SAN FRANCISCO, Feb. 25, 2019 – A letter sent to the Federal Deposit Insurance Corporation (FDIC) by 37 community-based organizations charges that granting fintech credit card processing company Square a bank charter as an Industrial Loan Company would undermine the Community Reinvestment Act, allow Square to preempt local regulations, and set a terrible precedent by giving a green light to other fintech firms who want to get around their responsibilities to local communities and borrowers.

“‘Move fast and break things’ may be the Silicon Valley way, but American communities don’t need anymore breaking by big banks,” said Paulina Gonzalez-Brito, Executive Director of the California Reinvestment Coalition. “Since the rise of the internet, e-commerce billionaires like Square’s owners have tried to wriggle out of the obligations that businesses have to local communities. Giving Square a bank charter in Salt Lake City would be like hanging a flag of convenience on a rusted-out oil tanker so it doesn’t have to follow environmental laws.”

Currently, Square operates not as a bank but as a “state-licensed lender.” This requires the company to follow the laws and regulations of every state in which it does business. California, for example, will soon require heightened transparency around Annual Percentage Rate (APR) disclosures for small business loans. If granted an Industrial Loan Charter, the company could ignore requirements to invest in its customers’ communities or to disclose the APRs that California small business borrowers will pay on loans.

Square’s plan is to win an ILC charter and locate their bank headquarters in Salt Lake City, Utah, hundreds of miles from the California communities which supported their rise and where many of their customers live. The signatories’ concern is that, having no physical branches and conducting business exclusively online, Square might only be required to make modest local community reinvestments in a single city. Acting as a bank, Square could replace costly loan funds from outside investors with customer deposits as a cheap source of money to fund its small business lending.

Square’s plan will have an adverse impact in rural communities and on populations underserved by traditional financial institutions,” said Tate Hill of Fresno’s Access Plus Capital. “Will Square offer loans in the Central Valley? If so, will they disclose APRs and other terms and conditions? Will they take profits from our communities and reinvest anything there? The FDIC must slow the process down and hold hearings in Fresno so that communities can get answers to these questions.”

Other problems remain with Square’s application.

  • Square conceals APR information from loan applicants, making it impossible for customers to comparison shop

  • Square does not report loan repayments to credit bureaus, so customers can’t improve their credit scores and qualify for cheaper loans

  • Fintech algorithms, though portrayed as ‘objective’, often wind up discriminating against borrowers of color, and Square will not commit to an independent and public fair lending audit of its operations

  • Square’s use of “Big Data” threatens bank customers’ privacy

These concerns make it critical that Square’s application for a bank charter not be considered until it answers questions from the public and commits to an appropriate community reinvestment plan. The signatories of the letter have requested that the FDIC reject Square’s application, extend the comment period and conduct public hearings in San Francisco and Fresno.

Square seems to be trying to get around the Community Reinvestment Act and dodge its responsibility to serve communities of color and low-income neighborhoods,” said Sharon Velasquez, Senior Economic Equity Program Manager at The Greenlining Institute, a co-signer of the letter. “Approving this application as-is could set off a regulatory race to the bottom for fintech companies.”

The full list of signatories can be found at this link.