Neobanks are Getting Into Credit

I waited to write this week’s newsletter because I heard a rumor that Chase would be announcing changes to their flagship Chase Sapphire Reserve.

Turns out, bigger news was on its way in the form of Venmo announcing its first credit card product. The Venmo credit card is issued by Synchrony, a leader in co-brand credit cards, and is on the Visa network. Venmo has a huge and loyal following of mostly younger users. It started as a peer-to-peer payment network startup, was purchased by Braintree, a payments processor, and then ultimately by PayPal, when PayPal acquired Braintree. The choice of issuing bank is logical given PayPal’s existing corporate relationship with Synchrony, which issues the PayPal Extras Mastercard (not a great rewards card).

The verbification of the word “venmo” (“I will venmo you for that beer.”) demonstrates the popularity of the platform. Much like top competitor Square Cash, Venmo has moved further into traditional money management with a debit card, ability to direct deposit into your account, and more. For a user with a simple set of daily payment needs, Venmo can provide access to everything in one place.

The new credit card is a very strong offering on the rewards front and appears to include low credit limits, as it will be offered as both a traditional Visa and Visa Signature product. The card carries no annual fee. The rewards are a flexible cashback structure with 3% cashback each month in your highest spend category, 2% in your second highest category, and 1% everywhere else. The category is automatically defined, no enrollment is required, and that top spend category can be one of the eight: grocery, dining and nightlife, travel, gas, transportation, bills and utilities, health and beauty, and entertainment. I imagine not everything fits into these eight super categories, so some large transactions may be relegated to permanent 1% status.

We’ve seen other cards with a 3/2/1 structure including variable top categories. With some, you have to choose the category on a quarterly basis (such as Bank of America’s Cash Rewards card). HM Bradley, another neobank, recently launched its credit card with a similar automatic 3/2/1 setup. The HM Bradley card carries a $60 annual fee (waived the first year).

When neobanks get into credit there is a lot of risk. There is traditional credit risk, which, in this case, appears to rest with Synchrony, which has tons of experience. There is also brand risk in rejecting your existing users who do not qualify. One of Venmo’s neobank competitors, Chime, recently launched a no-fee credit-builder secured card product (which I think is a great product). As a secured card, the product does not carry the same risk of rejection for many users. Venmo is taking a bigger risk in using an unsecured card approach.

Counteracting this challenge is strong brand loyalty to and built-in network effects of Venmo. Even if you use a traditional bank, many users will continue to use Venmo as a way to pay friends, family, and even service providers like gardeners, babysitters, and cleaners.

The other area I’ll be watching in this deal is the experience component. Typically, Synchrony runs a private label website for each co-brand card and it isn’t heavily customized. Even the Amazon private label credit card has a standard Synchrony site. As a Venmo user, I would expect a fully integrated credit experience into the Venmo app. We’ll have to wait and see what it looks like. Not anyone can apply following today’s announcement. According to Venmo, the card is initially available to a limited number of users. To be invited, you must have had a Venmo account for at least 30 days and been active in the past 12 months.

I’m always excited to see new market entrants. I think the Venmo card is a very solid cashback card offering. Conventional wisdom has it that younger users prefer debit cards and it will be interesting to see if the Venmo brand pulls additional consumers into the world of credit cards.

Marketplaces vs. Providers

Credit Karma announced last week that it was getting into the neobank game by launching a digital checking account “aimed at Gen Z.” The details are sparse, but this sounds like a standard off-the-shelf neobank debit card at this time. Credit Karma (CK) previously launched a high-yield savings account product. CK faces a challenge in that they have a large user base for whom they want to provide services, but they make their money by selling products from other financial institutions. As CK begins to compete with these financial institutions, it will be challenging to market these products while also competing. I can see why CK would be ambitious to take more control of their user’s financial lives, but I think it is at counter purposes to their original product goal and mission. CK isn’t the first marketplace and credit score provider to launch a neobank debit card. Credit Sesame, a smaller, but very similar company to CK launched a neobank debit card, Sesame Cash, last March.

Everyone is a Neobank Now

It turns out everyone wants to add financial products and neobanking services. Gusto, a late-stage startup payroll provider also announced a new debit card product this week. Again, there is basic strategic sense here: it’s integrated with payroll, Gusto can have its customers market their product to their employees, it helps employee financial wellness, etc. However, people change jobs, people don’t want any sense that their employer can see their money, and companies change payroll providers. Other big payroll providers (such as ADP) have payroll cards which are big in the lower-wage segment. However, as a user, I would run away from this offering quickly due to all the inherent challenges. I do not want my personal finance tied to my company’s service providers.

Old Fashioned Co-brand News

Goldman Sachs, long the bank of the rich, has been expanding aggressively into consumer products. Their first consumer credit card is the wildly successful Apple Card. For their next act, Goldman announced it was acquiring the GM Credit Card portfolio from Capital One. This card has always surprised me with its popularity. You earn points, which you can eventually cash in to buy a GM car or truck. First, it takes forever to get enough points to make a dent in a new card purchase. Second, how do you know when you get the card that you’re going to buy a GM in a few years? I don’t get it, but, full disclosure, I come from a Ford family. (No, I don’t have Ford’s lackluster credit card.)

Barclays refreshed its co-branded cards with hotel chain Wyndham. There are three cards here with a lot of options and it exhausts me thinking about explaining them all. As always, Doctor of Credit has the low down. I’ll just add that the naming is terrible: “Earner, Earner+, and Earner Business.” As with virtually all co-brand cards, if you love the brand, then check it out. Otherwise, move on.

Travel Cards Aren’t Just For Travel Anymore

Chase rolled out a variety of changes earlier this year to compensate users for the fact that its premium credit cards are entirely focused on travel and, well, you know, no travel is happening. This included a variety of new accelerators for bonus earnings in groceries and streaming, fee reductions, and the introduction of “Pay Yourself Back.” This feature allowed users to cash-in their travel points for cashback against dining and groceries at higher than average rates, up to 1.5 cents per point for Chase Sapphire Reserve cardholders. The program was set to expire on September 30th. Just in the nick of time, Chase announced they would extend the program to April 31, 2021, further proving everyone is surprised by how long this pandemic rages. I’ve been spending down my Chase points rapidly and am glad to have more time to do it. It’s a great deal if you don’t think you’re going to travel anytime soon. I wish American Express would do something similar.

Pay by Hand

Amazon is never afraid to experiment and they announced a big anti-card move with palm recognition. When I was running Wallaby in 2012 I met entrepreneurs trying to do this who kept getting laughed out of the room. Amazon’s touch-free handprint identification is even better than what was imagined in Spaceballs. People are getting more used to biometrics and the privacy bonus of handprints vs. facial recognition is very appealing. I remain skeptical, but you’ll probably be able to pay by hand at Whole Foods.

CardsFTW

Thanks for reading CardsFTW, a weekly newsletter about all things debit and credit. CardsFTW is written and curated by Matthew Goldman, Founder and CEO at Vertical Finance, a challenger credit card startup. If you’re looking for insights into everyday payments beyond deal blogs, please subscribe for free at cardsftw.substack.com.