Can Square Succeed Where Walmart Fell Short? Bankers Are Set on Ensuring It Doesn’t

While the nation’s banking industry may not welcome the development, experts say Square Inc.’s recent efforts to establish an industrial loan corporation, a form of bank, could well succeed where others have failed.

“Fighting the ILC designation is a good way for the banks to slow a dangerous competitor, but it’s likely to be a stall tactic,” says Rick Oglesby, principal at AZ Payments Group LLC, a Mesa, Ariz.-based payments consultancy, and a close observer of Square.

The Independent Community Bankers Association is mounting an effort it hopes will do more than delay efforts not only by Square but by other fintechs to establish banks. The Washington, D.C-based trade group this week released a white paper decrying the availability of banking licenses for business entities controlled by nonbanks, The document asks the Federal Deposit Insurance Corp. to impose a moratorium on deposit insurance for so-called industrial loan companies and argues Congress should “close the ILC loophole permanently” by banning nonbank applicants, says a statement released by the group.

The ICBA opposes Square’s application for an ILC in Utah, but its latest document is aimed at the general idea of nonbanks competing in the banking arena. The ICBA says industrial banks allow nonbanks to operate financial institutions without the regulation and supervision imposed on banks. “FDIC approval of new ILC deposit insurance applications would put the federal safety net, and ultimately the American taxpayer, at risk,” said Rebeca Romero Rainey, president and chief executive of the group, in a statement.

Square in December renewed its application with the Utah Department of Financial Institutions for an industrial-bank charter. It had originally filed in September 2017, only to withdraw the application 10 months later. The San Francisco-based company also has an application pending with the Federal Deposit Insurance Corp.

Still, it has been circumspect about its banking plans in recent months. In answer to an analyst’s query about the matter during an earnings call last month, Square chief executive Jack Dorsey would say only that “we look forward to more direct relationships with regulators.”

Square, which offers products like Square Capital that provide financing to small-business clients of its payments services, sees the bank as a means by which it can expand those offerings. But the ICBA has more than Square’s application in its sights. Its release this week also names similar applications from Social Finance Inc., a personal-finance company, and Nelnet Inc., a student-loan administrator.

Campaigns like that of the ICBA have succeeded in the past, most notably in the early 2000s when Walmart Inc. sought to operate a bank to process its credit card receipts. But while that effort forced Walmart to withdraw, observers now think the landscape has changed and favors companies like Square.

“I would argue that Square is not Walmart,” says Patti Hewitt, principal at payments consultancy PG Research & Advisory Services. “Square is a financial-services company and it makes sense to pull them into the fold so to speak, which would level the playing field. They are also a publicly traded company and are regulated by the [U.S. Securities and Exchange Commission].”

Indeed, some argue the ICBA might better deploy its resources in another direction. “The ICBA should have been seeking a lighter regulatory burden to level the playing field for its members with megabanks and encouraging them to vigorously compete in the market,” argues Eric Grover, principal at Minden, Nev.-based Intrepid Ventures, a financial-services consultancy.