1. Hybrid cards not traditional Credit or Debit Card
2. Dominance of MasterCard in Fintech
Both Brex and Zero’s new launches offer personalized, dynamic, simple propositions with great value, mobile first user experience and digital management tools. They are seeking to bring the same values and thinking to financial services that created Uber, Netflix, AirBnB and others and enabled them to turn their respective industries upside down.
But payments is an ecosystem play and a complex one at that, as well as highly regulated. To play you need the permission of the underlying infrastructure players and for that both Brex and Zero have turned to MasterCard.
In fact, MasterCard is killing it in FinTech.
The UK is one of the most competitive challenger bank markets globally. A brief survey of 39 FinTech brands present in the UK that have issued either a MasterCard or Visa product shows that 36* of them work with MasterCard and all but one of these relationships is exclusive. This leaves Visa with only 3 Fintech brands (Coinbase, Contis and Fineco Bank) despite their position as the dominant player in the traditional issuer space with 97% of UK debit share and 36% of Credit.
The same trends are true of the rest of Europe (can we still say that with Brexit?) and North America. Asia Pac in general (Aus/NZ excepted) is yet to experience the same wave of challenger banks but it has certainly started and will soon reach similar proportions.
Neither Brex nor Zero are perfect by any means. Brex remains a niche play and their rewards are at present impossible to quantify based on publicly available information. Zero offers an eye watering up to 3% cash back but you need to spend over $100K a year to achieve that (or introduce 4 new customers) which means almost every customer will be on their lower tier cards at a more industry average 1–1.5%.
Plus Zero’s deposit account at up to 1.75% annual interest is hardly competitive against others in the market like Betterment at 2.15%, Marcus at 2.25% and Wealthfront at 2.29% as well as only covering up to $250K FDIC insurance with many competitors providing up to $1m.
However, Brex and Zero mark a radical departure from the established tradition in global card issuing where consumers are forced into fixed inflexible product categories, incapable of changing with the business or with consumer needs or wants. There remains an awful lot of opportunity for further innovation and in a few years we will look back in wonder at why we were forced to carry both a debit and credit card let alone multiple versions of each.
What is more, on current performance the likelihood seems clear that the card we will be carrying in the future will be a MasterCard.
Neither Credit nor Debit — a new hybrid approach
Payments remain a critical component of consumer engagement in financial services, providing a daily interaction between bank and end user and providing a utility without which modern life would become impossible. Despite the increasing use of payment cards globally and the critical role of payment cards in digital commerce, we have seen very little true innovation.
Debit cards have quickly become as mundane as checkbooks with most only catering to those for whom credit is unavailable or unwanted, and of course necessary only as ATM cards.
Credit cards have for many years seen little or no true innovation — the straightjacket of traditional risk models based on generic risk agencies and legacy infrastructure across issuers and processors has starved the oxygen of innovation from the established issuers.
Whilst Brex and Zero are targeting very different end users, Brex as a B2B brand focussing on SME’s and Zero a B2C brand, they have both adopted a hybrid card model. This enables both to provide dynamic personalized credit limits rather than fixed generic ones based on public credit bureaus with limited flexibility and the necessary painful process to raise your limits under the traditional model.
Both offer headline beating rewards and benefits and no fees or cash rewards caps. Payment terms are 30 days from payment date with Brex ,and immediate with Zero. In the case of Zero deposits carry up to 1.75% annual interest.
End of the traditional Debit and Credit Card?
The Brex and Zero model is most similar to a Charge Card. These carry interchange income for the issuer and come with rewards and benefits. The spend limit is dynamic and based on a proprietary model with revenue and funding of the business in the case of Brex and the savings of the consumer in the case of Zero.
In addition to its dynamic credit limit Brex further segments its customers by industry — at a recent event CEO and Founder Henrique Dubugras pointed out that SME’s don’t call themselves that or think of themselves in those terms — they are Restaurants, Print companies, Ecommerce merchants, Marketing agencies etc. and their needs are radically different. Not many restaurants would benefit or care about AWS credits but a startup might. So targeted benefits and dynamic credit limits (as well as other innovations such as no personal liability) — seems obvious now but no one had done it before.
Opportunity for innovation in FinTech and payments has only just begun
We have not seen the radical impact of digital disruption that has occured in retail (Amazon), entertainment (Netflix), hotels (AirBnB) or taxis (Uber) in financial services as yet, although a lot are trying.
The combination of a highly fractured market (payments is very parochial with local markets often highly differentiated and country specific), low consumer engagement, high complexity and regulation has not allowed the seemingly rapid impact and scaling of disruption elsewhere.
But it’s certainly coming and the big banks are by no means out the running yet. The question is both what does innovation and differentiation mean in payments as well as who is going to deliver it.
The main criticism of Brex is that it’s still a niche play but that is rapidly changing as they add more verticals. More importantly though is a lack of transparency in its rewards structure. 7X points on ridesharing is great but how much exactly is a point worth?
For consumer plays like Zero there seems further opportunity for innovation especially around hyper personalisation:
Spend limit — dynamic and personalised linked to a consumers total net worth not just their cash deposits e.g. investments, property, savings, 401K and income profile. Information readily available via Plaid or Yodlee for example.
Rewards — tiered and dynamic linked to average spend and not requiring separate cards — Zero for example has 4 separate Tiers with their own cards creating unnecessary cost and complexity. To tier up you need to spend more with the entry level having 1% flat cash back and the the second tier 1.5% starting at $25,000 spend or one new customer referral. Given the average Credit card in the US spends less than $1K a month almost everyone will be on the lowest tier.
Benefits — targeted and dynamic linked to average spend or total net worth (if multiple accounts consolidated with the issuer) e.g. 5% cashback on ridesharing for low spending cards and 15% for high.
Zero does not carry any benefits whilst the higher cash back tiers are unattainable for most average consumers and the affluent are better served elsewhere (e.g. with higher FDIC insurance).
MasterCards dominance and competitive reaction
The seeming dominance of MasterCard in securing the network mandate for the vast majority of new FinTech brands is unlikely to go unchallenged. This is great news for emerging Fintech brands and the market as long as the competition is based on creative disruption and not only on “strategic equity investments” and marketing funding.
All global payment networks have well deserved reputations for being slow and conservative — as they have to be through necessity given the market they work in.
MasterCard has demonstrated that this need not prevent innovation happening at scale and speed and in a truly global way.
*For those interested the UK MasterCard issuers include in the sample were Amaiz, Cardonemoney, Cashplus, Coconut, Centtrip, Babb, B, Dipocket, Dozens, FairFX, Fidor Bank, Fire, Galeo, Ipagoo, Loot, Metro Bank (dual Visa), Mettle, Monese, Monzo, N26, Pockit, Prepaid Financial Services, Recognise, Revolut, Soldo, Starling, Sumo, Tandem, Thinkmoney, Tridos, Transferwise, UAccount, Viola Black and Weswap.
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