Digital Transactions Authoritative, insightful and timely information for payments professionals
At the end of July came an opening for nonbank payments players that, as the old expression goes, you could drive a Mack truck through. And it’s our guess that we’ll be hearing much more about this opening—and about how financial-technology firms and other nonbanks are exploiting it—for quite some time to come.
The new opportunity came courtesy of the Office of the Comptroller of the Currency, which on July 31 said it would start accepting applications for national-bank charters from fintechs. The big advantage in this for nonbanks is that now they can get licensed nationwide at a single stroke rather than fight their way through 50 state applications.
It wasn’t long before observers’ attention focused on Square Inc. The 10-year-old San Francisco firm is an obvious candidate given its strong interest in lending to the same small businesses that use its payments technology. Currently, its Square Capital operation makes hundreds of millions of dollars’ worth of loans through Celtic Bank, an unaffiliated Utah industrial bank.
A directly owned banking operation with its deposit-taking function would make those loans a lot more efficient. That’s why Square has already tried to set up what is called an industrial loan corporation, a type of bank, in Utah.
But the ILC effort hit a snag just three weeks before the OCC’s big announcement. Banking groups like the Independent Community Bankers of America aren’t too keen on ILCs, and they lobbied vigorously against Square. Early in July, the company suddenly withdrew an application it had filed in September with the Federal Deposit Insurance Corp., saying it wanted to re-file at a later date. A separate application with the Utah Department of Financial Institutions remains active.
Given its banking interest, Square could be a candidate for one of the new national charters the OCC now offers. But top officials are playing it coy for now. In answer to an analyst’s question about the prospect during an earnings call last month, CEO Jack Dorsey gave a carefully modulated non-answer answer: “We’re really well-positioned to broaden access to the financial system, which is our core purpose.”
Our take is that it’s nice to have the choice to go for a national OCC charter, especially given the headwinds the ILC application has stirred up. But if Square decides against the OCC option, we hope it follows through on its intention to re-file with the FDIC for the proposed Utah bank. These options aren’t just good for Square, they’re good competitively, and that should make for a better market all around—better for consumers, fintechs, innovation, and, yes, even banks.
—John Stewart, Editor, john@digitaltransactions.net
