Square (SQ -0.28%) announced on Monday evening that its banking subsidiary, Square Financial Services, has officially started operations. This comes after the fintech giant's industrial banking charter was approved by the Federal Deposit Insurance Corporation and Utah Department of Financial Institutions (the bank is headquartered in Salt Lake City).

Although Square Financial Services is a fully owned subsidiary of Square, it operates completely independently of its parent company. In other words, it has its own CEO, CFO, and other leadership team.

Customer in bike shop using Square payment terminal.

Paying via Square. Image source: Square.

Square Financial Services is an industrial bank, also known as an industrial loan company, which essentially means an institution that provides niche financial services -- in this case, small-business loans. Just to give a couple of other examples, private student lender Sallie Mae is an industrial bank, as are several banks that make auto loans on certain types of cars, such as BMW Bank of North America, a subsidiary of BMW Financial Services.

Square has been in the business-lending space for some time through its Square Capital division. But because Square is not a bank itself, it has had to rely on partnerships with third-party financial institutions.

Square Financial Services will become the primary financing source for Square Capital business loans, thereby keeping the entire process in-house. As Square CFO Amrita Ahuja (who is the executive chairwoman of Square Financial Services) said, "Bringing banking capability in-house enables us to operate more nimbly, which will serve Square and our customers as we continue the work to create financial tools that serve the underserved."

To be sure, Square Financial Services isn't expected to add significantly to Square's earnings. At least not at first. But this could be a first step in expanding Square's lending capabilities, and could become a bigger part of the business.