Fintech Square now manages its own bank

Fintech Square now manages its own bank

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The company announced on Monday that the bank started operations after completing the regulation approval process with the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions. It will operate as a subsidiary independent of Square Inc (SQ). Dorsey is also the CEO and co-founder of Twitter (TWTR).

Square Financial Services, based in Salt Lake City, Utah, will provide commercial loans and deposit products to sellers who use their card reader and other point of sale services.

The fintech industry gained momentum during the pandemic, as consumers and businesses switched to remote or contactless financial transactions.
Although fintech companies increasingly offer products and services traditionally provided by banks, it is still rare for technology companies to obtain bank licenses. In most cases, fintechs partner with third-party banks to provide products such as loans to small businesses.

Running your own bank will allow Square “to operate more quickly, which will serve Square and our customers as we continue to work to create financial tools that serve the needy,” said Square Inc.’s chief financial officer, Amrita Ahuja, in a statement. communicated. Square’s shares closed up nearly 5% on Tuesday.

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Square Financial Services will be an industrial bank, which means it will offer limited financial services.

The company said it would begin by underwriting and originating commercial loans for Square Capital’s existing loan product, which was previously provided in partnership with a third-party bank.

The move could give Square an edge over competitors like PayPal (PYPL), which also provides commercial services and commercial loans in partnership with a bank.

Square Financial Services will aim to “be the primary provider of finance for Square sellers in the United States,” said the company.

Square uses the data it collects about sellers’ transaction history to facilitate loan underwriting and payments, and says it offers a simplified application and approval process than many traditional financial institutions.

For payment technology providers, capital lending is a “logical extension” of their business, said Dayna Ford, an analyst at Gartner.

Unlike a traditional bank that relies on a business report on its performance, payment service providers “have a constant, almost real-time view of the business’s performance and perhaps its entire revenue stream,” said Ford. “When it comes to risk management, they do a constant check on how the business is doing.”

That kind of data helps Square to lend to companies that can be turned down by a typical bank – the company says it has a better record of loans to women and minority-owned companies than traditional lenders.

Square Capital facilitated approximately 57,000 loans during the fourth quarter of 2020, totaling $ 254 million (a 62% year-over-year decline it partly attributed to the pandemic). As of December 31, 2020, Square Capital had also facilitated approximately $ 857 million in paycheck protection loans for more than 80,000 small businesses.

The company said on Monday that it does not expect the bank to have a material impact on its balance sheet, revenue or revenue in 2021, and that it “will continue to sell loans to third-party investors and limit the balance sheet exposure”.

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