The ICBA Notches a ‘Victory’ Against Square, But Looks to Quash the ILC ‘Loophole’ for Good

Square Inc. may be planning to re-file its application for deposit insurance with the Federal Deposit Insurance Corp., but that isn’t stopping its main opponent from celebrating the fact that the company has withdrawn its original application—at least for now.

“We can call it a victory,” Chris Cole, executive vice president and senior regulatory counsel with the Independent Community Bankers of America, tells Digital Transactions News. Still, the ICBA takes Square at its word that it will be making a revised application to the FDIC. The application Square withdrew, as well as the one it intends to re-submit, are related to a so-called industrial loan corporation it plans to set up in Utah.

The Washington, D.C.-based ICBA strongly opposes the application but concedes the “victory” is probably temporary. “That they want to re-file indicates to me there was some sort of deficiency with their application,” Cole says. “We don’t think the fight is over yet.”

Square, which says its application to the Utah Department of Financial Institutions for an ILC charter remains “active,” wants to set up the bank so it can directly offer loans and other financial services to small-business clients. Currently, its Square Capital operation makes hundreds of millions of dollars worth of loans through Celtic Bank, an unaffiliated Utah industrial bank.

Square now plans to overhaul its application, according to a spokeswoman. It originally filed its paperwork in September. “We have been engaged in constructive dialogue with the FDIC, and our decision to withdraw and refile was a procedural step in the review process that will allow us to amend and strengthen some areas of our FDIC insurance application,” the company says in a statement. “Square Capital is uniquely positioned to build a bridge between the financial system and the underserved, and we continue to work closely with the FDIC and Utah DFI on our applications.”

Observers say running its own bank could be crucial to Square. “The more opportunities that a merchant has to connect with Square, the more difficult it will be to unwind the relationship and change providers,” says Thad Peterson, a senior analyst at Aite Group LLC, in an email message. “A banking function would allow Square to support many, if not most of a [small and medium-size] merchant’s financial services-requirements.”

But the ICBA, which represents almost 5,700 community banking institutions, says ILCs present unfair competition for conventional financial institutions because they are more lightly regulated. When Wal-Mart Stores Inc. (now Walmart Inc.) tried to set up an ILC a decade ago as a conduit for its card payments, determined opposition from banks forced it to drop its plans.

“We have no objection to Square owning a bank, just not an ILC,” says Cole.

Indeed, while Cole says the FDIC has been “very careful” about approving ILC applications, the ICBA would like it to go further and impose a moratorium, similar to a three-year suspension that was part of the massive Dodd-Frank Act of 2011.

Ultimately, however, the association’s aim is to shut down the ILC option for good. “We’d like to close the loophole permanently,” Cole says. “It’s an unfair playing field. It’s inherently a conflict, and systemically bad.”

That may be bad news for Square, but the San Francisco-based payments provider had no comment beyond its statement. “I doubt that Square will stop pursuing the opportunity to create additional value for [its] merchants through financial-services offerings, but perhaps getting a charter right now is a less likely option,” notes Aite’s Peterson.