Will Square's banking ambitions be curbed by Fiserv-First Data?

Banks certainly have a bone to pick with big fintechs like Fiserv and First Data, but the merger deal between the two companies could help banks address another competitive threat: Square.

Square has been offering more banklike services, including business loans. Its plan to obtain a bank charter threatens traditional banks the same way its mobile point-of-sale business disrupted merchant acquiring. As if on cue Thursday, Square announced a new debit card for business owners that acts as a default bank account but is not federally insured.

The intersection between Square's strategy and Fiserv's is at the tablet-based point of sale, an increasingly complex and full-featured offering that Square and other point-of-sale fintechs use as launching point to offer capital. As Square expands, there Is a clear opportunity for it to provide other banking services to its merchant base.

A major benefit of Fiserv’s agreement to buy First Data is the subsidiary Clover, whose tablet-based point-of-sale system could be every bit as vital to Fiserv's strategy as the Venmo mobile person-to-person payments app became to PayPal as part of PayPal's purchase of Braintree.

Square officials declined to comment for this story, but Fiserv CEO Jeffery Yabuki certainly fueled speculation about the prospect of a clash between Fiserv and Square.

Fiserv's addition of Clover could potentially benefit community banks, Yabuki said during a conference call to discuss the Fiserv-First Data deal announced this week.

“A lot of banks especially in the community spaces are worried about companies like Square,” Yabuki said during the call. “What do you do when Square has a rapidly growing point-of-sale lending business that's going to take money out of the revenue line of the banks?”

“We think Clover is a great opportunity … for community financial institutions to fight back on the front," Yabuki said.

First Data bought Clover in 2012 as a way to compete with Square. Observers see long-term potential for the Clover business.

“The unification of Fiserv’s small and midsize bank customer base with First Data’s SMB-focused Clover line creates the basis for a compelling merchant services distribution model that should help Fiserv’s bank customers more effectively respond to the threat posed by Square,” Jordan McKee, research director for customer experience, commerce and retail payments at 451 Research, told American Banker in an email.

“Of course, this opportunity won’t fully be realized until the integration challenges of uniting two industry behemoths are overcome,” McKee said.

Fiserv expects the deal to to be completed in the second half of this year.

The integration challenges McKee mentioned might make small banks and credit unions skeptical of Fiserv’s future ability to service them efficiently. Those institutions are frustrated with major core providers, arguing they are not moving fast enough to allow small banks to meet consumers' heightened digital expectations.

That shortcoming has pushed small-business customers to seek more modernized lending services from fintechs such as Square.

A Fiserv executive recently acknowledged the challenges smaller institutions face in updating their technology.

“I’m very sympathetic to the fact that everyone feels like we have to move faster,” Byron Vielehr, Fiserv’s chief administrative officer, said in an interview late in 2018. “We hear that message. We’ve been accelerating the rate of advancing our products the last few years.”

Bryce VanDiver, a partner at the global business and technology consultancy Capco, said Fiserv has the ability now to take advantage of its bank partnerships to position Clover as another value-added feature.

“Fiserv is servicing these banks with less than $50 billion in assets that don’t have large IT shops, or don’t rely on outsourced or hosted solutions from third parties,” said VanDiver. “These banks will have small-business customers coming in to ask about different services, maybe mobile payments, and now they have something additional they can point to in Clover.”

The San Francisco-based Square has found strong success servicing small and midsize businesses, especially through its lending division — Square Capital has extended over $3.5 billion in loans to more than 200,000 merchants since 2014, the company says. Square last month made another bid for a bank charter after it withdrew a previously filed application earlier in 2018.

Square presents a major competitive challenge to banks, VanDiver said.

“Look at the evolution of the Square business model, originally designed as a cost-effective alternative for the SMB market: As adoption rate grew, they successfully acquired higher-volume sellers, which is where your cross-selling opportunities exist with merchant acquirers,” VanDiver said.