Square Banking - Challenger Bank to Challenger Banks
10 min read

Square Banking - Challenger Bank to Challenger Banks

Square Inc (Payments Processor) has launched Savings and Checking Accounts.  While this statement may sound too mundane, it has a lot of meaning in the eyes of the businesses that use Square Payments for accepting their digital payments.

Square is a leading payment processor which empowers more than 2 million businesses accept payments (cash of digital).  While it may sound counter intuitive for a fintech (btw this has happened twice in July, once in US with Square and another in India with BharatPe [which also is into small business payment processing] getting an in principle nod to start a bank) to launch a Bank when you are already doing what a Bank does in parts (even better) i.e. facilitating payments and providing loans (Amazon Pay is also doing the same and has no plans to setup a bank for its sellers).

The real advantage of launching a full fledged bank (or rather offering deposit products) is the availability of cheaper capital (ROI of debt would generally be around 8-15% vs that of a deposit at around 0-2%).  In absence of this cheaper capital, the interest margin would have been around 3-5% (ROI of 12-20%).  With the cheaper capital available the interest margin goes up, deposit yield can also be bumped up (to attract even more capital) and borrower ROI can go down to make it more affordable (since all of this is happening in a closed loop ecosystem the funds will keep moving in a cycle i.e. deposits will come in > funds will be lent out > recoveries will be made and > depositors will be paid back).

But all of this is on its face, how does this even compare to a full fledged bank or even a challenger bank.  This is where the entire Square ecosystem comes together which includes Cash App (a P2P payments app under the Square Payments Umbrella).

Square Business Model

Traditional Bank Business Model

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