WASHINGTON — As Square seeks federal approval for a Utah industrial loan company, the fintech's bid has so far avoided the kind of loud, public opposition that marred past ILC bids by higher-profile nonbanks.
Community banks still criticize the ILC charter as a banking loophole for non-financial firms, and the Independent Community Bankers of America opposes Square's application.
But the vast majority of comment letters to the Federal Deposit Insurance Corp. on Square's reapplication support the proposed banking venture. That is in stark contrast to previous outcries over ILC bids by large retailers — including Walmart — before the financial crisis, which forced companies to withdraw.
“There are a lot of differences between what happened when Walmart applied and the dynamics today with Square applying,” said Camden Fine, who led the fight against Walmart's application as the ICBA's then-CEO. He is now president and CEO of Calvert Advisors. “At its heart, Square is a financial services company that’s heavily involved in payments.”
The furor over applications by Walmart and then Home Depot in 2006 helped precipitate a sharp slowdown in new ILCs overall. But with fintech firms acting more like banks and FDIC Chairman Jelena McWilliams trying to overhaul the bank chartering process, there is cautious optimism that Square will succeed.
There may also just be less attention to the issue this time around. When Square first applied for an ILC, in 2017, the FDIC received a mere five comment letters, with some
After Square withdrew its first bid and reapplied late last year, the agency received 15 letters. Nearly all were in favor of the charter while one commenter, the ICBA, opposed it and another two (written by the same person) said Square's charter should come with conditions. By comparison, the Walmart application had around 13,000 comment letters, with critics of the retailer's bid including banks, union leaders and lawmakers.
“I’m cautiously optimistic that the FDIC will look at this [Square] application the same way it" used to look at ILCs, which is "on its merits,” Howard Headlee, president of the Utah Bankers Association, said in an interview. Square’s application, he added, “will be the first opportunity to demonstrate that we have achieved normalcy in the de novo process and I think everybody should be happy to see that.”
Square, which specializes in credit card payment devices used by small businesses, is proposing to use the ILC through its Square Capital unit to expand credit products for small-business owners and provide deposit-account services. The venture has drawn support from a diverse array of stakeholders, including local politicians, minority and community groups, and small-business owners.
Commenters to the FDIC shared stories of how Square supports small businesses, including those underserved by other providers.
“With a solution like Square Capital, the decision for a loan is based on the success of the business and not on the business owners previous personal challenges," wrote Topeka Sam, founder and executive director of the Ladies of Hope Ministries in New York. The group helps incarcerated women re-enter the workforce through starting up businesses. "This kind of opportunity is critical to true economic empowerment.”
Sam wrote that those "who have been affected by incarceration are the very definition of underserved and often look to start their own businesses as they re-integrate into society.”
But industry observers say Square still faces hurdles in obtaining a charter. If it wins approval, it would be the first fintech company to get a federal banking charter since digital financial services firms began expanding their market share. It would also be the first new ILC approved in years.
Meanwhile, McWilliams, who took the reins of the FDIC in June, recently initiated a process to gather public comments on de novo chartering as a whole. How the agency rules on the Square bid could help convey the FDIC's views going forward on approving deposit insurance applications.
“We’re looking at a new era of bank chartering and deposit insurance,” said V. Gerard Comizio, a partner in the corporate department and chair of the banking practice at Fried Frank’s Washington office. “What’s interesting between the time of Walmart and now is that the banking agencies have made it clear to the banking industry that financial technology is in the business of banking.”
After previously withdrawing its application, Square sought to strengthen the bid and reapplied in December. The company also has a pending application with the Utah Department of Financial Institutions.
"An ILC is particularly well-suited for a company such as Square that has strong rooting in financial services and serving an underserved market,” Jackie Reses, the head of Square Capital, said in an emailed response. “An ILC will allow us to engage directly with regulatory bodies as we broaden access to the financial system, and we look forward to working closely with the FDIC and Utah DFI as they review our applications.”
Since Square is already in the financial services realm, observers say it has an advantage over a firm like Walmart. The retail giant launched multiple bids to enter the banking industry, the last being a 2005 application to charter a new ILC.
Legally speaking, an ILC is one of the last viable routes for a nonfinancial firm to own an FDIC-insured bank, since the charter is exempt from bank holding company requirements. But Walmart's quest for a bank charter generated years of public and political backlash, and led to several moratoriums on new ILC charters.
“It was a much different time and the fact that Walmart was a huge retailer ... our line of attack was you should not mix commercial banking with retail operations,” Fine said.
But the ICBA still opposes the Square bid because it has long-standing concerns about the ILC charter.
In a comment letter, Christopher Cole, executive vice president of the ICBA, noted "a significant problem with the Square application since the holding company of Square and its affiliates already engage in a diverse set of commercial activities including a food delivery business, a software business, and an online hardware store.”
“For safety and soundness reasons and to maintain the separation of banking and commerce, the FDIC should deny Square’s application and impose a moratorium on future ILC deposit insurance applications,” Cole wrote.
The FDIC can also address some concerns by adding conditions to approving a charter, such as heightened capital standards, certain expectations for the board or extra community investment requirements. These conditions can be added at any point in the process.
One commenter stressed that the FDIC should broaden the Community Reinvestment Act requirements for Square's ILC. The law was formed before online banking and grades banks’ community lending based on the resources it provides in its physical branch network.
“The local Assessment Area that the proposed Square Bank has delineated around its planned Salt Lake City headquarters results in an inequitable distribution of critical CRA resources which ends up benefiting that small community, compared to their much larger and more relevant national deposit and loan base,” wrote Kenneth Thomas, president of Community Development Fund Advisors in Miami. “Therefore, as a condition of the approval of this application, the Applicant should revise their proposed AA to be national in scope.”
Thomas also requested that the FDIC require Square to provide CRA investments “proportional to the amount of business generated from any [metropolitan statistical area] producing 5% or more of their business.”
The FDIC declined to comment; the agency does not weigh in on open applications. The agency has the option to host a public hearing before making a decision on Square. It hosted several in the case of Walmart.
But some observers say if the FDIC does host such a hearing, it would only be for the sake of transparency rather than a reaction to public controversy since Square has garnered community support.
“I honestly don’t expect at this juncture anything out of the ordinary or unwarranted or punitive ... I don’t sense that [McWilliams] is prone to act in a reactionary way,” Headlee said. “I anticipate ... [she] will react according to book, to the facts that are presented.”
