Fintech Firm Square Withdraws FDIC Application, Plans to Refile

By Lydia Beyoud

Small-business lender and tech company Square Inc. has withdrawn its application for deposit insurance as part of its bid to receive a bank charter, a company spokeswoman told Bloomberg Law on July 5.

The company’s application has been pending before the Federal Deposit Insurance Corp. since the fall of 2017. “We have been engaged in constructive dialogue with the FDIC, and our decision to withdraw and refile was a procedural step in the review process that will allow us to amend and strengthen some areas of our FDIC insurance application,” the spokeswoman said by email.

A concurrent application for an industrial loan company (ILC) charter with Utah’s Department of Financial Institutions is still active, the spokeswoman confirmed.

State-issued ILC charters allow nonbank companies to operate both retail and banking businesses. ILCs that obtain deposit insurance from the FDIC are exempt from extensive regulations of the Bank Holding Company Act, including supervision by the Federal Reserve.

Square’s bid to enter consumer banking has faced opposition from many traditional banks. The company has sought to cast its interest in banking as a way to help its existing client base of small businesses. “Square Capital is uniquely positioned to build a bridge between the financial system and the underserved, and we continue to work closely with the FDIC and Utah DFI on our applications,” the spokeswoman told Bloomberg Law.

It’s widely believed that new FDIC Chairman Jelena McWilliams may look more favorably on granting insurance to a fintech company or other ILC insurance applicants. She previously told lawmakers she would review new bank charters on a case-by-case basis, and would push the FDIC to move more quickly on them, as well.

Clearing Cobwebs

Square’s move will likely delay a decision on deposit insurance but may be an indicator of eventual success, Isaac Boltansky, director of policy research at investment firm Compass Point Research and Trading LLC, told Bloomberg Law.

“It’s been a decade since we’ve seen one of these applications go through, and this strategic withdrawal, I think, is indicative of some of the cobwebs and uncertainty associated with the process,” Boltansky said July 5.

The bullish comments from Square’s spokeswoman indicated a level of collaboration between the FDIC and the fintech company “that was a positive signal for their efforts,” Boltansky added.

“That’s my main takeaway from today: The timeline is murkier but the outcome is clearer,” he said.

More ILCs Could Follow

FDIC approval of Square’s foray into banking could set the stage for a fresh wave of ILC applications.

Student lender Nelnet Inc. filed ILC applications June 28 with the FDIC and Utah’s financial regulators. If granted, the company plans to form an FDIC-insured online bank that offers private student loans.

“With diversified sources of funding that include deposits and securitizations, Nelnet Bank would act as a reliable source of funding for creditworthy, education-seeking consumers throughout all credit markets,” the company said in a June 28 statement.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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