• Square officially brings small business banking in-house.
  • Its new industrial bank could leverage its vast merchant network and data capabilities to establish Square as a significant threat to incumbents.
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The fintech, which provides point-of-sale payment and credit solutions to small and medium-sized businesses (SMBs), opened the doors to its highly anticipated industrial bank.

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Square fires up its business bank, and incumbents can feel the burn.

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It will initially just offer its existing lending product, with plans to expand into more business loan and deposit offerings in the future. Square’s journey began in 2017 and culminated with regulatory approval to become an industrial bank last March. It will operate the new entity as an independently governed subsidiary under the name Square Financial Services.

The fintech’s existing merchant base is a vast resource it can leverage to take market share from less agile incumbents. Insider Intelligence details two key advantages Square’s established base could provide:

  • It serves as a low-cost access point for Square to acquire new banking customers. Square already supports at least 2 million merchants globally and is one of the most-used business platforms by SMBs. Its network immediately provides a wide audience to which it can upsell its new platform. Given that Square is starting with a lending product that is already known to most of its sellers, it may not need to spend as much time or money raising their awareness of Square Financial Services—freeing up more resources to utilize for attracting customers beyond its current base.
  • Square can generate insights from data it has gathered from sellers. It already uses machine learning to analyze transaction data, which will only continue to improve its underwriting ability as more data is fed into the model. Conversely, incumbents have struggled to apply the risk frameworks that underpin their large business or individual credit solutions to SMBs—typically relying on less pertinent data points like a founder’s credit score. It’s no surprise then that over half of US SMBs whose credit risk is deemed medium or high (as determined by their business or personal credit score) would turn to online lenders that are better equipped to assess their financial health. As Square continues to broaden its business and banking offerings to SMBs worldwide, access to its existing trove of data—including information on payroll and invoices—could give its lending operation a big leg up right out of the gate.

Square has an early mover advantage among fintechs in the competitive small business banking space, but it still faces significant threats. For example, American Express-owned alt lender Kabbage is planning to relaunch as a one-stop shop for small businesses in the next several months.

Like Square, it is expected to offer business loan and deposit products, and utilizes machine learning to streamline its underwriting process. Brex, a corporate card and rewards fintech, has followed Square’s lead and applied to establish an industrial bank. Its customer base is more specialized—mainly helping tech and life sciences companies—but becoming a reliable provider in that area could still eat into Square’s total market share.

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