently declined to provide the community organizations ranges of annual percentage rates (“APRs”) at a meeting it had with them.

Another concern expressed by the 37 was that Square, which currently makes loans to small business through a subsidiary, does not disclose APRs to borrowers, which makes it difficult for the borrowers to comparison-shop. Of course, the Truth in Lending Act, which requires disclosures of APRs, only applies to loans to consumers, not to loans to businesses; however, apparently recently enacted California legislation requires APR-like disclosures on small business loans, legislation that the organizations assert Square lobbied against.

The 37 also complained that Square does not report repayment information to credit bureaus, thus hurting the ability of performing small business borrowers to improve their credit scores. Further, Square apparently uses algorithms in making credit decisions, and the 37 are concerned that algorithms may have a disparate impact on minorities; that concern is based on a 2018 study by the University of California, Berkeley, suggesting that fintech lenders charge Hispanic and African-American borrowers six to nine basis points higher interest rates than those charged to non-minorities. The 37 urge Square to subject its operations to an independent fair-lending audit that would be made available to the public.

They also suggest that the use of “Big Data” to underwrite loans raises privacy concerns; Square’s loan underwriting apparently relies on such data. The community organizations question how Square protects that data and informs its customers on its use of their data. The 37 then raise question about how much Square captures in float when it works with small business payroll tax deposits. Finally, the 37 assert that Square provides processing services for neo-Nazi and/or white supremacist organizations, citing a report in the Huffington Post.

Other negative comments came from a CRA expert who suggested that fintech charters should only be issued by the federal government, not by state governments, since fintech banks propose to serve a national market. For that same reason, he suggested that such applications be filed with the headquarters of federal regulators rather than with their regional offices, and that each federal regulator should have a staff dedicated to consideration of fintech charter applications. He also urged that fintech banks should be required to strive for an “outstanding” CRA rating. He also objected to Square’s proposal that its CRA record be measured based on the ratio of the combination of community development loans and investments to total assets (he characterizes this as adding “apples and oranges”) and the number of community development service hours per average full-time employee, which he suggested promotes inefficiency (he prefers using the number of services). He also urged, like the 37 California community organizations, that CRA performance for a proposed national player be considered in multiple assessment areas, i.e., each MSA from which 5% or more of the bank’s deposits derive, making the point that permitting the bank only to serve, from a CRA perspective, the Salt Lake City area, deprives local Salt Lake City banks of CRA loan and investment opportunities. He would expect a fintech bank to provide a proportional amount of CRA loans, investments, and services to each such MSA. Finally, he urged that, as a condition of approval, the bank be required to disclose all commitments to community groups.

No doubt Square’s deposit insurance application has raised some policy questions for the FDIC to consider. On the one hand, the FDIC wants to encourage financial innovation and creativity, a hallmark of bank regulatory policy under this Administration. Indeed, federal bank regulators are actively considering CRA modernization, and the Square deposit insurance application presents an opportunity to apply CRA in the modern fintech environment. On the other hand, federal bank regulators have expressed concern about loopholes in the Bank Holding Company Act and have urged that they be addressed.

Followers of bank regulatory developments are like recipients of the apocryphal ancient Chinese curse, “may you live in interesting times,” as these are certainly interesting times at the FDIC.