Square's many flirtations with banking

January 18, 2019 1:17 PM

The mobile point of sale pioneer Square has done much to expand its product range to stay competitive, and a few of those efforts have made the company more of a direct threat to banks.

Not all of those projects have panned out. But the common thread among them is of a company that is a known disruptor turning its attention to an audience that banks hold dear.

This item is compiled from reporting by PaymentsSource writers including John Adams, Kate Fitzgerald, David Heun and Michael Moeser. Click the links in each item to read more.

(Originally published July 6, 2018. Last updated Jan. 18, 2019)

Why have a bank account?

Square's new card for business owners does something very bold with debit — and very troubling for banks.

The card is far more ambitious than the debit cards attached to P2P systems or mobile wallets, like the short-lived Google Wallet card or the many iterations of the PayPal debit card. With its new card, Square has found a way to keep sellers' funds in its own hands and out of bank accounts.

"We now offer all sellers who use our point of sale a place to store their money, and a MasterCard to spend it instantly," Jack Dorsey, the CEO of Square and Twitter, said in a tweet. "No bank account needed."

Though the card is a Mastercard issued by Sutton Bank, Square is clear that a cardholder's balance is not a bank account and is not FDIC insured. "The funds are held in pooled accounts in banks on your behalf and for the benefit of you and others holding such balances," Square says in the card's terms of service.

For this trade-off, Square offers two major perks: instant funding and instant rewards. Any revenues from sales made through Square are available instantly on the card, and any purchases made with the card at Square merchants provide an instant 2.75% discount off their purchase.

Square's ongoing efforts to get an ILC charter

Square first submitted its application to the Federal Deposit Insurance Corp. to create an industrial loan company in 2017. It filed a separate application with the Utah Department of Financial Institutions, the state where it plans to headquarter its new ILC bank. And finally, Square applied a second time to charter an industrial loan company late in 2018, sending a clear signal Square plans to provide more banking services to its merchants.

Community banks have long resisted ILC charters, arguing that they blur the line between commerce and banking. The industry waged its biggest battle against the charter when Walmart filed an ILC application in 2005. The retailer later withdrew its bid in the wake of strong opposition.

Square has said its ILC is not intended to compete with community banks but to help small business that are left out of the traditional banking system.

Square taps into transaction data to offer small-biz loans

In 2014 Square launched Square Capital, a credit program for small business, joining a growing number of companies breaking into small-business lending.

The program closely resembles PayPal's Working Capital, in that it allows merchants to pay back loans from the sales they handle through the payment provider and lending decisions are based on a merchant's transaction history. Square Capital does not have an application process — merchants see in their Square dashboard whether they have received a loan offer. If they do, businesses can get money as soon as the next day. Square Capital's fees are tailored to each merchant, which may receive several offers that vary by loan amount. The funds are repaid as a percentage of the card payments accepted through Square devices.

In 2015, Square transitioned the program from a merchant cash advance model to a traditional lending model, though the difference mostly affected how the loans were regulated rather than how they were offered and repaid.

Since the program's introduction, Square Capital has extended more than $2.8 billion to over 180,000 merchants, according to Square's website. Loan amounts range from $500 to $100,000. The program has been funded by investors such as Victory Park Capital and Colchis Capital.

Square gets into consumer wallets

The plastic card is a major component of a bank's branding, so Square's decision to offer a customizable prepaid card directly threatens any account's top-of-wallet status.

The card formally launched in 2017 in black with white print, allowing cardholders to customize the front with either their own signature or a sketch of their choosing. Square seems to have a fairly high degree of leniency when it comes to designs, but does monitor for unsuitable content.

The customizable media is likely to make the card appealing to younger users, presumably as direct competition for the then-rumored Venmo card. Historically, other digital payment providers such as Google and PayPal have put out stored-value cards, neither of which gathered meaningful adoption.

Even if the Square Cash Card gets little use, it's still a valuable marketing exercise. Many card issuers — including digital brands such as PayPal — use high-end materials or colored cores to stand out in consumer wallets and reinforce their brands. India’s IndusInd bank uses a textured pattern near the card’s top edge, so it can be easily identified and pulled from the wallet without looking. Japan’s JCB offers a scented card, which it markets to women.

Square Cash gets a new identity as a digital sandbox

Banks may be loath to dabble in bitcoin and other nontraditional financial products, but Square has built itself a sandbox in which to experiment with any concept in which it sees potential.

Square Cash launched in 2013 as a bare-bones email-based P2P system that was largely cut off from the main Square ecosystem. Given the somewhat vanilla appeal of Square Cash and its self-imposed quarantine from Square’s other products, Square had the opportunity to experiment within the Cash platform without having any direct repercussions for its more mainstream products.

The bitcoin pilot announced in 2017 fills this role perfectly. By January of this year, Square had rolled out the bitcoin trading feature to all Square Cash users, and in June Square was granted a virtual currency licence in New York.

Square has similarly used Cash in the past to experiment with new approaches to handling payments. In 2015, the company introduced the "$Cashtag," a spin on Twitter hashtags and usernames that also served as a way to allow businesses to accept funds through the Cash ecosystem. The $Cashtag hardly revolutionized digital payments, but as a feature of the Cash app, it also never risked the reputation or performance of Square's primary offerings.

Square's first debit card

The experimental nature of Square Cash — and its isolation from Square's broader merchant ecosystem — made it the perfect testing ground for Square's first debit card.

Square was encouraged by the Cash App's continuing popularity in the iOS app store, and every Friday it notes a significant flurry of activity, Square CEO Jack Dorsey said in an earnings call last year.

"We see a bump in terms of sign-ups, downloads and usage," he added. "As persons are getting paid, they are sending money to their friends or receiving money from their family."

Square Cash and the Cash Card are becoming primary spending options for consumers, Dorsey said. After downloading the app, the consumer has "everything they would need from a typical bank," he said.

"This is very powerful, certainly for the individual, and it has potential for [other services] around our business," Dorsey said. "We think there is a lot more opportunity to power and provide more for the seller side and business side of our business, while being a more complete solution for individuals around their finances and financial health."

Square's many mobile wallets

In 2011, Square debuted Card Case, which allowed consumers to store a credit or debit card with Square after using it at a Square merchant. The app, later rebranded as Pay with Square, eventually became the Square Wallet before disappearing from app stores in 2014 with the launch of Square Order, an order-ahead app that lasted just a year.

Although none of Square's mobile wallets captured much of an audience compared to its flagship mobile card reader, they demonstrate a longstanding ambition to put Square's brand in front of consumers. But just as banks and other companies struggled to build an audience for their mobile wallets, Square couldn't make its wallet apps a success even when those apps integrated with merchants to enable features such as hands-free payments.

Even today, the Square Cash app remains Square's only consumer-facing product, but Square's commitment to that category illustrates the company's ongoing threat to traditional banks.