Square Renews Effort to Become a Bank

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Outside the Square Headquarters in San FranciscoSquare has plans to refile paperwork with state and federal regulators to open a wholly owned bank in Utah, according to a report in The Wall Street Journal today. In 2017, the company applied with the Federal Deposit Insurance Corp (FDIC) for a licence to become an Industrial Loan Company (ILC) bank, but it withdrew the application at the beginning of July 2018.

An ILC bank can take deposits and can be owned by a non-bank. It is also exempt from certain regulations that traditional banks must follow, making the ILC bank structure highly controversial. Critics say that ILC banks are very risky because they can engage in commercial activity outside of banking, which could lose money and jeopardize the bank.

“ILC banks were meant to serve a certain type of industrial worker [in the early 1900s] that had trouble finding a commercial bank they could bank with,” said Chris Cole, Senior Regulatory Counsel at Independent Community Bankers of America (ICBA), a trade group.

“Now we don’t have that problem anymore…this [ILC bank] charter is completely outdated [and is] a loophole that should be closed so that the owners of these bank-like institutions are restricted in the same way that commercial banks are restricted,” he said.

Proponents of ILC banks, like the fintechs that seek ILC status, say that becoming a bank can better serve their customers. Under the 2010 Dodd-Frank Act, which came in response to the Great Recession, there was a moratorium on establishing ILC banks because they were deemed to be a risk to the U.S. banking system. That moratorium was lifted in 2013 and over the last several years, a handful of fintechs have applied to get an ILC bank charter license.  

SoFi applied for a license and later withdrew its application in 2017 amid a scandal related to its former CEO. But its current CEO, Anthony Noto, mentioned the possibility of pursuing ILC status again at the Money 20/20 conference in October.

NelNet, which services student loans, applied for an ILC license in June of this year and later withdrew its application in October.

Last modified: December 19, 2018
Todd Stone


Category: Banking


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