Watch out, PayPal. Square just launched its own bank

The company announced Monday that the bank has commenced operations after completing the approval process with the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions. It will act as an independently controlled subsidiary Square Inc. (SQ). Dorsey is also the CEO and founder of Twitter (TWTR).

Salt Lake City, Utah-based Square Financial Services will provide business loans and deposit products to sellers who use their card readers and other outlets.

The fintech industry has become An increase during the pandemic when consumers and businesses switch to contactless or distant financial transactions.
Although fintech companies are increasingly offers products and services traditionally provided by banks, it is still rare for technology companies to obtain bank charters. In most cases, fintechs partner with third-party banks to provide service products such as small business loans.

Running its own bank will enable Square to “operate more smoothly, which will serve Square and our customers as we continue to work on creating financial tools that serve the underprivileged,” said Chief Financial Officer for Square Inc. Amrita Ahuja in a statement. Kvadratet’s share closed almost 5% on Tuesday.

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Square Financial Services will be an industrial bank, which means that it will offer limited financial services.

The company said it would start with subscription and origin loans for Square Capital’s existing lending product, which was previously provided in partnership with a third-party bank.

The move could give Square an advantage over competitors like PayPal (PYPL), which also provides commercial services and business lending in cooperation with a bank.

Square Financial Services will strive to “be the primary provider of financing for Square sellers across the United States,” the company said.

Square uses the information collected on the seller’s transaction history to facilitate loan subscriptions and payments, and says it offers a more streamlined application and approval process than many traditional financial institutions.

For payment service providers, capital lending is a “logical extension” of their business, says Gartner analyst Dayna Ford.

Unlike a traditional bank that has to rely on a company’s report on its performance, payment service providers “have a constant, almost real-time view of business performance and perhaps their entire revenue stream,” Ford said. “When it comes to managing risks, they have a constant heart rate monitor of how the business is doing.”

This type of data helps Square lend to companies that may be rejected by a typical bank – the company says it has better lending to women and minority-owned companies than traditional lenders.

Square Capital facilitated approximately 57,000 loans during fourth quarter 2020 a total of $ 254 million (a decrease of 62% compared to the same period last year as partly attributed to the pandemic). As of December 31, 2020, Square Capital had also facilitated approximately $ 857 million in Paycheck Protection Program loans to more than 80,000 small businesses.

The company said on Monday that it does not expect the bank to have a significant impact on its balance sheet, revenue or revenue in 2021, and that it will “continue to sell loans to third-party investors and limit its balance sheet exposure.”