Ben Soppitt

Railsbank and Unifimoney unleash untapped credit card potential for US Fintechs

Credit Cards are about to get a whole lot more interesting

The last moat around the big banks’ most guarded product, the credit card, has finally collapsed.

Railsbank — a leading global Banking as a Service player which today entered the US market — is taking on the challenge of making it easier, faster and cheaper for Fintech’s to launch innovative credit card propositions.

The $3.8 trillion credit card market

Railsbank will offer its complete platform, including Banking as a Service, Cards as a Service, Compliance as a Service and the first-of-its-kind Credit Card as a Service (CCaaS) to fintech and “brand” customers in the US.

The global open banking leader said that the innovative CCaaS product will encourage increased competition and innovation within the country’s $3.8 trillion credit card market in spending and over 40 billion transactions annually.

Nigel Verdon, co-founder and CEO of Railsbank, explained: “The high costs and complexity of launching credit card propositions have stifled innovation by creating barriers to entry to all but the largest of traditional financial companies. Fintech has changed the face of much of the banking industry, but, to date, the credit card market has been immune from this disruption. Railsbank will be able to drive change in the market with its CCaaS offering.”

Unifimoney

And Unifimoney, Railsbank’s first customer in the US, will be the first brand to launch using the new service. Unifimoney is the first full-service neobank serving the needs of high earning professionals.

The Unifimoney credit card will be launched in the fourth quarter of 2020 as an integrated part of its single mobile account — including saving and investing — to help automate personal financial management.

Ben Soppitt, CEO of Unifimoney, explained: “We invested a year searching for the right partner: a company that could manage the complexity of credit cards and be a true innovation partner. We are extremely pleased to have found that company in Railsbank.”

US credit card market

The US credit card market is one of the last big financial-services sectors that remained immune from and unchanged by tech-driven competition.

The barriers to launching a credit card are so high in terms of cost, time and resources that it has made it almost impossible for new fintechs to compete in this space.

A highly concentrated market of five main companies has created a lack of competitive pressure to innovate; the only innovation to speak of comes in the form of marketing investment and ever more complex acquisition offers.

There are over 70 challenger banks in the US and less than a handful have launched credit cards; all of those that have are focused exclusively on providing credit to the sub-prime customers ignored by mainstream issuers.

By creating a shared AWS-style platform, Railsbank will provide an end-to-end managed service enabling Fintech’s to be able to launch a credit card program for a fixed price in 90 days, or less potentially.

The volume of new, highly innovative, fintech-led credit card programs coming to market is now set to explode.

The backdrop

  • Just five companies control 65% of the $3.8 trillion credit card market in the US and the top 10 companies control 90%.
  • There are over 1.06 billion cards in the market and the average credit card customer has four cards.
  • Around 50% of the 1 billion cards are inactive (defined as one transaction in the last 12 months).
  • It costs, on average, $200 to acquire a new credit card customer, attracted mainly via over 3 billion pieces of direct mail which are sent to consumers each year.

Credit cards have come a long way in terms of the utility they offer and their ubiquity. Merchant acceptance is almost total thanks to the likes of Square, and online commerce is rapidly growing thanks to PayPal, Stripe and Amazon (and Covid-19).

Of all the ways you can pay, credit cards offer unparalleled protection, security and returns with benefits and rewards on your spend.

Barely changed [Innovation stalled?]

Yet, despite the transformation of credit cards from being an exclusive and niche product for the rich in the 1970s and 1980s to an everyday utility, the core experience of being a credit card customer has barely changed. The majority of the innovation has been seen in how you can pay (on the phone, on the watch, online) and, to a lesser extent, in card design and materials (for example, the once novel and now common “metal” card).

The experience of being a credit card user is the same as it was 20 years ago: sketchy new card incentives, fixed monthly bills, incomprehensible rewards, benefits and random offers, and generic spend limits regardless of your actual personal circumstances.

Disappointedly, product innovation has virtually ceased — the same three products and associated consumer targets dominate:

  • For affluent travellers — points;
  • For everyday shoppers — cash back on gas and groceries;
  • For sub-prime consumers — no rewards/feel lucky we gave you a card at all.

Consumers have responded by adopting behaviors that drive up costs for issuers: signing up for multiple cards, maxing out rich sign-up incentives and repeatedly revolving balance transfers, and working to gamify which cards to use to maximize perceived rewards.

It’s a war of attrition between card issuers, consumers and merchants driving up costs, but it always goes the way that hurts consumers; either merchants increase prices or consumers get less back in rewards. It’s a zero-sum game and all but the lucky few consumers who successfully game the card issuers, the consumer comes out with the losing hand. The majority of customers are too busy or unwilling to put the effort in to successfully compete with the card issuers on a daily basis — getting value from your credit card shouldn’t be a full-time job.

But where are the startups to disrupt this broken system? One of the largest and most profitable consumer financial services markets is devoid of any meaningful presence, or innovation from Fintech. The reason is a market structure that makes it incredibly difficult, time-consuming and expensive to launch a new credit card product.

How to launch a credit card: the old way

To launch a credit card program requires a large number of separate services to be either built, or bought. For a fintech, the only option is to buy. At the very minimum, you would need to secure a processor, a BIN sponsor and a line of credit. You would also need to create a large and comprehensive set of policies and procedures, including a credit policy, detailed financials, compliance management system, risk policy, Infosec and more. These require experienced and dedicated resources to develop.

And when it comes to processors, the majority willing to serve the fintech community don’t do credit and stick to the far easier debit and prepaid rails. Marqeta and Galileo don’t do credit. Two that do include i2c and Corecard.

Issuers provide the Visa or Mastercard BIN and have regulatory and compliance ownership over the program. If the program fails, they are required by law to pick up the pieces and close the program; this is expensive and time-consuming. Issuers hold the receivables and the debt from the transactions. The program owner (the fintech) has to pay them and hold them on their books or securitize them.

As you’d imagine, issuers are very risk-averse and will be very selective as to who they will work with. It’s not uncommon for them to require any fintech company to have raised over $5 million before they will even return calls; some aren’t interested even then.

And ultimately, any fintech will need to secure a credit facility to pay for the debt. Most use their equity to do this (it helps if you’re like Brex and can raise close to $10 million in your seed). Then banks like SVB and others will be prepared to offer you debt. Eventually, if you succeed, you end up working with Credit Suisse, or similar, as a credit warehouse.

Each of these requires a set-up fee and minimum monthly payments. It will often take up to 18 months and, at a very minimum, several hundreds of thousands of dollars, and that’s before the credit card is even launched.

The process is highly customized, with each program having a significant amount of work involved and almost no shared services. Each program carries the full cost on its own.

How to launch a credit card: the new way

Using the CCaaS model, the fintech customer will pay a fixed fee, be able to pick a templated program and have the option to customize specific elements to their needs. And they share the program and BIN range. Because the program is already in existence, it could potentially be launched in 90 days or less. This gives the fintech the opportunity to launch a program at low cost and high speed, greatly increasing the number of programs in the market. Increasing the number of competitors will increase innovation in a space that desperately needs it.

It also reduces the risks for banks and others in the ecosystem. Now more radical ideas can be brought to market, tested and scaled. The CCaaS model will bring the next 10 Brexes to the credit card space and in quick succession.

For the first time ever, we will see the explosion of new ideas and companies in the credit card market, bringing real choice and competition.

All change

So,the market is set to change in a way that never seemed likely even a few years ago.

The time of the fintech credit card market is upon us.

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