It may seem surprising that the fintech disruptor Square is reverting to an old format and become a bank. Square has helped so many small businesses expand their payment methods, embracing fintech ahead of other disruptors.

However, there is much more to this story. In fact, this strategic decision could be one of the best moves the company has made. Square's decision could start a revolution and revamp the entire financial institution structure to address the changes in the transaction and lending environment.

Square essentially is proving how the traditional bank is no longer necessary. By becoming their own bank, they do not have to seek out a separate institution as a strategic partner. They don't have to add specific business banking services to their portfolio.

With recent changes by the FDIC to lessen the regulatory requirements and encourage new types of banks, Square is smart to capitalize on this opportunity before anyone else does. However, SoFi may be close on their heels. They are also taking out a bank charter application.

Changing Small Business Needs

Most financial institutions do not necessarily cater to the small business owner. And -- to make matters worse -- they haven't had to. Banks haven't had to provide any services they don't want to or that they don't have the capacity for to do.

Although the banking sector has tried, most banks still have too many fees and capital requirements to provide business accounts with their needs. Numerous freelancers or startups just can't satisfy those requirements because banks are still designed with the larger business in mind.

More small businesses need smaller sized loans to tap into for their launches and expansion. Recognizing how peer-to-peer lending has grown together as an entire industry illustrates how ripe the financial industry is for more competition. Peer-to-peer lending is more personal, with a much needed boost to the financial sector in watching to find new ways to provide the much-needed financial support of smaller entities and businesses.

According to available research, the last time any new type of bank appeared was 2010. Although various types of fintech solutions address some of what small businesses need, there is no overriding solution available as a one-stop shop for all business banking requirements.

Well -- that is until Square announced this exciting news.

In Europe, there are already signs that companies understand the importance of serving small businesses like freelancers. For example, N26 launched business bank accounts specifically for freelancers and other self-employed people. Other startups are looking to address the small business owners' banking challenges. Other companies bringing about a similar goal as well, include Qonto and Ibanfirst.

A New Type of Bank

Square had already been adding more products to help small businesses. This included small business loans, which have helped the company gain more value in the eyes of its target customers. However, the fintech company has also considered consumer loans.

With these products, it makes sense that the company could become a one-stop shop for financial needs. To become a one-stop service requires obtaining a bank charter, which is what the company has now applied for under the moniker, Square Financial Services Inc.

With this charter and a base in Utah, Square can offer business bank accounts. To disrupt the traditional product, they can also redesign how these bank accounts are run in order to lower fees. At the same time, the goal is to increase service and provide valuable support to the ever-growing small business segment.

In fact, Square can reimagine how these financial products can be offered to businesses just as it did with merchant accounts when this fintech service first appeared. Square and others are starting to build a case for what has been called the Open Bank Movement. They are trying to push the archaic financial institution framework forward into the future by encouraging the adoption of more digital technologies.

By pushing the boundaries to better service and more options, many issues related to transparency, security, and cost savings can -- and have been addressed. In return, innovation can flourish in an industry that had previously stifled it with regulations and compliance pressure.

Empowering More to Stimulate the Economy

Offering a new type of bank can fulfill Square's objective of helping more people participate in the economy. Providing more startups and freelancers with business accounts allows these smaller businesses to separate their business and personal funds. It provides counseling and options that have not been addressed nor targeted before. This move by Square can help small businesses perform in a big way. Businesses can now better oversee and account for their revenues and expenses.

The more that new banking option companies help address the challenges of the small businesses owner, the more this segment can bolster national and global economies. This push toward "helping the little guy" and smaller businesses can encourage more people to become financially independent.

Smaller businesses can take hold again in this country (and other countries) by creating work to grow their business, and be able to grow on their own terms. That makes what Jack Dorsey and his Square team are doing even smarter. I'd "bank" on the success and disruption that this move will create.

Published on: Sep 8, 2017