CFO's corner

The ‘Brex’it: Why card first spend management products need a second look

July 5, 2022
|
4
Min Read
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In this Article

On July 17th, 2022, Brex announced that they will no longer serve small business customers, disrupting thousands of small businesses who are left in the lurch. They’ve been given two months to find a new financial partner. 

As a founder in this space, I can’t say I am surprised, but this is the start of things for most card-led-free-software spend management products. For the last 4 years, issuing cards became a commodity and every software company could become a card provider, thanks to platforms like Marqeta and Stripe, who truly democratized card issuing. It was also a time when banks made it very tough for startups to get credit cards, since they measured personal credit scores in order to provide funds. 

Brex was a game changer for these small businesses, who account for more than 90% of all US businesses. Others followed Brex and this led to the rise of the spend management gold rush.

Between 2018 and 2021, there have been more than 10 unicorns in the spend management space. All followed the same model of bundling lightweight software with corporate cards. But when you take a closer look at this sector, you can see a different picture.

The qualification criteria that leaves out most SMBs

Since companies like Brex only take into account available cash balance as an underwriting formula while issuing cards, it leaves out the majority of small businesses who use credit cards as a source of funding and cash flow management. Yet, the difficulty in applying this formula to classify a business is clear in Brex’s co-CEOs statement: “Did we misclassify any company? Probably.” 

This is why it favors tech startups who have the luxury of venture capital, or businesses with any kind of ‘professional funding’. They require customers to have minimum cash balances in order to even access the credit. Here are some of the figures for popular fintechs: 

 

Sources: Brex, Ramp, Divvy

They’re not really credit cards 

As a result of their underwriting criteria, the cards they offer are NOT credit cards. They are charge cards that need to be paid off daily or monthly. For many SMBs that typically use credit cards as a source of funding or cash management, it offers no payment flexibility and becomes difficult to revolve a balance with charge cards. 

The interchange-based revenue model 

Brex makes most of its money by taking a cut from the small interchange fee that is levied on credit card transactions. When you don't charge for software and depend entirely on the interchange, things can get ugly very fast.  

When capital is cheaper, everyone wants to fund the float. When it starts getting expensive, it creates a very different dynamic. Since there is only a small share of interchange available which does not change with rising interest rates at which balances won’t be paid off, funding the float becomes expensive. 

Another factor is the rewards. Fintechs have been offering high rewards and bonuses to businesses, coupled with no annual fees. But they’ve found it difficult to turn a profit by offering credit to small business accounts. 

We don’t need to reinvent credit card issuing 

Fintechs have been subsidizing businesses with crazy rewards in order to steal customers from banks. Brex even incentivizes cardholders who make Brex their only business card. But the banks have one thing that fintechs don't - access to capital at negative cost. Customers are actually paying banks to hold their money, and banks use this capital to lend money to businesses, creating credit. 

Banks also have a tried and tested method of underwriting risk, based on which they provide credit. Fintechs, on the other hand, don’t have an efficient way to determine creditworthiness. 

What we do differently at Fyle 

At Fyle, it was very tempting to look at the card-issuing model, but we believe that the best business credit cards are those that customers already have, so we left the lending to the banks. 

The world does not need yet another credit card. What it needs is a better, faster, easier way to manage them. We built a magical spend management experience on the customer’s existing software stack, where they realize value in the form of efficiency and delight, not rewards or cashbacks. 

We are the first spend management platform to integrate directly with Visa, enabling real-time feeds and automated reconciliation for all Visa business credit cards from any bank (extending to Mastercard soon). We don't depend on the bank’s technology, nor touch the bank's interchange fee. This is why we are natural partners for banks, who can bundle their credit cards with our software. If you are a bank looking to embed spend management with your credit cards, please reach out to us.

For those small businesses who are affected by this new "Brexit", we’d love to support you. We don't offer credit cards but have a set of banking partners who do. You get to use bank-issued credit cards, without compromising on the superior software experience. You can say goodbye to manual work and expense reports with Fyle.

CFO's corner

The ‘Brex’it: Why card first spend management products need a second look

July 5, 2022
|
4
Min Read

On July 17th, 2022, Brex announced that they will no longer serve small business customers, disrupting thousands of small businesses who are left in the lurch. They’ve been given two months to find a new financial partner. 

As a founder in this space, I can’t say I am surprised, but this is the start of things for most card-led-free-software spend management products. For the last 4 years, issuing cards became a commodity and every software company could become a card provider, thanks to platforms like Marqeta and Stripe, who truly democratized card issuing. It was also a time when banks made it very tough for startups to get credit cards, since they measured personal credit scores in order to provide funds. 

Brex was a game changer for these small businesses, who account for more than 90% of all US businesses. Others followed Brex and this led to the rise of the spend management gold rush.

Between 2018 and 2021, there have been more than 10 unicorns in the spend management space. All followed the same model of bundling lightweight software with corporate cards. But when you take a closer look at this sector, you can see a different picture.

The qualification criteria that leaves out most SMBs

Since companies like Brex only take into account available cash balance as an underwriting formula while issuing cards, it leaves out the majority of small businesses who use credit cards as a source of funding and cash flow management. Yet, the difficulty in applying this formula to classify a business is clear in Brex’s co-CEOs statement: “Did we misclassify any company? Probably.” 

This is why it favors tech startups who have the luxury of venture capital, or businesses with any kind of ‘professional funding’. They require customers to have minimum cash balances in order to even access the credit. Here are some of the figures for popular fintechs: 

 

Sources: Brex, Ramp, Divvy

They’re not really credit cards 

As a result of their underwriting criteria, the cards they offer are NOT credit cards. They are charge cards that need to be paid off daily or monthly. For many SMBs that typically use credit cards as a source of funding or cash management, it offers no payment flexibility and becomes difficult to revolve a balance with charge cards. 

The interchange-based revenue model 

Brex makes most of its money by taking a cut from the small interchange fee that is levied on credit card transactions. When you don't charge for software and depend entirely on the interchange, things can get ugly very fast.  

When capital is cheaper, everyone wants to fund the float. When it starts getting expensive, it creates a very different dynamic. Since there is only a small share of interchange available which does not change with rising interest rates at which balances won’t be paid off, funding the float becomes expensive. 

Another factor is the rewards. Fintechs have been offering high rewards and bonuses to businesses, coupled with no annual fees. But they’ve found it difficult to turn a profit by offering credit to small business accounts. 

We don’t need to reinvent credit card issuing 

Fintechs have been subsidizing businesses with crazy rewards in order to steal customers from banks. Brex even incentivizes cardholders who make Brex their only business card. But the banks have one thing that fintechs don't - access to capital at negative cost. Customers are actually paying banks to hold their money, and banks use this capital to lend money to businesses, creating credit. 

Banks also have a tried and tested method of underwriting risk, based on which they provide credit. Fintechs, on the other hand, don’t have an efficient way to determine creditworthiness. 

What we do differently at Fyle 

At Fyle, it was very tempting to look at the card-issuing model, but we believe that the best business credit cards are those that customers already have, so we left the lending to the banks. 

The world does not need yet another credit card. What it needs is a better, faster, easier way to manage them. We built a magical spend management experience on the customer’s existing software stack, where they realize value in the form of efficiency and delight, not rewards or cashbacks. 

We are the first spend management platform to integrate directly with Visa, enabling real-time feeds and automated reconciliation for all Visa business credit cards from any bank (extending to Mastercard soon). We don't depend on the bank’s technology, nor touch the bank's interchange fee. This is why we are natural partners for banks, who can bundle their credit cards with our software. If you are a bank looking to embed spend management with your credit cards, please reach out to us.

For those small businesses who are affected by this new "Brexit", we’d love to support you. We don't offer credit cards but have a set of banking partners who do. You get to use bank-issued credit cards, without compromising on the superior software experience. You can say goodbye to manual work and expense reports with Fyle.

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