Square’s Pursuit of an ILC Charter

by Sarah Grotta 0


You may have seen the announcement last week that Square was pulling its application for an Industrial Loan Company (ILC) charter.  At least temporarily.  Square is pursuing their own charter to have greater control over their lending activities to small businesses.  Today, Square’s lending activity is executed through a partner bank who also can control the types of loans, underwriting and fees that Square charges.  Digital Transactions reported that the Independent Community Bankers of America are looking at Square’s retreat from the application as a “win” for community banks:

“We can call it a victory,” Chris Cole, executive vice president and senior regulatory counsel with the Independent Community Bankers of America, tells Digital Transactions News. Still, the ICBA takes Square at its word that it will be making a revised application to the FDIC. The application Square withdrew, as well as the one it intends to re-submit, are related to a so-called industrial loan corporation it plans to set up in Utah. 

Cole: “We don’t think this fight is over yet.” 

The Washington, D.C.-based ICBA strongly opposes the application but concedes the “victory” is probably temporary. “That they want to re-file indicates to me there was some sort of deficiency with their application,” Cole says. “We don’t think the fight is over yet.” 

Square comments that the pull back is just a part of the process and they will be back to seek approval from the FDIC.

Square, which says its application to the Utah Department of Financial Institutions for an ILC charter remains “active,” wants to set up the bank so it can directly offer loans and other financial services to small-business clients. Currently, its Square Capital operation makes hundreds of millions of dollars worth of loans through Celtic Bank, an unaffiliated Utah industrial bank. 

Square now plans to overhaul its application, according to a spokeswoman. It originally filed its paperwork in September. “We have been engaged in constructive dialogue with the FDIC, and our decision to withdraw and refile was a procedural step in the review process that will allow us to amend and strengthen some areas of our FDIC insurance application,” the company says in a statement. “Square Capital is uniquely positioned to build a bridge between the financial system and the underserved, and we continue to work closely with the FDIC and Utah DFI on our applications.” 

It is interesting to contrast the pursuit of a charter by Square with Pay Pal’s approach which is to continue to build and acquire more financial services capability, yet still rely on bank partnerships and sponsorships to gain access to the networks and systems they need.  Pay Pal may find that managing bank relationships is an easier task than effort to acquire and maintain a charter.  It is doubtful that the Independent Community Bankers of America are particularly happy about that approach either.

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory service at Mercator Advisory Group

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