Square, the Silicon Valley payment processor that is at the center of the fight over the tech industry’s ambitions in banking, is firing back at its small-bank critics, while also taking steps to placate community activists.

Advocacy groups that once expressed concern about the adequacy of Square's plan to satisfy its obligations to low- and middle-income customers are now sounding more supportive of the fintech's bid to open a bank. The more unyielding opposition is coming from the Independent Community Bankers of America, which is concerned about the precedent that Square’s application for a bank charter could set for voracious tech giants such as Amazon.

Jacqueline D. Reses
“A full bank charter isn’t appropriate for Square," said Jacqueline Reses, the fintech's head of small-business lending.

Jacqueline Reses, who heads Square’s small-business lending unit, pushed back against the small banks' objections. She noted that Internet behemoths like Amazon and Facebook have never even expressed interest in getting a banking license.

“Frankly we’re speculating about things that nobody’s even mentioned they have any intent to do,” she said in an interview. She added that if the tech giants were to seek bank charters, their applications would have to be evaluated on their merits.

The proposed bank, Square Financial Services, would operate as an industrial loan company, a relatively uncommon charter type has been used by commercial firms like the Minneapolis-based retailer Target and the German automaker BMW.

That’s not by choice, but rather by necessity, according to Reses. She said that Square, which is best known for the slim payment card readers used by its small-business customers, is not eligible for other bank charters.

“Our purpose is to offer business loans to small businesses, and the rest of Square offers hardware and software products that are very different than any other license would enable,” Reses said. “A full bank charter isn’t appropriate for Square, because we do have other predominant lines of business that are not products and services that require a banking license.”

Square currently offers loans as small as $500 to its business customers under a partnership with Celtic Bank in Utah. A banking license would remove the middleman, and it would also enable Square to start accepting deposits.

Some of the pushback against Square’s move into banking has come from community reinvestment activists, and the company has been working to address their concerns.

Earlier this fall, Square met with officials from the National Community Reinvestment Coalition, and they came away impressed by the company’s commitment to serving businesses that typically have trouble accessing credit. Square conducted a survey of 7,000 of its borrowers in January, which found that 54% of them were owned by women, and 37% were owned by minorities.

“Looking at this company and its origins and who the leadership is, it gives one hope that this company is going to do the right thing,” said John Taylor, president and CEO of the National Community Reinvestment Coalition.

The activists’ concerns have not yet been fully resolved. For example, Square is proposing that its Community Reinvestment Act assessment should focus on the Salt Lake City area, where its bank would be headquartered, but Taylor argues that is too narrow a focus for a national lending business.

A Square spokesperson said in an email that the company takes a broad approach to thinking about how to support small businesses.

"Our purpose of economic empowerment drives us to continuously search for ways to serve the underserved, and we look forward to continued dialogue with organizations interested in our efforts," the spokesperson said.

Another issue that activists have raised with Square involves the terms of the company’s loans. Square requires borrowers to pay back a fixed percentage of their card sales until the loan has been repaid, which makes it impossible to calculate an interest rate upfront.

Still, the stiffer opposition to Square’s application is coming from the ICBA, which has not met with the company’s officials in recent months.

Square’s bank would be supervised by the Federal Deposit Insurance Corp., which will also decide the application’s fate. The charter that the company is seeking provides an exemption from the Bank Holding Company Act, a law that typically subjects banks’ parent companies to the Federal Reserve's supervision.

Square maintains that the FDIC provides robust supervision. ”I don’t think that an ILC circumvents any oversight and regulation,” Reses said.

But Christoper Cole, senior regulatory counsel at the ICBA, argued that Square is looking to exploit a legal loophole. “And so in the process of doing that, they will be subject to a different set of regulations than all of our members are subject to,” he said.

Cole argued that it would be difficult for the FDIC to examine any large commercial firm that owns an industrial bank. The ICBA has called on the agency to impose a two-year moratorium on its approval of deposit insurance applications for industrial banks, which would block Square’s path.

“This is no criticism of the FDIC,” he added. “They are a very competent regulator.”

The trade group, which represents thousand of small banks across the country, is also concerned that after Square gets a banking license, it will morph into a much bigger, more diversified company. So Square has emerged as a stand-in for bankers’ fears about Amazon, Facebook and the like.

Square was started in 2009 by Twitter co-founder Jack Dorsey, who currently serves as the CEO of both companies. In recent years, Square has moved beyond its roots as a payment processor, branching into person-to-person payments with the popular Square Cash app. The company has also expanded internationally, with operations in the United Kingdom, Canada, Japan and Australia.

Today, Square boasts a market capitalization of $14.4 billion, which is tiny compared to tech industry titans, but comparable to the midsize banking companies Ally Financial and Huntington Bancshares.

“When I look at Square, I see a company that wants to be as large as Amazon, that wants to be as large as Google,” Cole said. “And so far they’ve been very successful.”

Square offers a very different narrative about itself — one that casts the company in the role of champion for the underdog.

“We think a lot about success stories of entrepreneurs, starting from a food truck to a restaurant, starting from a pizza shop to a pizza chain,” Reses said.

Square’s average loan size is just $6,000, and its business customers are often so small that their only alternative would be to borrow from friends or relatives. Square argues that it can responsibly lend to these micro-businesses because it processes their payments, generating data that provides great insight into their daily cash flow.

“We create that dynamic where they can grow and become flourishing, larger businesses that help support broader entities like community banks,” Reses said.

Square filed its application for an industrial loan charter in September. Reses said she expects the FDIC’s review to last more than a year.

“It is a very, very rigorous process that includes both on-site reviews and hundreds of pages of documents,” Reses said. “And so on the merits of our application, they will make the decision. And I think that’s the way the FDIC should look at it."

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