San Francisco-based Square, which offers card readers and a payments app, has confirmed to CU Times that is has filed an application for an industrial loan charter with the FDIC.
The company is the latest in a string of fintechs to make the move toward bank status. Lending fintech SoFi and mobile-banking personal finance startup Varo Money have also applied for bank charters recently. Those companies are also based in San Francisco.
“The primary purpose of the bank will be to offer business loans to small businesses, similar to the existing business of Square Capital, and to offer deposit products,” a company spokesperson told CU Times. Square’s average loan size is $6,000, and the company said it is often a substitute for business loans from friends and family rather than banks.
Brian Kaas, who is managing director at CUNA Mutual Group’s venture capital arm, CMFG Ventures, said credit unions can’t ignore the bigger issue at hand.
“We continue to see this shift in the financial services and insurance industries in terms of disruption, new market entrants and an evolving competitive climate,” he said. “Technology levels the playing field between established companies and start-ups, so moves like what we see with Square are interesting because it validates their model and allows them to enter the banking world, a regulated industry.”
CMFG Ventures has invested in companies such as MortgageHippo, Align Income Share Funding and CUnExus, Kaas noted.
Filene Managing Director of Research Andrew Downin said he’s seen no signs that Square will be the last fintech to pursue a bank charter.
“I definitely think it is a wake-up call,” he said. “[Credit unions] need to realize that these fintech providers have the advantage, not only of scale and greater risk tolerance and more capital to make these investments, but they have a distribution advantage in that they don’t have to necessarily build a branch on the corner. They don’t necessarily have to build an online banking site from the ground up. They’re able to get an app out there.”
Many credit unions are indeed nervous about where things are heading, according to a NAFCU survey out last February. Most respondents said they think fintech companies could significantly disrupt the current market. The survey also reported that much of the concern is related to increasing member preferences for speed, innovation and accessibility. More than 90% of credit unions in the survey said they support federal regulation of fintechs, and more than 70% want fintechs and traditional financial institutions to abide by the same regulatory standards.
Where those regulatory standards will land is still uncertain, however. On September 13, for instance, Reuters reported that Acting Comptroller of the Currency Keith Noreika told the news agency the OCC isn’t ready to accept applications from fintechs, because it first needs to get a sense of how they operate.
The fact that that fintechs often focus on one offering rather than on becoming a primary financial institution (PFI) is another thing credit unions need to think about, Downin added.
“The power of PFI isn’t as relevant for a consumer as it is, I think, to a credit union,” he explained. “I think many credit unions are still seeking out that PFI status, which is important and good to seek out, but it’s not as relevant as it used to be.”
The best defense may be a good offense, according to Downin.
“We’ve still got a lot of fintech start-ups that say they would love nothing more than to work with credit unions,” he said. “Because obviously credit unions have something that these fintech start-ups don’t.”
