Debit, Credit, Charge, What’s the Difference? - CardsFTW #131

Last week, Pipe announced a new embedded card product for small businesses to manage their spending right after Novo announced their new SMB credit card (see CardsFTW #129). Both launches reinforce what I’ve been predicting this year (or perhaps, this entire decade) that fintech’s focus has been shifting away from debit products toward credit cards and increased investment in business solutions.

(I don’t just have predictions about payments, check out my recent piece on wealthtech in This Week in Fintech: Signals.)

The new Pipe card is not a credit card, though. While it helps businesses with working capital and comes from an embedded fintech lender, it’s technically a charge card issued by First Internet Bank of Indiana, a fintech sponsor bank. (Also, the Pipe card isn’t available directly to SMBs but is an embedded offer. I’ll come back to this later.)

Understanding the Basics: Debit vs. Charge vs. Credit Cards

So, what is a charge card anyway? Do consumers know the difference? Do small business owners (defined by Pipe as an ideal customer with $100,000 to $1,000,000 in annual revenue) know the difference? I think these distinctions often get lost. While industry readers of this newsletter probably know this inside and out, it’s worth exploring what sets these products apart and the pros and cons for companies when they’re choosing between them.

Debit cards are a direct access device to a demand-deposit account (DDA, e.g., a checking account) at your traditional bank or a neobank like Chime or Current. As soon as you swipe the card and your transaction is authorized, the available funds in your account are debited. In effect, you pay in full immediately.

Secured credit cards are the original credit builder tool. The simplest version requires users to deposit some amount of cash (usually at least $100) with a bank and are issued a corresponding credit line. They can use this card as a normal credit card and must pay it back (at least the minimum each month). The secured cash is escrowed at the bank and is not used to pay the card bill, except if the account enters into default. Newer entrants like Pesto*, Aven, and Yendo are securing these cards with other assets like jewelry, houses, and cars. (See CardsFTW #63 for more information on both cards like Extra and these secured cards.)

Quasi-Secured Credit, a term coined in November 2024 by me, refers to these new hybrid debit/credit products, like Chime’s secured credit card and Extra’s debit card. These products link a credit line or loan to a debit account, helping users build credit by creating a dynamic line based on the account balance.

For instance, Chime’s card links directly to another Chime account where the linkage is tight and can lead to near-zero losses due to insufficient funds. For companies like Extra or Fizz, the debit account is held at another institution, and a 1-3 day delay occurs during the ACH transfer, which increases risk. These products sit in a somewhat confusing gray area. While they can impact your credit score, it’s unclear if they truly help users build meaningful credit. If the card provider isn’t taking on actual risk and payments are automatically covered, does making on-time payments really show responsible, credit-worthy behavior? I’d argue no.

Unsecured credit cards which most people think of as “credit cards,” offer a revolving line of credit with a defined limit. Cardholders can spend up to this limit and carry any unpaid balance forward as a loan, paying interest on it. For example, with a $5,000 limit, a user who charges $1,000 can pay $100 and carry the remaining $900 forward, incurring interest on the balance. While revolving credit can be expensive, it’s an efficient short-term borrowing option.

Charge cards are the original credit cards, like the Diners’ Club and American Express cards from the 1950s. These cards do not have a fixed limit; issuers approve charges based on their discretion. Unlike credit cards, charge cards require payment in full each month. This monthly payoff requirement differentiates them from credit cards and means they cannot be used to carry a balance. Charge cards like those offered by Amex today may include flexible financing, but generally, they are designed for short-term, full-payment use.

(Just to make things more confusing, some issuers, like Amex, now let users finance certain charges over time. But for simplicity’s sake, let’s set that aside for now.)

I’ve tried to make a useful chart:

The card landscape has evolved and grown more complex over the decades, from the first charge cards in the 1950s to the rise of revolving credit in the 1960s, and the growth of debit cards with electronic authorization in the 1990s. The past decade has brought quasi-secured and alternative secured cards, as well as a surge in business card offerings from companies like Brex, Ramp, Divvy, and now Pipe.

Most users, both consumers and business owners, don’t fully understand the difference between charge and credit cards. Only 19% of U.S. consumers have an Amex card according to Nilson.¹ I suspect only a portion of these Amex cards (maybe 40%?) are traditional charge. With limited other charge offerings that leads me to estimate that less than 10% of consumer cards are charge today.

Many small business cards, such as those from Capital One (Spark) or Chase (Ink) are credit products, but charge options do exist. When a business applies for a loan, they’re generally not thinking, “I need funds for 15 to 45 days, then I’ll pay it back,” but more likely, “I may need this for a while.”

I suspect most business owners fall into the latter mindset.

There’s been a lot of focus on revolving credit, but many consumers and businesses are actually transactors, which is industry-speak for those who pay their balance in full each month. For transactors, a loan effectively spans 21 to 51 days for consumers and 1 to 45 days for businesses. Some business charge cards, like Ramp, don’t offer a grace period. Transactors use cards for short-term lending (at zero cost), rewards, and expense management. Pipe’s focus on spend management could appeal to SMBs looking to streamline cash flow and expense management.

Embedded Finance

Another key part of Pipe’s announcement is its pivot toward embedded finance, not a direct provider. While Pipe first gained traction and fame as a lender to e-commerce businesses, they have gone through a pivot and leadership change and are now one of many embedded players who offer the ability for brands to offer these products to their customers.

Pipe joins CapitalOS among others to offer business card products as a service, so that a company like Housecall Pro (Pipe) or Workiz (CapitalOS) to offer a business card product to their customers (plumbers, electricians, etc in this example). There is a big opportunity here in terms of technology features and capabilities for SMBs. 

Comparing traditional bank offerings for SMBs (e.g., Capital One Spark, Chase Ink, Amex Gold) to modern card offerings (e.g., Brex, Ramp, Divvy/Bill.com) you find that the user experience and controls of the modern offerings is far superior. As a small business owner myself (although more sophisticated about finance than most) I want to be able to (and can with a provider like Ramp) create virtual cards, manage budgets, send cards to users, etc., all through a modern interface. With a traditional provider like Chase, the best I can do is set a single limit for a physical card that is mailed to me, and I have to physically hand it to my employee (not great in a remote situation).

However, companies like Brex and Ramp do not target small businesses. Brex explicitly is seeking startups and enterprises, Ramp requires a minimum cash balance of $75,000 to open an account, which can be very hard for a business doing less than $1MM in annual revenue.

Reaching SMBs is also very hard (see again, my advertising experience) because small business owners are very busy (they are directly responsible for most of the business), and they receive dozens of cold calls and email messages each week. An SMB that is using a platform like Housecall Pro has already chosen to align themselves with a vertically-oriented software-as-a-service platform to help them run their business. Attaching a credit (and a debit card) to that service and via that services is a great choice. Companies like HousecallPro know that offering a fintech product is outside of their core competency, and as such, an embedded provider is an obvious choice.

Pipe’s embedded offering has a bright future in that there is room in the SMB card market for an embedded offering and the turn-key nature should give them an advantage over banking-as-a-service providers that may require more custom work. However, I am concerned for Pipe from a lending basis as it is very hard to lend effectively to SMBs without high loss rates and because I am concerned that applicants for the card will not understand what a charge card is versus a credit card. 

In a rapidly evolving financial landscape, Pipe’s embedded solution could meet the needs of small businesses seeking modern spending solutions without the cost and complexity of traditional credit options. Educating SMBs on charge cards and focusing on responsible lending will be key for Pipe to navigate this promising but challenging market.

CardsFTW

CardsFTW, released weekly on Wednesdays, offers insights and analysis on new credit and debit card industry products for consumers and providers. CardsFTW is authored and published by Matthew Goldman and the team at Totavi, a boutique consulting firm specializing in fintech product management & marketing. We bring real operational experience that varies from the earliest days of a startup to high-growth phases and public company leadership. Visit www.totavi.com to learn more.

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*Indicates a company with which Totavi has a financial relationship.

1. (2024). US General Purpose Credit Card Issuers at Midyear—2024. The Nilson Report, (1271), 5. ↩︎