Mobile-payments company Square (SQ 0.95%), which has evolved into a financial-technology company offering a wide array of services to businesses and consumers, surprised investors last September when it revealed it had submitted an application to form a wholly-owned bank. If approved, Square's financial offerings would expand and give the company more flexibility.
Now we learn (via American Banker) that Square recently withdrew its banking application with the Federal Deposit Insurance Group (FDIC). But this isn't because Square is backing out on its effort to form a depository bank of its own. On the contrary, some constructive conversations with the FDIC led Square to pull its application as part of an effort to improve and resubmit it.
Given Square's success thus far at continually launching new products and services and growing them into meaningful aspects of its business, Square's initiative to form a bank is a narrative worth following -- and this looks like promising progress.
Square's new platform for restaurants -- one of the company's many new products launched since 2014. Image source: Square.
Refiling
Square confirmed the withdrawal of its application with the FDIC to form a bank with an "industrial loan" structure -- which would allow for more flexibility beyond just banking -- along with its plans to refile, to American Banker. "We have been engaged in constructive dialogue with the FDIC," a Square spokesperson explained, "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."
Supporting the case that Square still plans to try to become a bank, the company's application with the Utah Department of Financial Institutions is still active, according to American Banker.
When Square submitted its banking application last year, the company said it's a process that typically takes a year. Refiling could delay the process but ultimately increase the likelihood of approval.
Why becoming a bank could benefit shareholders
Square CEO Jack Dorsey gave investors some insight into the reasoning behind the company's desire to form a bank in its third-quarter earnings call (via an S&P Capital IQ transcript) last year.
[The industrial loan banking structure] represents an efficiency for us. It allows us to go faster, create more efficiencies in the model, but also allows us to just take a different tack on our business and make sure that we're constantly doing the right thing. We can bring the lending capabilities of a bank in-house, allowing us to be more verticalized and to make stronger and faster decisions.
Further, Dorsey said that though an approval would strengthen its Square Capital business, it would also help the company provide "more financial services to the underserved, both on the seller standpoint and also individuals as well."
In Square's first quarter of 2018, the company made 50,000 business loans worth a total of $339 million -- up 35% compared to the year-ago quarter. Square's loan business is accounted for in its subscription and services-based segment, which includes other fast-growing products like Instant Deposit and Caviar. Total subscription and services-based revenue was $97 million in Square's first quarter -- up 98% year over year.
Bolstering the argument for Square to pursue a broader array of financial products, management recently noted that 22% of net revenue and 35% of adjusted revenue in the company's fourth quarter of last year was derived from products launched since 2014.
Investors shouldn't get too excited, though. The FDIC hasn't approved an application for an industrial loan bank since 2008, according to American Banker.
