Mar 19, 2020 - Economy & Business

Jack Dorsey gets a bank

Photo illustration of Jack Dorsey holding a piggy bank.
Photo Illustration: Sarah Grillo/Axios. Photo: Burhaan Kinu/Hindustan Times via Getty Images

Jack Dorsey's Square, the upstart payment processor for smaller merchants, got the OK to open a bank, after nearly three years of trying.

Why it matters: Square applied to set up an industrial loan company — a "lite" bank that isn't subject to Federal Reserve supervision — which hasn't been approved in more than a decade. It may open the floodgates for companies that want all the perks of being a bank without the same amount of oversight.

Driving the news: Square Financial Services, as the fintech's bank is to be called, will be based in Utah, and — when it opens in 2021 — will collect deposits and lend money to merchants that use Square devices.

  • The approval comes at a crucial time for Square, as many of its customers are the kind of small businesses that have been forced to shutter because of the coronavirus.

The conditions placed on Square — by the FDIC and the Utah Department of Financial Institutions — are way tougher than those of typical banks. But they are still answering to fewer regulators.

  • Its initial capital level will be $56 million, "significantly higher" levels of capital than other banks, per the FDIC.
  • The FDIC will also have the right to examine Square Financial Services' parent company.

Of note: The FDIC signed off on educational company Nelnet's request to launch a bank.

What they're saying: "Nonbanks have always wanted deposit insurance," Thomas Vartanian, a longtime banking lawyer who heads a financial regulatory institute at George Mason University’s Antonin Scalia Law School, tells Axios.

  • "If you can take deposits at a very low cost, that's an enormously cheap way to fund yourself," he says, as opposed to regular companies that go into the markets and borrow money at more expensive rates.

The bottom line: Applications like Square's caused an uproar in the banking industry more than a decade ago. Remember when Walmart tried to be a bank? Traditional banking institutions howled about the potential consolidation of power in a single company.

  • But Square's approval marks the beginning of a friendlier approach, reopening the doors for other tech companies to open their own banks.
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