What happened to CardsFTW? Life. It happens to all of us. The past six months feel like they might have been a few years. I’m not one for New Year’s resolutions, so I will get a jump start on this and return to publishing in December. I have a long list of interesting links from the past months that I won’t write about in this post, but hey, that’s life.

Is Fintech Dead?

2022 has not been friendly to fintech. As the economy has stumbled under high inflation, all sorts of things have stopped working. The era of fintech 2.0 that emerged following the 2008 financial crisis was built on low interest rates.

When you build a financial model, one of your first inputs is the cost of capital, determined by what you have to pay for that capital (e.g., the interest rate) or your foregone yield earnings on that capital (if you happen to be sitting on lots of cash). This I learned in Introduction to Economics with Professor Eric Helland at Claremont McKenna College. The 2008 Financial Crisis drove the growth of fintech 2.0 through three interesting conditions:

1. absurdly low interest rates
2. regulatory steering (e.g., Dodd-Frank and the Durbin Amendment, more on this later)
3. a long expansion pattern from a very deep economic recession

The market today is very different. We have:

1. rising interest rates we haven’t seen in 20 years
2. inflation at rates most fintech leaders and entrepreneurs have never seen in their lifetime
3. continued economic uncertainty

Now fintech companies are faced with a series of threats:

1. venture capital to fund their business is scarce (or at least more expensive, there is plenty of money)
2. loan defaults are increasing, and insufficient funds are increasing
3. valuations are plummeting publicly and privately
4. regulatory problems persist (Congress has not repealed Dodd-Frank)

We see challenges to fintech due to product-market fit. We see challenges due to the regulatory structure. We see challenges due to funding.

Concerning the regulatory landscape, the Durbin amendment shifted how fintech innovation was supported. Before Durbin, a select few large banks were working with startups (for example, Green Dot’s early cards were issued by units of Synovus, a top 30 financial institution). After Durbin, regulators limited large banks from earning meaningful debit interchange (theoretically to lower prices, but I’m pretty sure there is no evidence of that happening). Now fintech companies exclusively work with smaller banks.

I don’t intend to paint a broad brush on smaller banks; some are highly sophisticated. Fintechs shifted substantially to banks that didn’t have the resources to properly manage and monitor fintech 2.0 programs.

Fintech is in a tough spot.

Yet, fintech is not dead. Money movement is critical to our economy, and many opportunities exist to build new and better experiences. Some things won’t change any time soon (regulation), some things we can hope will change soon (inflation), and some things will go through cycles as usual (venture funding).

Long Live Fintech

Here are a few quick notes on new products and card space innovations that I’m excited about!

Ness*

I love to talk about challenger credit cards. We continue to see a few new credit card products grow and launch. Ness is a premium credit card product focused on the health and wellness space. *I am an advisor to Ness, which allowed me to be one of their alpha testers. The Ness team is building its card from the ground up, acting as its program manager. The Bank of Missouri issues the card.

Bilt

I’ve covered Bilt before, and they are on a great path. They are working with major landlords to enable rent payments to drive rewards on Mastercard. Since their launch, they raised a ton of money and moved from a typical fintech issuer to a co-brand deal with Wells Fargo. Credit, in particular, is a space where big banks continue to have advantages around capital management, lending, and systems (also where Durbin has no impact).

Ally

Ally Bank re-entered the credit card space. Ally isn’t a fintech but operates as a more tech-oriented branchless entity. The three cards are a return to the space from a few years back. The cards aren’t super innovative, but I am excited to see more competition beyond the big six issuers.

Greenlight

Greenlight is known for its debit card products designed to help parents and kids manage money and learn financial literacy. They recently launched a credit card product issued by First National Bank of Omaha (FNBO). FNBO is a traditional co-brand card issuer making inroads as a more tech-oriented platform, competing with folks like Deserve, Cardless, and Imprint.

Predictions

Much like resolutions, I don’t make predictions, but I don’t think 2023 will be a great year for the broader economy or fintech. We will see companies fail, we will see companies get acquired, and we will see some sanity return to lending. This shift has been painful and will continue to be painful. It will probably be for the best in the long run. Tough times breed innovation.

I’m looking forward to seeing what people invent!

CardsFTW

Thanks for reading CardsFTW, an occasional newsletter about all things debit and credit. CardsFTW is written and curated by Matthew Goldman, President at Apto Payments. If you’re looking for insights into everyday payments beyond deal blogs, please subscribe for free at cardsftw.substack.com. If you enjoyed this, please share it with a friend!