Payments processing solution company Square, Inc. (SQ) is becoming a bank. The San Francisco-based company, which already lends money to small businesses through its Square Capital unit, has submitted an application to form a wholly owned industrial loan company in Utah. According to a report in The Wall Street Journal, the new unit will be called Square Financial Services Inc. and have initial capital of $56 million at its disposal.

Jacqueline Reses, chairman of Square's new entity, provided more details regarding Square's move into banking. Reses said that the move enables Square to have a direct relationship with regulators. The industrial loan license also enables Square to operate other businesses, such as Square Capital, food delivery through Caviar and Square Cash. Per existing regulations, banks are not allowed to lend money and sell related products at the same time. (See also: Square Q2 Loss In Line With Expectations; Revenues Top.)

Square's move into banking comes at a time of transition for the sector. Major banks such as JP Morgan Chase & Co. (JPM) have reported declining profits in recent times because their operations have been hemmed as a result of Dodd-Frank regulations. But an expected winding down of such regulations by the Trump administration has spurred business entities to apply for licenses to form new banks. Social Finance, a startup that provides educational loans, has also applied for a bank license. (See also: Bank Stocks Nearing Intermediate Breakdowns.)

Square's move also broadens its reach into small business territory and expands its relationship with existing customers. The company's other initiative, Square Capital, has made $1.8 billion in loans since 2014. That service extends loans to small businesses in exchange for a cut of future sales. Typically, such loans are used by small businesses as a last resort.

As a banking entity, Square will be able to garner a bigger slice of the small business market. Community banks hold 43% of small business loans nationwide, according to third quarter FDIC figures. They reported net income of $5.6 billion, an increase of 10.4% from a year-ago figures, in the first quarter of 2017. That increase was mainly driven by increased revenue from interest payments. For Square, the relationship has an added benefit to its bottom line. The company has an array of products, from hardware terminals to a digital money transfer service, that it can upsell through the new unit. (See also: Square's 70% Run-Up Prompts Credit Suisse to Downgrade.)

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