We previously reported on payment processor Square, Inc.’s application for an industrial loan company (ILC) charter. That is now over, at least for the time being. Last week, Square announced that it had temporarily withdrawn a pending application with the Federal Deposit Insurance Corporation (FDIC) to obtain deposit insurance for a proposed ILC. The company stated that it pulled its application in order to strengthen the application before reapplying at a later date. The company stated that a parallel application with the Utah Department of Financial Institutions (DFI) for the ILC charter is still pending. The company plans to headquarter its new ILC bank in Utah. “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,” stated a Square spokesperson. “Square Capital is uniquely positioned to build a bridge between the financial system and the underserved, and we continue to work with the FDIC and Utah DFI on our applications.” The company has not indicated what areas need to be strengthened in the application.
This announcement comes at a time when many fintech companies are exploring different means of obtaining greater access to the banking system. While some fintech companies are weighing partnerships with banking entities, others are considering whether to seek bank charters. As we also have previously reported, Congress, along with state and federal banking regulators, continue to explore potential regulatory actions for the expanding and dynamic fintech sector. The Treasury Department is expected to release a report during the next few weeks that will provide some recommendations on financial services regulation, including fintech innovation, and Comptroller of the Currency Joseph Otting has stated that the Office of the Comptroller of the Currency (OCC) will make a decision about whether to accept fintech company applications for special purpose national bank (SPNB) charters sometime later this month.
The FDIC has not approved an ILC application since 2008, but new FDIC Chairman Jelena McWilliams appears to be supportive of at least going through the process. “The agency has a duty to the public to actually proceed. Now, that doesn’t mean that we will approve every application. That doesn’t mean that we will deny every application. But we have to move swiftly; we can’t just sit on those applications,” McWilliams reportedly stated during a banking conference last month.
To date, no fintech company has obtained a national bank charter. We note that student loan servicer Nelnet has an active application to charter an ILC, and Varo Money’s application to charter a full-service national bank remains pending. While it remains to be seen whether a fintech company will succeed in chartering an ILC or a national bank, any such approval would create a model for other companies to follow and eliminate a set of associated “first-mover” costs.