The Federal Deposit Insurance Corp. (FDIC) approved the deposit insurance applications of fintech Square and student loan servicer Nelnet on Wednesday, allowing the companies to operate their own banks as industrial loan companies (ILCs).
The two approvals come a day after the regulator issued a notice of proposed rulemaking to codify the standards it says it already applies to ILCs, such as confirmation of financial backing from the parent company and recordkeeping and reporting requirements, among others. "This proposal would ensure that parent companies serve as a source of strength for their industrial bank subsidiaries," FDIC Chair Jelena McWilliams said in a statement. "By codifying these requirements, the proposal would enhance transparency and provide important protections for the Deposit Insurance Fund."
- ILCs are financial institutions owned by commercial firms that are not regulated by a federal banking agency. Their structure has received widespread criticism from bank trade groups, which argue the lack of oversight is a consumer safety issue.
For Square, the green light from the FDIC caps off the San Francisco-based fintech’s two-and-a-half-year journey to establish its own bank.
Square first filed an application in September 2017 before withdrawing it a few months later, and refiling in December 2018.
"We appreciate the FDIC’s thoughtful approach to our application, and their recognition that Square Capital is uniquely positioned to build a bridge between the financial system and the underserved," Jacqueline Reses, capital lead at Square and executive chairwoman of the board of directors for Square Financial Services, said in a statement. "We’re now focused on the work ahead to build out Square Financial Services and open our bank to small business customers."
Square said its bank, Square Financial Services, is expected to launch in 2021 and operate independently, as a direct subsidiary of Square. The company said its primary purpose will be to offer small-business loans for Square Capital’s commercial lending business, and to offer deposit products.
Not all FDIC board members stood in favor of Square’s application. Martin Gruenberg voted against it.
"Square has yet to demonstrate its viability during a downturn in the economic cycle," Gruenberg said in a statement. "In fact, it has failed to demonstrate its viability during the upside of an economic cycle."
As the nation deals with a potential financial crisis brought on by the coronavirus pandemic, some are questioning the timing of the FDIC’s latest moves.
"Even in good times, the industrial loan charter raises policy issues that remain unaddressed since 2008," Graham Steele, director of corporations and society initiative at Stanford Graduate School of Business, told Banking Dive. "The FDIC's decision to approve these applications at a time when we are exposed to the risk of another great recession, and all eyes are on the COVID-19 pandemic, is all the more troubling."
The former Federal Reserve Bank of San Francisco staff member and minority chief counsel for the Senate Committee Banking Committee said the actions send the message that industrial bank charter applications "have a friendly audience at this FDIC."
House Financial Services Committee Chairwoman Maxine Waters, D-CA, asked the FDIC in a letter Friday to hold off on approving any new ILCs until after it finalized its new rule, also calling attention to the timing amid the coronavirus pandemic.
The recent ILC approvals are bound to usher in more scrutiny from the banking establishment, which have called the model’s lack of oversight a consumer safety issue.
"The ILC loophole in the Bank Holding Company Act allows commercial interests to own full-service banks, avoid consolidated supervision, and threaten the financial system," Independent Community Bankers of America (ICBA) President and CEO Rebeca Romero Rainey said in a statement, adding the trade group is "extremely concerned" with Square and Nelnet's recent ILC approvals. "Conditions imposed by the FDIC, whether in the approvals or the proposed rule, are insufficient to alleviate these concerns."
Like Waters, the trade group also called on the FDIC to refrain from approving any additional deposit insurance applications submitted by ILCs until the regulator’s proposed rulemaking is finalized.
Rainey also called attention to a bill introduced by Sen. John Kennedy, R-LA, in November, which would halt nonfinancial companies' ability to establish ILCs.
"[T]he Eliminating Corporate Shadow Banking Act of 2019 would support a safe and sound financial system, level the regulatory playing field between ILCs and community banks, and maintain the important separation of banking and commerce," she said.
Several companies with pending ILC applications at the FDIC include Japanese e-commerce site Rakuten which filed its application in July, and commercial equipment finance company GreatAmerica Financial Services Corp., which submitted its bid March 5.