The FDIC conditionally approved the application by Square Financial Services, a subsidiary of Square Inc., for deposit insurance.

The Utah Department of Financial Institutions also granted charter approval to Square Financial Services. (San Francisco Business Times)

Square now a Utah business bank

Recognized by the FDIC as a so-called “industrial loan company,” Square Financial Services will likely launch in 2021. It will operate as payment processor Square Inc.’s (NYSE: SQ) independent banking subsidiary. The firm will offer both small business loans and deposit services such as checking and savings accounts out of Utah.

The banking unit will be led by CEO Lewis Goodwin and CFO Brandon Soto.

“We appreciate the FDIC’s thoughtful approach to our application and their recognition that Square Capital is uniquely positioned to build a bridge between the financial system and the underserved,” said Jacqueline Reses, Square Capital Lead and Executive Chairwoman of the board of directors for Square Financial Services. “We’re now focused on the work ahead to build out Square Financial Services and open our bank to small business customers.”

Square’s longstanding ambition to get a foothold in banking is now a reality. It’s also a foot-in-the-door for other fintechs looking to secure the advantages of a banking license.

FDIC conditionalities

The FDIC granted conditional approvals on March 18 to Square and educational services company Nelnet (NYSE: NNI).

It mandated that Square Financial “maintain levels of capital that are significantly higher than typical FDIC-insured banks.”

Further, the FDIC required the bank, the bank’s parent company (Square, Inc.), and the controlling shareholder of Square, Inc. to execute a Capital and Liquidity Maintenance Agreement (CALMA) and a Parent Company Agreement (PCA).

“These agreements contractually obligate the proposed bank’s parent to serve as a source of financial strength for the bank and require the parent company to ensure that the bank maintains sufficient capital and liquidity and to inject capital or liquidity if the bank’s capital or liquidity falls below a certain threshold,” said FDIC Chairman Jelena McWilliams. “The PCA would require the bank’s parent company to consent to examination, reporting, recordkeeping, and other provisions designed to provide safeguards to protect the bank and the Deposit Insurance Fund.”

Nelnet Bank, the other entity approved by the FDIC and Utah, will offer student and consumer loans, as well as refinance options to help borrowers obtain better interest rates. The FDIC imposed similar conditionalities on Nelnet.

FDIC puts up a proposal for public comment

The day before it granted the Square and Nelnet licenses, the FDIC publicized a proposal to allow non-financial companies to operate banks with full deposit insurance.

It’s a move to convert existing practice into a rule.  “The proposed rule would codify the FDIC’s current supervisory processes and policies with respect to covered industrial banks and ensure the safe and sound operation of these institutions as well as provide the necessary transparency regarding the FDIC’s supervisory practices,” the FDIC said.

By extracting contractual undertakings from the applicant’s parent entity, such as for extending financial backing and “liquidity support” to the industrial loan entity, the FDIC seeks to “enhance transparency and provide important protections for the Deposit Insurance Fund.”

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