By Matthew Goldman — Feb 23, 2021

CardsFTW #18: Brex Wants to Own a Bank

Plus, Joint Cards and New Card Features

Brex is Latest Fintech to Seek Charter

When consumers acquire a card (debit or credit) from a fintech company, the card’s primary brand is typically not a bank. For example, my startup’s credit card, Grand Reserve, is issued by Celtic Bank. Their name appears only in the fine print on the back. However, you need a bank to issue a credit or debit card in the United States. The issuing bank also provides critical oversight and regulatory services.

As they grow, many fintech companies seek to own a bank charter. The charter enables a more vertically integrated product, better control, improved margins, and access to substantially less expensive capital. On the flip side, banks are highly regulated, and the company needs to build out capabilities around compliance and regulation that their bank partners previously managed.

The trend towards fintech companies acquiring (or starting) banks is accelerating. When I worked at Green Dot (2006-2009), we worked with several sponsor banks such as Columbus Bank & Trust (a unit of Synovus Financial), Citibank, GE Money (now Synchrony), and others. At the time, Green Dot was already working on acquiring a charter, ultimately acquiring Bonneville Bank in Utah. Green Dot now, uniquely, operates a bank, a direct-to-consumer brand, and a banking-as-a-service platform.

In the last year, we have seen acquisitions or new charters from companies like Square, LendingClub, and Varo. Some companies like Chime have previously indicated they do not want to own a bank. Now we have news that Brex, the largest startup provider of corporate cards, has applied to start an Industrial Loan Company in Utah. ILCs are a unique type of bank, and there are very few of them. My issuer, Celtic Bank, is one of them, and they often provide loan servicing and help non-financial companies with lending. You can read more and see the shortlist on Wikipedia.

Most ILCs are based in Utah, and the Utah Department of Financial Institutions sums up the essential facts about ILCs very well: An industrial bank is a state-chartered depository institution that is:

eligible for FDIC insurance
exempted from the technical definition of a “bank” for the purposes of the Bank Holding Company Act of 1956 (BHCA),
otherwise generally subject to the same banking laws and regulations as other bank charter types.

They are still regulated, but the exemption from the BHCA enables non-financial companies to own them (such as a retailer or auto manufacturer). Filing an application is a long way from receiving a charter, but having an ILC will enable Brex to become a full-fledged bank on a more modern back-end and user experience. As more fintech companies acquire charters and more banks use more modern interfaces, we will see a convergence of the two categories of providers.

A New Way to Get Your Credit Cards Issued

Speaking of fintech companies, Marqeta, which powers many of the corporate card players and other fintech companies through its card-issuing platform, announced a path to issuing consumer credit. To date, Marqeta has focused solely on consumer debit and business/commercial credit card products. Consumer credit is really hard–it is very regulated and requires many integrated services to provide. Marqeta is partnering with Deserve to power the solution. While my company is a customer of Deserve, I have no insider info here. It appears that Deserve will power servicing and lending, while Marqeta will be the underlying processor (Deserve currently lives on the CoreCard processing platform, which Intelligent Systems owns).

Marqeta is a well-run company and has an industry-leading processing platform that is very powerful for its clients. Compared to traditional processors, the API-driven experience enables very high customization levels and powerful experiences such as virtual cards, instant issuance, and fine-toothed controls for spending. This underlying capability is part of what makes cards in the corporate space like Brex and Ramp so powerful for their users.

If Marqeta and Deserve can bring some or all of this to the consumer credit space, I think there will be a boom in new credit card products from startups. That said, startups will need to adhere to more complex regulations and challenges than for the debit space. Overall, more competition will be good for both consumers and startups.

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Venmo Card Opens Up to All

A few months back, I noted that Venmo had launched a new credit card powered by Synchrony. The card started in public beta and is now available for all to apply. The card rewards you by accelerating your rewards in your top spending category each month. It does not, however, have any traditional signup incentives. Like most brand-related card plays, I think this card will appeal most to the Venmo user base. I’ve been on the fence about acquiring a card, but I might have to just to see the experience. It should be quite different from a standard Synchrony card.

New Joint Cards

Traditional banks have long created joint accounts for consumers, such as a married couple. On the checking or demand deposit account side, this is quite common, including allowing each user to have a debit card. On the credit side, most products offer this, although the second card is called an “Authorized User,” as the line of credit is typically in a single person’s name. (Some banks do allow for joint credit card accounts, as well, notably Bank of America.)

However, few fintech products have had joint accounts or cards as the underlying infrastructure hasn’t supported it. This past week both Zeta, a fintech focused on shared finances, and HM Bradley, a neobank for savers, announced joint account capabilities. Shared accounts are a common need and something that demonstrates the challenges new companies have in reaching a level of features that allows them to compete with traditional financial institutions. Similar challenges in these card-based companies include support for features such as wire transfers, which only a small subset of users may need.

New Card Features from Traditional Companies

A few highlights of new card features from the traditional card issuers and networks:

American Express announced a feature that aims to help customers understand their card bills better by incorporating receipt details from large merchants such as Google, Microsoft, and Apple. The feature is also supported by Square, enabling digital receipts for millions of small square merchants. One consequence of app stores and payment facilitators like Square and PayPal is a reduced amount of information about the underlying merchant. Payment facilitators increase disputes as consumers may not be clear on where the purchase originated. There has long been tension between merchants and card companies on providing full detail on the purchases to the card company. Typically, card issuers only have the total amount, not the line-item detail.

Visa announced it is adding discounts and services from Norton LifeLock to its credit card products. Mastercard has similar ID Theft Protection features for its cards. Identity theft continues to be a massive strain and concern for consumers. Many of these programs are very expensive, so I’m curious to see what actual benefits cardholders receive. I plan to try it out and compare with features from the other issuers later this year.