Square gets a bank – and so, now what? It may be the case that the proverbial floodgates have opened for FinTechs to leverage what we might think of as the “industrial bank” operating model, in order to meld digital-first operations with traditional banking services.
As noted earlier this week, Square’s state-chartered industrial bank, Square Financial Services, is up and running in Utah. That financial services arm will offer banking services such as deposits, according to releases. The initial forays will focus on servicing the company’s network of small businesses that are already operating on Square’s payment processing platform.
This is the 16th FDIC-insured industrial bank operating in Utah. And it’s the second de novo industrial bank operating in the state, according to a Square release emailed this week to PYMNTS.
Industrial Banks
A bit about the fine print, so to speak:
The Utah Department of Financial Institutions reports that the state-chartered industrial bank is subject to the same regulatory oversight as a Utah-chartered commercial bank. These banks are authorized to make a range of commercial and consumer loans and to accept federally insured deposits. They don’t need to be owned by bank holding companies (thus paving the way for the FinTech ownership). The de novo designation simply is tied to a bank that is not acquired.
Square has said that the bank will be a primary point of financing for Square sellers across the U.S. Thus, we may see the creation of a stickier ecosystem, using the extant platform as leverage, for Square and its sellers.
In recent months, there has been some renewed interest in FinTech/traditional financial institution (FI) tie-ups. As noted late last month, Brex, focused on financial management software, has filed to go the industrial bank route in Utah, too. “As proposed, Brex Bank will expand upon Brex’s existing suite of financial products and business software, offering credit solutions and FDIC-insured deposit products to [small to medium-sized businesses (SMBs)],” stateed the February release about the charter.
And then there’s LendingClub, which earlier in the year received all the regulatory approvals necessary to close its $185 million acquisition of Radius Bancorp (this deal did not involve an industrial bank component).
In an interview with Karen Webster, Anuj Nayar, vice president and U.S. financial health officer at LendingClub, said the LendingClub/Radius combination will create the U.S.’ first publicly traded neobank, taking a branchless, digital-first approach to financial services. Nayar said that after the deal closes, the combined entity will likely first launch a high-yield savings account in which the firm could offer a higher rate on those accounts than what has been seen in the market at large. The LendingClub checking account stands as a way to market other services that “connect the dots” between a range of LendingClub and Radius offerings.
Thus, the lure of cross-selling becomes apparent. The FinTech platform has its installed base, and the FI has its installed base. There is the potential to bring traditional bank clients (if they are extant) toward digital-first and streamlined financial activities. For small businesses, especially, tapping into platforms to address funding and other financial needs, without the long paper trail that has typically been a hallmark, may be of particular value.
Of course, for tech firms and retailers, as spotlighted in PYMNTS’ discussion about Walmart, the idea is to craft a suite of diversified revenue streams without necessarily having to build it all from scratch.
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