Watch out, PayPal. Square just launched its own bank

Square, the financial payments firm run by Jack Dorsey, launched an in-house bank that it says will allow it to “operate more nimbly” in an increasingly crowded fintech market.

The firm announced Monday that the bank has begun operations after completing the charter approval process with the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions. It will operate as an independently governed subsidiary of Square Inc. Dorsey is also the CEO and co-founder of Twitter.

The Salt Lake City, Utah-based Square Financial Services will provide business loans and deposit products to sellers who use its card reader and other point-of-sale services.

The fintech industry has gotten a boost during the pandemic as consumers and companies shift toward touchless or remote financial transactions.

Although fintech firms are increasingly offering products and services traditionally provided by banks, it’s still rare for technology companies to get bank charters. In most cases, fintechs partner with third-party banks to service products such as small-business loans.

Running its own bank will allow Square to “operate more nimbly, which will serve Square and our customers as we continue the work to create financial tools that serve the underserved,” Square Inc. Chief Financial Officer Amrita Ahuja said in a statement. Square’s stock closed up nearly 5% Tuesday.

Square Financial Services will be an industrial bank, meaning it will offer limited financial services.

The company said it would begin with underwriting and originating business 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 edge over competitors such as PayPal, which also provides merchant services and business lending in partnership with a bank.

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

Square uses the data it collects on sellers’ transaction histories to facilitate loan underwriting and payments, and says it offers a more streamlined application and approval process than many traditional financial institutions.

For payment tech vendors, capital lending is a “logical extension” of their business, Gartner analyst Dayna Ford said.

Unlike a traditional bank that must rely on a business’ report of its performance, payment service providers “have a constant, near-real-time view into the business performance and perhaps the entirety of their revenue stream,” Ford said. “As far as managing risk, they have a constant pulse check on how the business is doing.”

This kind of data helps Square lend to businesses that might be turned away by a typical bank — the company says it has a better record of lending to women- and minority-owned businesses than traditional lenders.

Square Capital facilitated approximately 57,000 loans during the fourth quarter of 2020 totaling $254 million (a 62% year-over-year decline that it attributed in part 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 Monday it does not expect the bank to have a material impact on its balance sheet, revenue or income in 2021, and that it will “continue to sell loans to third-party investors and limit balance sheet exposure.”