On March 18, 2020, Square Inc., became the first U.S. fintech company to receive conditional approval of an Industrial Loan Company (“ILC”) charter from the Federal Deposit Insurance Corporation (“FDIC”), to pair with its prior charter approval on March 17, 2020 from the Utah Department of Financial Institutions.  It became the first new de novo ILC charter to be approved by the FDIC in over a decade.  This comes just one day after the FDIC codified its approach to managing ILCs generally.  The ILC charter allows non-bank owned companies to provide various deposit and lending services to customers without being subject to federal bank holding company regulations.

Square Inc. was formed in 2009 as a payment services provider enabling businesses to accept card payments.  Since then, the platform has expanded its suite of services to include software and hardware products related to point-of-sale payments, merchant services, money transmission, and business financing.

With the ILC charter approval, in 2021, Square is expected to launch Square Financial Services, Inc., as an independent and direct subsidiary industrial bank, which will provide small-business loans and deposit products to Square’s customers.  According to the company, Square Financial Services will be headquartered in Salt Lake City, Utah.

The road to ILC charter approval has not been easy or swift.  ILCs are required to obtain FDIC deposit insurance.  Applications for deposit insurance are evaluated under a framework of seven factors, including the applicant’s financial history and condition, capital structure, future earnings prospects, general character and fitness of the management, as well as any risks to the Deposit Insurance Fund, the convenience and needs of the community to be served by ILC, and whether the institution’s corporate powers are consistent with the purposes of the Federal Deposit Insurance Act.

While Square received conditional approval of an ILC charter, the decision of the FDIC board was not unanimous, with one dissenter noting Square’s inconsistent profitability since its initial founding in 2009, and potential vulnerability to an economic downturn.

Given that the FDIC last approved a de novo ILC application over a decade ago, the decision signals a potential easing of regulatory resistance towards fintech companies and their mission to increase access to financial services to traditionally underserved consumers.