The company suggests Square’s banking products — which have no account fees, minimum deposits or balance requirements — can help Square merchants better manage their flow of funds. The savings accounts will carry a 0.5% annual percentage yield (APY). Meanwhile, Square Lending, a rebranding of Square Capital, will continue to offer loans to sellers through the capabilities of the in-house bank.
“By bringing banking services to the point of sale, we’re able to give sellers instant access to their sales, the ability to automate their savings by putting aside a percentage of each sale they make, and proactive loan offers that are based on their sales and potential rather than their personal credit history,” Christina Riechers, head of product at Square Banking, told Banking Dive.
Square’s banking offerings are an extension of its growing suite of money-management tools for sellers, including a debit card it rolled out in 2019, and Square Capital loans that were launched in 2014. The debit card, which included a Federal Deposit Insurance Corp. (FDIC)-insured checking account in partnership with Sutton Bank, offered instant access to card sales processed through Square.
The money-management tools connected to Square's checking account resemble those of many neobanks: the ability to automatically save a portion of each sale and direct savings toward specific priorities, including tax obligations.
Riechers said the banking product roadmap was “heavily influenced” by what the company heard from sellers who used the debit card, which saw 140% growth between 2019 and 2020.
“As more sellers adopted the Square Debit Card to have instant access to their funds, we saw many sellers begin to treat their stored balance with Square as their primary home for business finances,” Riechers said.
As Square’s merchant customers use its various payment and inventory management tools, the banking products will help keep sellers in Square’s ecosystem and offer a rich source of data from which to suggest other products, including “proactive loans.”
“[With banking], Square gets to maintain and own that entire relationship in a way that they did not previously,” said John Popeo, a partner at bank consultancy The Gallatin Group. “That's going to give them a leg up on their competitors and also enable them to capture more data and more information.”
Square was granted an industrial loan company (ILC) charter in March 2020. By operating through an ILC charter, Square retains an advantage over banks and fintechs that offer business banking products. Industrial banks are state-chartered, federally insured depository institutions that are subject to supervision by the FDIC and the applicable state regulator. Therefore, compared to traditional banks, Square, with its ILC charter, only needs to answer to two regulators, reducing its compliance cost, Popeo said.
With its ILC charter, Square can originate small-business loans without having to go through a partner. Another advantage Square’s bank, Square Financial Services, has is that it can engage in commercial activities — with some limitations. The FDIC in December approved a final rule giving the agency authority to examine the parent holding company — subject to written agreement — and review the scope of commercial activities that may affect the subsidiary ILC.
“Their parent holding company can engage in commercial activities where they might otherwise be precluded from doing so under the Bank Holding Company Act,” Popeo said. “The [FDIC] rule clarifies existing precedent to require prior FDIC approval for certain changes at the ILC level in a way that somewhat levels the playing field between ILCs and traditional banks.”
Having a banking charter also insulates Square from competition from fintechs and e-commerce platforms that offer banking and other financial services, analysts said. One company that plays in a similar field is online-to-offline commerce platform Shopify, which offers seller loans and a seller banking product called Shopify Balance.
“[Square] really has the ability to expand its capabilities without the need to partner,” said Gilles Ubaghs, a senior analyst at Aite Group. “Shopify, by contrast, works with a number of partners for both payments and broader financial services, meaning it can't be as vertically integrated.”
Ubaghs said Square has carved a niche with micro-sellers who often use Square’s physical point-of-sale devices as a gateway to other product offerings.
“Square’s big advantage here over the competition is that they have a strong foothold amongst smaller-scale micro merchants, and a much stronger position when it comes to physical point-of-sale environments,” he said.
Riechers said the product offerings were crafted with Square sellers in mind. The company is pitching the simplicity and integration of Square’s banking products with other Square seller tools as a selling point.
“Square Checking and Square Savings can be used by any small business that signs up for Square, [but] the products are most magical when they use Square for payments, given the automated savings and instant access to funds,” she said.
Ronak Doshi, vice president at research and advisory firm Everest Group, said Square’s foray into checking and savings accounts makes sense as a way to lower the cost of customer acquisition and drive higher customer lifetime value.
While the company is focusing on direct customers, it doesn’t close the door to business-to-business (B2B) opportunities, Ubaghs said.
“[Square], in theory, could expand into the broader B2B space,” he said. “Commercial cards, in general, are on the rise, and lots of businesses are turning to new providers even where they have less of a traditional card acceptance or point-of-sale environment.”
But as Square operates as a bank and delves deeper into crypto, there may be some reputational risks to manage, Popeo said.
In a tweet last week, Square CEO Jack Dorsey said the company is creating a new business “focused on building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless, and decentralized financial services.” The primary focus of the unit, as yet going by the name TBD, will be Bitcoin, Dorsey said.
“They've done a very good job of managing those reputational concerns, but I think as we move forward and regulators are exploring [oversight] of stablecoins and inner workings of cryptocurrencies, I'm very curious to see how Square continues to navigate the opportunity afforded [to] them — not only with respect to Bitcoin but with respect to other cryptocurrencies."