How SFS Could Change Square Capital


Sep. 27 2017, Updated 9:12 a.m. ET

Industrial bank instead of traditional bank

Square (SQ) intends to separate some of its existing financial services, offered under Square Capital, from its bank business if regulators grant it an industrial bank license. Square has applied for an industrial bank charter so that it can take its lending business to a higher level and potentially unlock more growth.

The company applied for an industrial bank license as opposed to a traditional bank license to allow it to keep its nonfinancial operations. The company runs an online food delivery service called Caviar. Traditional banks are prohibited from participating in nonfinancial businesses (QQQ) (XLK).

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Keeping it separate

The plans that Square has for its bank business imply that Square Capital will see permanent changes. Square’s bank unit, to be called Square Financial Services (or SFS), will provide loans and accept deposits from small businesses. Thus, SFS will likely take over the core lending operations of Square Capital.

However, Square intends to keep its consumer-facing financial services separate from its main bank unit. One of Square’s consumer financial services is Square Cash, a mobile money transfer service akin to PayPal’s (PYPL) Venmo, Snap’s (SNAP) Snapcash, and Apple’s (AAPL) upcoming Apple Cash.

Square’s other consumer financial service is Square Installments, a service that allows Square’s merchant customers’ buyers to finance large purchases over several months.

Revenue in consumer finance market

Through Square Cash, Square is targeting the multibillion-dollar P2P (peer-to-peer) payments market. According to Forrester Research, global P2P transactions will reach $17 billion by 2019. According to Javelin Strategy and Research, the number of Americans using the P2P payment service will increase to 126 million by 2020 from 69 million in 2016.


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