Square's new debit card poses big threat to banks

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."

David Paul Morris/Bloomberg

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.

The card itself can be personalized and is contactless — features that promote the Square community and the capabilities of Square's hardware.

"Square inevitably will start looking a lot like a bank," said Thad Peterson, senior analyst with Boston-based Aite Group. The Square card "adds velocity to the funds that they are offering their merchants. That is a huge deal, and a debit card is like a bank in a lot of ways."

Square applied a second time to charter an industrial loan company just two weeks ago, sending a clear signal Square plans to provide more banking services to its merchants, he said.

"This is a logical first step because it is a card in their hands that they can use. … It is definitely a step toward a more banklike Square," Peterson said.

Square has previously offered a debit card for consumers, with the same option of customizing the card's front with a signature or sketch. The consumer card, launched in 2017, was tied to Square Cash, a P2P system that's separate from Square's merchant accounts. Square has also used Square Cash to experiment with services that banks find too risky, such as bitcoin trading.

The new debit card may be the most direct threat Square has made to banks' merchant relationships, but it's far from the first. Square has found unparalleled success servicing SMBs, particularly through its lending division — Square Capital has extended over $1 billion in loans to more than 100,000 merchants since 2014.

As with the debit card, Square crafted its merchant capital service based on its unique relationship with those customers. It bases lending decisions on past Square sales, and allows merchants to pay back their loans as part of their future Square transactions.

Will Hernandez contributed to this story.