Square, Inc., is headquartered in San Francisco, California, and according to its website describes its business as having “revolutionized payments in 2009 with Square Reader, making it possible for anyone to accept card payments using a smartphone or a tablet computer. Today, Square provides tools that empower businesses and individuals to participate in the economy. This cohesive ecosystem of managed payments, hardware, point-of-sale software, and other business services helps sellers manage inventory, locations, and employees; access financing; engage buyers; and grow sales. With Weebly, sellers can build a website or online store; with Caviar, restaurants can easily offer diners delivery, pickup, and group ordering; and with Cash App, individuals can send, spend, and store money. Square [also has] offices in Canada, Japan, Australia, Ireland, and the UK.”
As a startup and now international financial services company, Square, Inc. has applied to the Utah Department of Financial Institutions to establish an industrial bank in Utah. What makes this news of interest is that, while industrial banks are “banks” whose deposits may be insured by the Federal Deposit Insurance Corporation (FDIC), unlike other banks, their parent companies are not subject to supervision by the Federal Reserve Board or to limits on their activities imposed by the Bank Holding Company Act. Consequently, Congress and the regulators, for years, have imposed moratoriums on applications for deposit insurance for industrial banks, but all moratoriums have now expired, and there is a new Chair of the FDIC who is part of an Administration that emphasizes regulatory relief.
The bank’s detailed business plan is confidential, but its proposed strategic CRA plan is public information. Winston requested a copy of the public information through a FOIA request, and we learned much from it.
The application indicates that the primary purpose of the bank will be to offer business loans to small businesses nationwide, with loans and deposits being offered primarily online. The application clarifies that deposits would include NOW accounts with debit cards for individuals and sole proprietorships, prepaid debit cards, savings accounts, and time deposits. According to the application, customers initially will be sourced through Square’s existing card processing customer base, which includes millions of small businesses. It is also contemplated in the application that the bank would enter into referral arrangements with other firms. The target market is the 28.8 million small businesses in the U.S., according to the application.
The application also describes that a subsidiary of Square engages in this business, buying card receivables from merchants (a so-called “merchant cash advance product”) which process their card transactions through Square. The application states that subsidiary has made more than 570,000 loans totaling more than $3.5 billion, and the subsidiary has partnered to date with a Utah industrial bank to accommodate this business. According to the application, 70% of Square’s current borrowers state that they did not seek, or were unable to obtain, financing from other lenders. The application discloses that 57% of the borrowers are women, compared to 18% of borrowers of traditional small business credit; and 37% of the loans are to minority-owned businesses, compared to 26% in the case of traditional loans.
The application states that Square believes, because it processes card payments for small businesses, that it has a unique insight into the economic health of each such business. In addition, the application states that processing this business provides Square with real-time payment and point of sale data. Loan offers would be in proportion to a small business’s sales and would eliminate a lengthy loan application process. Thus, Square states in the application that its customer acquisition costs would be minimal, loans would be payable in 18 months, and repayment terms would be based on a fixed percentage of card processing volume with Square.
Square’s application specifies that loan amounts would average approximately $6,000 per borrower, amounts that may be too small for traditional lenders to lend. Thus, according to the application, the prospective small business customer base of the bank is an underserved population.
The bank would not operate branch offices.
It is proposed that the industrial bank’s board of directors would consist of five directors; the majority being outside directors. The Executive Chairman would be the executive who runs the subsidiary of Square that currently makes these kinds of loans. Another inside director would be a CPA who was the CEO for an online bank and is currently employed by that same Square subsidiary that makes the loans and who would be CEO of the industrial bank.
The three outside directors include an outside director of Square who is a former head of equities at a major securities firm and a money center bank and the CEO of a new card company, who previously worked at the Consumer Financial Protection Bureau.
The application described director training as an ongoing feature of board meetings, emphasizing board governance and oversight of management, material developments in banking regulation, compliance, and other related matters.
The industrial bank would initially be capitalized at $56 million in cash, which is anticipated to be adequate for the bank’s first three years using stressed financial projections. No off-balance sheet activities are contemplated, nor would dividends be paid by the industrial bank during its first three years.
The bank would operate from a building in Salt Lake City, and the public would have access to its offices, which would accommodate 30 employees working in an open workstation floor plan with multiple meeting rooms. In developing its CRA plan, Square consulted extensively with community groups.
Square’s application may very well become a technological and policy bellwether with the FDIC and for the bank regulatory agencies. If the FDIC approves Square’s application for deposit insurance, that action would signal a significant change in public policy as federal regulators, and certain state regulators, have been working to encourage technological innovation in financial services. In any event, the FDIC’s action on the Square application will reflect how sincere agency support for innovation is. Certainly, the contents of the application, as described above, provide a sense of what Square and its advisers believe regulators want to see in such an important application and what future applicants need to consider. We found the level of management to be located in Utah as well as the extensive experience of the proposed members of the board of directors to be particularly instructive. Time will tell whether other applicants follow the same route as Square in submitting applications for an ILC charter.