Square applies for bank status

Square, the fintech startup headed by Twitter founder Jack Dorsey, has made an official application in the US for a banking license, ending months of speculation about its plans but also reigniting the argument about the use of industrial loans charters (ILCs).

These charters, also known as industrial bank charters, give companies permission to carry out banking services but also enables them to continue providing other non-financial commercial services. In theory Square, which applied for an ILC rather than a traditional banking license, will be able to continue to operate its food delivery business Caviar as well as the provision of its payment terminals.

In contrast, traditional bank holding companies are prohibited from any activity unrelated to financial services. Unsurprisingly banks have complained that this gives challengers seeking an ILC an unfair advantage while others have voiced concern that an ILC places too much commercial power in the hands of a single organisation.

ILCs were subject to a moratorium during the passing of the Dodd Frank Act but this was lifted in 2014. Since then retailer WalMart unsuccessfully applied for an ILC and then earlier this year online lending startup SoFi applied for an ILC. The application is still pending but if successful it would be the first award of an ILC for more than a decade.

The move, first reported by American Banker, would also potentially pave the way for Square to assume banking status. According to a Square spokesperson, the new bank will offer loans to small businesses, similar to its lending service Square Capital which is a partnership with Celtic Bank, as well as some deposit services. ILC status would enable Square to continue lending but without the reliance on a banking partner such as Celtic Bank. According to Dorsey, Square has to date lent more than $1.8 billion to over 140,000 businesses, with an average loan size of $6,000.