Square recently announced it will start offering FDIC-insured accounts and small-business loans. Square’s new bank, which is a notable expansion of their payment processing services, will forever change traditional banking by amplifying consumers' growing shift towards mobile banking.
Square’s new industrial bank, known as Square Financial Services, will
If you’ve ever purchased a coffee from a family-owned coffee shop or clothes from a boutique store, there’s a good chance you hovered your smartphone over the Square dongle. That white chip reader has become one of the most innovative point-of-sale payment systems in the world, largely because consumers have adapted to making payments with their mobile wallets.
Whenever customers make a purchase on a Square dongle, the company collects data, which allows them to offer customized loan terms faster and better than a typical bank could. Square’s hope? That customers will enjoy the point-of-payment technology so much that they will stick with their bank services as well.
Even before launching their bank, Square, like Venmo or PayPal, allowed users to maintain a balance in their Square account. Small business owners could track expenses with their Square Card and leave money in their Square Balance, spending it down as opposed to continuously transferring money between a separate bank account. Chase launched a similar service known as QuickAccept. The service not only allows merchants to accept payments through a mobile app or contactless card reader — the funds appear in their checking account on the same day.
Square’s other major service, Cash App, a mobile application that allows people to send, spend, save and invest money without a bank, has enabled faster and safer transactions. The application’s advanced encryption technology means that each transaction is instant, but cannot be canceled. Chase, Bank of America, and other banks are already offering similar services, such as QuickPay with Zelle.
The ripple effects of Square’s announcement might have other, broader implications, too. For one, it might help to drive a period of merger and acquisition activity in which the top 20 banks across the U.S. acquire smaller regional banks. After all, Square has recently acquired a majority of Tidal, Jay Z’s streaming service. The future of fintech and financial services, it seems, is partnerships, especially ones that start from your mobile device.
Fintech’s arrival on the banking scene suggests that a paradigm shift is occurring in the financial services sector. Tech has ushered in similar changes in other industries, such as how Uber and Lyft reshaped the taxi industry or how e-commerce and the rise of Amazon accelerated the retail apocalypse. Former household names, such as Blockbuster, Radio Shack, Toys R Us and Sports Authority, couldn’t survive the digital revolution.
The retail apocalypse has sparked fears that a similar situation might occur in the retail banking industry. For retail banks, the good news is that switching costs (from one bank to another) is much higher than retail switching costs (from one store to another). More important, many banking clients remain loyal to brick-and-mortar banks such as Chase and Wells Fargo. The hybrid retail banking experience offered by such banks, including in-person and digital services, can be an advantage for retail banks, especially if the institutions continue to offer standout customer experiences on mobile devices for the majority of clients’ banking needs.
Retailers like Walmart and Target responded to the boom in e-commerce by doubling down on digital channels, especially mobile apps. Retail banks should follow in their footsteps and plunge themselves into the digitization of the experience. More and more banking clients want to accomplish tasks such as getting a home loan or applying for a credit card directly from their mobile devices. Digital natives are hungry for mobile banking experiences that remind them of social media apps or Amazon.
Square’s major accomplishment is that the company has allowed people to move their money without touching other human beings. The good news for retail banks is that they will continue to offer in-person services that online banks can’t, such as providing a $10,000 cashier’s check to put a down payment on a house. Current federal regulations mean that in-person banking can’t disappear entirely.
And while in-person branch use will continue, retail banks should nonetheless double down on building intuitive, easy-to-use mobile experiences that drive customer satisfaction and brand loyalty. In turn, enhanced mobile experiences will reduce call center traffic, boost in-person engagement at branches and, more important, keep clients excited about their bank’s digital future.
