SFS to be capitalized with $56 million in cash
Square (SQ) runs its lending business, Square Capital, in partnership with Utah-based lender Celtic Bank. This leads to the question of why Square is seeking its own industrial bank charter when it already has a bank partner.
Square is seeking regulatory consent to be allowed to operate a bank unit that will be called Square Financial Services (or SFS). As with Square Capital, SFS will provide small loans to merchants. On top of providing small business credit, SFS will provide deposit account services to merchants.
Independence in financial services business
Square is pursuing its application for a bank charter because it’s seeking more independence in its financial services business. Square Capital head Jacqueline Reses told the Wall Street Journal, “As we scale, it’s becoming increasingly important that we have direct relationships with regulators.”
While a partnership with Celtic Bank has helped Square Capital grow, Square prefers running a financial services operation that it controls. The US (SPY) small business alternative lending market is forecast to originate $52 billion in loans by 2020 compared to $5.0 billion in 2015, according to BI (Business Insider) Intelligence.
Potential benefits of controlling bank operations
With a bank division that it fully controls, Square could have a much easier time expanding and diversifying its financial service offerings, potentially resulting in more rapid growth for the bank business.
Additionally, a financial unit that it fully controls could allow Square to increase efficiency in its financial services business, potentially improving the profitability of the unit.
Square may have realized that it needs to up its game in the credit business as the alternative lending market continues to draw more players. Square competes with PayPal (PYPL), Amazon (AMZN), and LendingClub (LC) in the alternative lending market, where they fill the gap left by large banks in providing credit to small businesses.