Square (NYSE:SQ) announced recently that it’s obtained an industrial banking charter. Investors may be wondering what this means for the company and why it made this move. On a Fool Live episode recorded on March 3, Fool contributors Matt Frankel and Brian Withers dive into what a banking charter means for the payment processor today and in the future.
Brian Withers: And Matt, they had this little announcement that I wanted to ask you about. They said they’re beginning banking operations. What’s that all about?
Matthew Frankel: Square applied for a banking charter. It’s called an industrial banking charter. That essentially means you’re some sort of niche lender. If you’ve heard of private student loan company Sallie Mae [SLM], their bank is considered an industrial bank. BMW‘s financing division is considered an industrial bank, pretty much a niche lender. Square has its Square Capital business lending division, and until this point, since Square was not a bank, they had to partner with a third-party bank that acts as a middleman.
Now that Square has been approved for its banking charter, it’s set up in Utah, which is where most industrial banks are located just because of the way the regulations work there. They can now facilitate their own loans and not have to… [they’ve] cut out the middleman.
Initially, at least, this isn’t going to be a big needle for the company. They’re going to save some of the money that they would have kicked to the third-party bank, but really, the long-term implications are the story here. This can allow Square to scale its lending operations and its financial services it provides to customers over time. If it wants to offer interest-bearing deposit accounts, it potentially doesn’t need a third-party banking partner now.
It’s really more of a long-term growth story than anything. Square itself said that it’s not really going to be a material impact in 2021. So it’s more of a longer-term story. I cannot talk about Square enough. One of my longest-held positions, the first stock I ever bought right after its IPO. I just couldn’t believe that I could go to my local craft market and not have to stop at the ATM first. That was my initial investment thesis in Square, was that, for years and years I had to make an ATM stop, and now I didn’t.
So I really like Square going forward. It’s one of my favorite stocks and it’s grown into one of the biggest stocks I own and I don’t plan on selling any of it.
Withers: Square’s my third largest at 8 1/2 percent and I love it when companies do these things, like this banking charter, that it doesn’t have any obvious ramifications today, but it’s certainly going to help stabilize and solidify their ecosystem over time. They’re just smart management and a great, great product that’s going to continue to be valuable long into the future.
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