Square's bank accounts lay groundwork for a super app

The new holy grail of fintech is the so-called super app. But even a super app needs a few mild-mannered features, and for Square those will come in the form of a traditional checking and savings account.

Square's plans for these new accounts were revealed in the code of an update to its iPad and iPhone apps, according to Bloomberg. By offering these accounts within the same app that merchants use for accepting payments, Square can provide a full banking relationship to any of the small and midsize business owners that already use its technology.

Unlike most of its fintech rivals, Square has a banking license, which enables it to roll out new services without having to find a willing bank partner.

"This doesn't alleviate any of the regulatory requirements but it may just speed up the decision-making process for Square," said Sarah Grotta, director of debit and the alternative products advisory service at Mercator Advisory Group.

Bloomberg

Square's ILC charter removes a layer of friction from its operations, Grotta said. That means when Square wants to launch a new product or add features, the project only needs to clear the company's own risk and compliance departments. Most fintechs that offer lending or FDIC-insured accounts do so through banks to manage deposits and regulatory compliance. Square's existing merchant lending product, Square Capital, worked through Utah-based Celtic Bank.

By acting as a bank that also has a suite of merchant and consumer-facing services — and a large enrolled base of merchants and consumers — Square's in a good negotiating position to build a super app since it does not rely as much on finding a regulated bank for a partnership.

Apple's Goldman Sachs partnership and Google's partnership with Stanford Federal Credit Union and Citigroup are prime examples of traditional banks linking to large technology companies to offer enrollment, card issuance and credit through a single relationship. Super apps also offer the opportunity to expand beyond financial services and payment other products such as streaming content to the app for enrolled users.

PayPal plans to offer its super app later this year, and the unwinding of Wirecard has resulted in firms such as Railsbank acquiring key parts of Wirecard to build an ecosystem that can support financial super apps.

"A lot of companies are embarking on a 'super app' ambition," Steven Kwok, a director at Keefe, Bruyette & Woods, said in an interview. "Square is one of the few that are in position to benefit from that. It is approaching a largely underserved part of the market."

Years in the making

Word of the new business accounts comes shortly after Square launched its long-awaited bank at the beginning of March. That followed a multiyear quest at Square to obtain an ILC that came to a successful outcome in March 2020, when Square and the student loan servicer Nelnet received the first ILCs in 12 years. ILCs are a source of controversy because banks view them as a way to offer loans and other banking products without having to follow holding company regulations. Square had earlier submitted and withdrawn an application for an ILC in 2017, and resubmitted in 2018.

Square would not comment for this story. When Square Financial Services launched, the company said bringing banking in-house would allow it to operate more nimbly. Square competes with large firms such as Stripe, PayPal and Kabbage to support digital payment and ancillary services such as merchant capital. It also competes with smaller niche firms that sell services to a specific merchant category. Going after bank licenses of their own isn't an obvious play for Square's rivals.

"There are considerable capital and support costs required to have a charter that may not be a good fit, whereas a bank partner that takes on some of the regulatory burden could be the better, less expensive solution," Grotta said.

Square has built financial heft over the past year due to its extensive bitcoin trading business, which now makes up more than 70% of its revenue.

The bitcoin windfall comes as Square transforms its seller ecosystem, a core part of its business, to broaden services for business clients. It's going after slightly larger businesses in the broader SMB market. More than 60% of its seller business volume comes from companies with more than $125,000 in yearly payment volume — a category that has more complex banking needs than those of the micromerchants Square initially targeted. Square's fast-growing Cash peer-to-peer transfer app is another important cog, serving both consumers and businesses and acting as a launchpad for Square's bitcoin trading service.

The new accounts would be called Square Checking and Square Savings. The savings account would offer a 0.5% interest rate, which according to a Keefe Bruyette analysis would be in line with other online-only savings accounts. The checking account will be linked to Square's business debit card.

"These accounts would make the merchant relationship sticker for Square," KBW's Kwok said. "If a merchant is using multiple products from Square, it's a lot harder for that merchant to leave unless they're going to someone with the whole suite. If not, the merchant would need multiple partners."