Square: An Increasingly Strong Player in Financial Services

Jim Marous:
Hello, and welcome to Banking Transformed. I'm your host, Jim Marous, owner and CEO of The Digital Bank Report and co-publisher of The Financial Brand.

Jim Marous:
In March of this year Square Financial Services officially launched its bank after receiving its industrial loan corporation license from the FDIC a year prior. The Salt Lake City Bank is owned by Square, a fintech worth more than all but four US banks according to the KBW Bank Index. Square Financial Services will offer services like deposits and other products initially to service a nationwide network of small businesses, many who already operate in the Square payment processing platform.

Jim Marous:
I'm excited to have Square Financial Services CEO, Lew Goodwin, on the Banking Transformed podcast. He will discuss the strategy behind building a bank to serve small businesses and the challenges facing fintech players in North America.

Jim Marous:
Historically, Square has been best known for its card reader and point of sale payment solution used largely by small businesses, but it's also facilitated credit for entrepreneurs and small businesses that have used its products. The formation of this new bank gives Square the ability to directly provide access to loans and banking tools for the underserved populations. So, Lew, I think we met each other, oh my gosh, several years ago in Phoenix when you were at GoBank, and now you're at Square Financial Services, so it's great to finally have you on the Banking Transformed podcast.

Jim Marous:
It's interesting, because while there's differences obviously between GoBank and Square there are a lot of similarities, in that you're serving underserved populations both in the consumer and now in the small business area. So how has your role at Square Financial Services really different than what you were doing at GoBank?

Lew Goodwin:
First of all, thank you, Jim, and thank you for inviting me to participate on Banking Transformed, which it's a pleasure to be with you and your loyal followers today.

Jim Marous:
Thank you.

Lew Goodwin:
The similarities of GoBank, as you mentioned, it was truly a pioneer in the digital bank account, actually giving cards to consumers that were underbanked and really overlooked. When I look at Square Financial Services we do much the same thing, and that is looking and helping small businesses come into the banking system, where before it was very hard for them to enter and really fully participate in the banking system.

Lew Goodwin:
If I look at Square and Square Financial, we service really small businesses, a lot of which are sole proprietors, and we're able to offer them as we've gone forward a full suite of financial products and services, so I think that that's the similarities and what we're doing today at Square.

Jim Marous:
It's interesting, because over the past several years we've seen fintech firms increasingly offer product and services that were traditionally provided just by traditional banks, but Square is certainly a technology firm that offers a broader array of financial services.

Jim Marous:
When you look at the marketplace right now, what organic advantages does Square have in the marketplace, especially when you're running against not only traditional banks, but against a lot of big tech firms that are even bigger than Square?

Lew Goodwin:
As I look at Square and Square Financial, Square's mission is firmly focused on economic empowerment. That's how we began, that's what our purpose has been, and truly everyone at Square is committed to easing the pain points for our customers or our sellers.

Lew Goodwin:
So we're always looking at ways that we can help them provide and be the business that they have worked their whole life to get to. We've been able to provide them with the tools to, first, actually process and process their payments for the debit cards and credit cards with only processing fees, no contracts, and we provide the hardware.

Lew Goodwin:
Then we just continued to add different products as we have seen their pain points, and that really leads to how we started Square Capital, which is now Square Loans. Over six years ago we saw that there was a huge need for businesses to have capital, and that allowed us to use the data that we have and collect in a way to provide small businesses credit, which they had just not had the opportunity for previously.

Jim Marous:
Going back a little bit in the discussion, Square Financial Services got a license as an industrial bank. What is the difference between getting licensed as an industrial bank as opposed to a traditional banking license?

Lew Goodwin:
First of all, I would qualifying for any banking license today demonstrates a strong commitment from the participant and the applicant. If you look at the entry requirements they are demanding, and they should be. If you look at what a regulator has to do, they have to be able to keep a high standard to make sure that the barrier to entry brings in strong players, because if you can't trust the banking institution I think that you really have a big failure in society.

Lew Goodwin:
If you allow people in that aren't committed to serving the customer and being compliant and safe and sound, then that's not a good thing for anybody in the ecosystem.

Lew Goodwin:
But even more so, obtaining a license as an IOC or an industrial bank is even higher, because the companies that are mainly looking at getting into an industrial bank are non-traditional in nature. They, as you mentioned, have a specific product or they have a very focused business plan, and they don't have the traditional look of a financial institution.

Lew Goodwin:
So if you look at our charter, we were the first fintech to be granted an industrial charter, and really one of two entities that have been granted an IOC in the past 13 years, so it is a high bar, and again, it should be.

Lew Goodwin:
I'll say one other thing that's I think interesting here is that the regulatory landscape I think is less of a challenge and more of an opportunity, because as we look over the past decade and then recently at Square Financial Services, being a financial institution and industrial bank gives us a seat at the table. It gives us the ability to help regulators understand the day-to-day struggles of small businesses and what it takes to work their cash flow, to go through what they have to do to have lending opportunities or opportunities in the marketplace in general.

Lew Goodwin:
So I think that we can help regulators understand throughout the entire cycle how small businesses and what their needs are and how they can perform.

Jim Marous:
Does the IOC designation, the license from the IOC, allow you to get into consumer services for consumers as well or... I mean financial services for consumers as well? Are you pretty much regulated to just stay within the small business segment?

Lew Goodwin:
No. The industrial charter is very much like a traditional bank charter. There are very few limitations, so it certainly allows entrance into the consumer space as well as the small business space, and we've chosen to focus on the small business space as we've entered into our de novo period.

Jim Marous:
It's interesting, because obviously small businesses are people too, but the possibilities of serving other underserved market segments while they have been attacked by other fintech companies, is this something that may be on the horizon for Square Financial Services?

Lew Goodwin:
We certainly have a full plate now with what we've got. Again, during our de novo period I think it's important that the regulators get comfortable with how we do business and how Square does business and how Square supports us to be a strong institution and a compliant institution, but I think there's a lot of opportunities as we look forward.

Jim Marous:
Yeah. I often mention my continued dissatisfaction with my traditional business bank. They do the basics really well, there's no argument there. They're local, they're convenient, all that, but they have a difficult time showing me that they understand me, my business, my customers, or even my banking needs. In fact, many times they mis-target me with offers for things I already have, all these different dynamics, and really it's based on information collected.

Jim Marous:
If they use the insights and data that they have available they could do a much better job serving me. The company I use now for a lot of my banking transactions knows everything about me, just like Square does. You have the ability to collect information from the merchants. Does this provide you with an upper hand when in competition with traditional banks and credit unions as far as being able to actually serve their needs based on what you see in transactions?

Lew Goodwin:
I think it's a great observation, Jim. I think it's important that we collect a lot of information about the merchants and about the sellers, and we try to utilize that to benefit them. That's been the basis of how we've been able to underwrite them and also understand their needs and the timing of those needs, so those are all important pieces that really help differentiate Square, as you said.

Jim Marous:
It's interesting, because what's interesting from my dynamic is that if you're able to track their sales through their devices and what their needs are overall you can reach out to them with services sometimes before they even know they need it.

Jim Marous:
I often reference my trip to Shenzhen, China in early 2020, when I was able to visit WeBank, Alibaba and Pinyin. Their marketplace advantage was being able to use alternative data, transaction data, information from how people use their mobile device, other outside data that is not often accessed, to serve underserved segments.

Jim Marous:
Is this really the strategy behind Square Financial, that you don't need to take just normal financial reports, but you really are looking at transactions and flow of cash and things of that nature?

Lew Goodwin:
Yeah. First of all, the trip to China sounds like it was an amazing discovery of banking and finance, the nature of finance in Asia.

Lew Goodwin:
I totally agree that alternative data when used in an unbiased way can be very helpful in helping the customer make it through their journey. They are focused on their business, and if we can help them focus on their business by providing the opportunities for banking services, for financial services that benefit them, then that's one less thing that they have to concern themselves with when they're trying to conduct their business.

Jim Marous:
How do you see the power of AI assisting in the growth and servicing capability of Square Financial Services?

Lew Goodwin:
AI and machine learning is really the basis for what we do at Square Financial Services, because we don't underwrite traditionally, so we are always updating the data. Our data is virtually real time. We understand a business' strengths and trends. So that, as you alluded to, I mean AI and machine learning is just the heart of our business.

Jim Marous:
It's interesting, last year was a tough year for small businesses. I wanted to understand a little bit about how the marketplace from your perspective rebounded from the impact of the pandemic that it had on small business. What has Square learned about the resilience of the segment and the needs of small businesses compared to what you saw before the pandemic? Has it really changed all of the rules? It changed everything we knew about consumers, businesses, each other.

Jim Marous:
What did Square learn and how have you rebounded as a company, because obviously transaction buying going down, especially with small businesses, has obviously impacted your business, but what have you learned since the pandemic and what do you see in the future?

Lew Goodwin:
I think you said it best. I think what has been amazing through this whole past couple of years is the resilience of small business and what it takes to change. We at Square tried to help and do our part, where you think about some businesses and the way that they were taking payments or even conducting business was that they had to alter everything about their business plan on the fly, and it changed by the week and by the month.

Lew Goodwin:
So what we wanted to do is make sure that we provided tools for the small business that say had never taken payments outside of a face-to-face type of situation to payments that were not face-to-face, drive up, and take out and all sorts of things we had to build. And our engineers built solutions so that we could help these small businesses alter the way that they did business.

Lew Goodwin:
I think that there are so many elements that happened over the last year that are critical, and a lot of that relates to the timeliness of the PPP program and government support, because that happened at a time when everybody was uncertain, and I think it was just such an important piece of the puzzle to allow businesses to change and to alter the way that they did business.

Lew Goodwin:
Ultimately we've seen processing return in a very strong way. There are certainly small geographies or segments that are recovering slower, but I would say overall it's just been amazing to see the perseverance of the small businesses.

Lew Goodwin:
Again, we have seen a down credit cycle, where things changed in a very strong stress scenario, and they have come out and we have learned and come out much stronger I believe.

Jim Marous:
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Jim Marous:
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Jim Marous:
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Jim Marous:
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Jim Marous:
Welcome back. I'm joined today by Lew Goodwin, CEO of Square Financial Services. We've been discussing the strategy behind the formation of Square Financial Services and the competitive advantage of a tech firm offering financial services as opposed to a traditional bank.

Jim Marous:
Lew, one of the dynamics of Square that's very obvious is they are an extraordinarily innovative firm. You've been innovative from the very beginning, but even more so now. The rapid nature, the dynamics of change in banking, is happening so quickly, but I would say that Square is really in the forefront.

Jim Marous:
We last saw each other at the MX Forum and one of the questions we were asked, Ron Sheldon and I were asked in our debate, was which firm do you think is in the best position for success? I will admit that both Ron and I had basically the same answer, that said while there may be organizations that have deeper pocketbooks, there aren't many that match the innovative spirit and innovative nature of Square.

Jim Marous:
Why don't you tell us about how important that is to the dynamic of what you're doing at Square Financial Services, but really about the impact that you can possibly have in the marketplace when your organization is continually I wouldn't say reinventing itself, but certainly transforming yourself over time to better serve your target markets?

Lew Goodwin:
A great question, and it is so important to maybe not look at what others are doing, but focus on our ability to serve our sellers and provide a great experience while doing so, because if we don't somebody will, and I think that's been our opportunity.

Lew Goodwin:
When you look at traditional financial institutions, they do a good job at serving the masses, but they miss the edges, and the edges are very big. There are millions of people that need and really are looking for financial services, and we like to make sure that we're looking ahead at trends, at things that our sellers need, and a lot of the data we get helps us understand and identify that. But it's really anticipating the needs and having the flexibility and the strong set of engineers and data scientists to build that and to make it a reality.

Lew Goodwin:
As you've been in the financial institution world for a long time, it seemed like innovation was very slow to come about 25 years ago. Now we look at it, and Square has just been in business a little over a decade, and we've seen the evolution cycle move very quickly, and there's no reason to not expect that to accelerate going forward.

Lew Goodwin:
I think it's important that you as a provider need to really look deep and plan forward to say this is what we believe that our customers will require and want.

Jim Marous:
It's interesting, because it's one thing to be a disrupter and be on the cutting edge, to be an innovator, being a fintech, but as you've said you've been in business for a decade now. There could be a tendency for some firms, and there are tendencies for some firms, to almost become legacy mindset in a decade, because the world is changing so quickly.

Jim Marous:
One thing that Square has really been good at is staying in the forefront of change, keeping that challenger mindset, continually disrupting the marketplace.

Jim Marous:
I think a good example is recently you introduced a new set of services called Square Banking, that introduced newly designed deposit services, including both checking and savings accounts. Can you explain the services that are offered as well as the benefits of these products for small businesses?

Lew Goodwin:
Sure. You think about checking and savings accounts as being fairly mundane, but to the population of small businesses that is something that hasn't really been offered to them before. Again, a traditional bank may look at providing consumer services, but the small businesses have been again overlooked in that equation, and to really fully participate small businesses have not had access to I would say low fee or low minimum products, so they have done a lot of their transactions through their personal accounts.

Lew Goodwin:
I think what we are trying to offer is that we are offering accounts that are tailored for small businesses, allowing them to have their business transactions in these accounts and be able to separate their personal transactions.

Lew Goodwin:
When we look at a checking account or a savings account, it is just paramount that they understand the value of having say for example a savings account where they can put money and set it aside into different folders and prepare to pay their quarterly taxes or save up for that espresso machine that breaks down at a key point, and a lot of times that's what our lending takes care of, but to help a small business become self-reliant on their cash flows and understand and manage their cash flows is going to be critical for their success.

Lew Goodwin:
The better the small business, the more processing they can do, and the whole chain and value chain benefits from that.

Jim Marous:
It's interesting, I almost thought you said setting aside money for quarterly taxes, is that as a small business, and I'm a small business owner, and probably a good example of some of the businesses you're speaking of is while I have a lot of things going on, that's part of my problem, is that I'm spending a lot of time trying to keep my businesses going and I don't have the time to decide to do the basics right, the banking issues right, to understand I've had a pretty good year. How much more do I need to set aside in the future? How do I balance everything that's going on, and more importantly how does this become something that if taken off my plate but another organization can take it on?

Jim Marous:
It gets back to my frustration with my financial institution, is they provide a place to store my money really well. They provide a place where I can write checks or make payments fairly well. But the reality is by not understanding what I really need, which is I need budgeting skills, I need taxation skills, I need to understand ebbs and flows of cash... You can tell your merchants what months are going to be best for them, even though they may not know for sure based on outflows and inflows.

Jim Marous:
Again, it gets down to that whole innovation thing, but it also I think gets back to engagement. We've been talking quite a bit in the podcast around the difference between having an account and having relationships.

Jim Marous:
I think one of the things that Square seems to have down pretty well is building relationships, because you make it so that the engagement level of your merchants is very high, that they want to go and check their Square app on a regular basis and say where am I? How am I doing in my Square Banking products? Where is the flow going? What's working?

Jim Marous:
You don't stop there. You recently acquired Afterpay, a major player in the buy now, pay later marketplace. Obviously payments, deposit services, and now lending services and a buy now, pay later product shows that the marketplace is just changing so dynamically.

Jim Marous:
You also have been talking quite a bit about the offering of bitcoin acceptance and things of this nature. Is this also just part of the whole transformation of Square and Square Financial Services, to be able to serve every single need that a small business owner may have?

Lew Goodwin:
It is, and that's again well said, Jim. I think that there are so many opportunities and in so many areas that we need to help our sellers and our customers, give them a place to transact, give them a place to move forward with their business, and having them focus on being an expert in what they do, whether it's hairstyling, coffee shop, a craftsman in some way, allowing them to not have to worry so much about things that are very important to them, as you've said, cash flow, cash management, being able to work through the ebbs and flows of the business cycle.

Lew Goodwin:
But we want to make sure that we are providing them the tools, and that they're very intuitive in how they can help them further their business.

Jim Marous:
A lot has been said about embedding financial services within super apps. Square, if you take it apart there's a lot of those components that you're building in here to make it so the small business really relies on you to get them going in the day.

Jim Marous:
This obviously impacts the trust factor. Is this one of the reasons why there are several fintech firms, yourself included, that really rank higher than many, many traditional banks from the trust factor, is that the organizations actually feel like you're getting into business with them as opposed to just accepting their business as a customer?

Lew Goodwin:
Yeah. To me trust is paramount. If you can provide a gateway for the customer to trust you, to know that when you're dealing with Square that you are being treated fairly and that they are looking out for you in a way... Trust takes a long time to build and it takes just a second to lose it.

Lew Goodwin:
So it is important that you're always having a value proposition and a way of dealing with customers that is going to allow them to continue to feel that they can trust you.

Jim Marous:
Another question I have is there's a social aspect to the small business marketplace. People who sell items on an online platform are different than those who sell on a physical space. Those who are in the restaurant business are different than those that may sell novelty items or clothing or something like that.

Jim Marous:
Is there a social community way of communicating within merchants in the Square platform, or ways for organizations to kind of reach out to others to see how they can improve their business? Since you have so much information on the Square customer, I'm wondering if there's some social aspect to Square that you don't see from the naked eye or from the debits and the credits?

Lew Goodwin:
Yeah. We do have those opportunities for our sellers to understand and learn from each other. I think that that is important to further grow and facilitate those conversations, because we do have a lot of understanding of the different types of merchants and the different trends that we would be seeing both geographically and by segment.

Jim Marous:
Finally, there's no lack of announcements in the marketplace of acquisitions, partnerships in the fintech space. Square is obviously being the center of some of these discussions.

Jim Marous:
How do you see the world of finance, especially the small business, but even broader than that... How do you see the world of finance evolving? I was going to say in the next five to 10 years, but let's make it more logically, seeing that we've been tested on your ability to project anything nowadays.

Jim Marous:
Let's say in the next two to five years, what do you really see happening, not maybe specifically, but as finance in general is moving?

Lew Goodwin:
I certainly don't have a crystal ball, as none of us do, but as we talked about earlier, things are evolving so quickly and there are so many firms with great ideas and ways to help customers achieve what they feel is important to them. There are so many new aspects that are coming in, whether it be cryptocurrency or other things that are interesting and will bring in to me more consumers and more businesses into the marketplace, because the thing is is that it's easy to serve customers of high net worth and high value, but it takes a real strong business plan and dynamics to bring and open up and add to the number of customers that are out there, to make your platforms appealing to many more people in different ways than they have been seen before.

Lew Goodwin:
So I think the next two to five years will see a continuation of a really strong evolution of financial services to the marketplace.

Jim Marous:
Lew, thank you for being on the show today. I said it to you offline, I said it to you when I saw you in Utah a couple weeks ago, and I just want to say that anybody who's followed me for any length of time knows that I truly believe in the comments.

Jim Marous:
You need to embrace change, you need to take risks, and you have to disrupt yourself, both as individuals and as financial institutions or companies, and that those who can quickly adapt to new environments and stay on the front of that curve will be the successes.

Jim Marous:
Lew, I really admire you in what you have done, what you've achieved, but more importantly on where you have gone, because I think that you're on the forefront of a lot of things that weren't even thought of a decade ago, and both what you've done at GoBank, what you've done at Square Financial Services, and what you're going to do next, whatever that is, I want to say that it's really an honor to know you, but it's really good to see somebody that takes and says, "You know what? I can't rest on my laurels. I can't accept status quo. I've got to be part of whatever is happening, changing going forward."

Jim Marous:
So, again, thank you very much for being on the show today.

Lew Goodwin:
Thank you, Jim. Appreciate the opportunity.

Jim Marous:
Thanks for listening to Banking Transformed, rated as a top five banking podcast. I really appreciate the support you have provided since we started the endeavor. If you enjoy what we're doing please be sure to follow Banking Transformed on your favorite podcast app.

Jim Marous:
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Jim Marous:
Finally, be sure to catch my recent articles in the Financial Brand and check out the amazing research we're doing on the Digital Banking Report.

Jim Marous:
This has been a production of Evergreen Podcasts. A special thank you to our producer, Leah Longbrake, audio engineer, Sean Rule-Hoffman, and video producer, Will Pritts. I wouldn't be able to do any of this without them. I'm you're host, Jim Marous. Until next time remember, you don't have to get ready if you stay ready.