The news: Affirm filed applications last week with the Nevada Financial Institutions Division and the FDIC to create Affirm Bank, a Nevada-chartered industrial loan company (ILC).

Trendspotting: In December, PayPal filed with the FDIC and Utah Department of Financial Institutions to form PayPal Bank. Its rationale may be the same as Affirm’s: Offer savings accounts, offer more financial services for small businesses, and connect directly with card networks. In direct competition with Affirm, PayPal may finance its growing buy now, pay later program with its bank’s own balance sheet.

Affirm said the ILC charter “would also spur opportunities to introduce new products and services over time.” ILC charters allow a bank to offer savings accounts and loan products but not checking accounts—which would stop it short of offering a complete digital banking product set. But it can lean on sponsor banks to issue products the charter doesn’t allow for.

Implications for banks: Block has an ILC charter via its subsidiary, Square Financial Services, which began operations in 2021, to originate loans for Square Capital. And last year, Klarna—which is eyeing a US banking license—accelerated its retail banking ambitions, introducing US debit cards in June. And it has expanded its deposit offerings and is transforming its image from a payments and shopping company to a neobank.

For years, Affirm has been a competitive threat to financial institutions’ (FIs) credit card business. FIs have responded with card-linked installment payments. Affirm’s commerce features, including its shopping app and a payment button in retailers’ checkout flows, were utterly foreign to FIs. (FIs have belatedly responded with the Paze digital wallet and checkout service.) With an ILC charter, Affirm may lower its funding costs and cut out fees paid to sponsor banks. It can instead invest in breadth and scale, where it competes on larger loans.