ILC freeze breaks with federal approvals for Square, Nelnet

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WASHINGTON — The marathon quest by two companies to get federal approval for their industrial loan companies finally ended this week with the Federal Deposit Insurance Corp. signing off on charters for the small-business payments giant Square and Nelnet, a student loan servicer.

The FDIC announced the approvals one day after releasing a proposal Tuesday to codify the agency’s requirements and procedures for companies to receive an industrial bank charter.

The decisions signal a potential thaw in FDIC rulings on new ILCs following years of controversy over the specialized charter, which gives banking access to non-traditional parent firms and allows them to sidestep bank holding company regulation. The last time the FDIC had approved an ILC application was in June 2008.

The ILC charter approval for Square — which had drawn opposition from community bankers and consumer advocates — in particular highlights a path other leading fintech firms could attempt if they are interested in operating banks.

Square, originally launched in 2009 by Twitter CEO Jack Dorsey as a payments provider for small businesses, will use the ILC to originate commercial loans to their payments customers.
Square, originally launched in 2009 by Twitter CEO Jack Dorsey as a payments provider for small businesses, will use the ILC to originate commercial loans to their payments customers.

“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,” said Jacqueline Reses, who leads Square Capital and is executive chairwoman of the ILC, which will be called Square Financial Services. “We’re now focused on the work ahead to build out Square Financial Services and open our bank to small business customers.”

Yet the two approved applications represent distinct approaches to the industrial bank charter.

Square, originally launched in 2009 by Twitter CEO Jack Dorsey as a payments provider for small businesses, will use the ILC to originate commercial loans to their payments customers. Nelnet, a student loan servicer, will now originate its own educational loans along with other consumer loans. Both ILCs will be based in Utah.

The FDIC approved the charters despite pleas from some lawmakers, consumer groups and even bank lobbyists for the agency to wait until after it finalizes its proposed rule for all ILC applicants. Moving forward, the FDIC could face more opposition on still-pending applications.

Still, FDIC Chair Jelena McWilliams said in a statement that both Square and Nelnet’s industrial banks will be required to have capital levels “significantly higher than typical FDIC-insured banks.”

"FDIC staff found that Square satisfied each of the statutory factors required for approval, subject to certain conditions," she said.

Square Financial Services will be required to have an initial capital level of $56 million, with a minimum leverage ratio of 20%. For Nelnet, the industrial bank will require capital levels of $100 million with a minimum leverage ratio of 12%.

The rulings are sure to generate controversy in the U.S. banking world, which has long blasted the industrial bank charter as a back door for commercial entities to enter the financial system. Walmart's bid to charter an ILC before the financial crisis united banks and others in opposition, leading the retail giant to withdraw. (Both Square and Nelnet are considered financial companies.)

Rebecca Borné, senior policy counsel for the Center for Responsible Lending, accused the FDIC of creating “a pathway for loosely regulated online lenders to evade state interest rate caps and circumvent consumer protections."

"Making it easier for lenders to ignore state usury laws is bad for consumers and for states that want to keep predatory lending out of their markets,” she said.

FDIC board member Martin Gruenberg voted against the approval of Square’s industrial bank, writing that its parent company “has failed to demonstrate profitability over a ten-year life during a largely favorable economic environment” and would “not meet the statutory financial source of strength requirement.”

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FDIC Jelena McWilliams ILCs Square Nelnet Fintech regulations Licenses and charters
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