Banking on Identity

Banking started as a community affair. Banks were local both in original nature (before easy electronic movement of money) and by legislation in many states. Credit unions are another form of this localized banking. By law, credit unions are required to serve an affinity group (be that a geographic area, an employee group, members of an association, or other defined groups).

Focusing on a particular customer, or subset of customers, is a tested and well-proven business model. There are very few services and companies in the world that are genuinely mass market. Only in the past few decades has banking has grown to be a conglomerated national enterprise, as people have become more mobile, as electronic communications have grown, and as regulations have changed.

A little personal history

As an example of this, my first banking experience was at a local credit union, now called Del Norte Credit Union. Initially, the credit union was focused on my small town, but merged with another credit union in the 1990s and expanded its reach. When I opened my first business and looked for new banking products, like business checking, I tried other local banks like Mountain Community Bank and Los Alamos National Bank. (Both of these banks have been acquired and merged into much larger entities now.) When I moved to Los Angeles, I initially sought another local bank but found its services lacking (no weekend access to ATMs!) and eventually gave in and went with Bank of America.

As these smaller banks have closed or merged with larger competitors, a new breed of community-focused neobanks is rising. What's different this time around is that these neobanks are not geographically focused but more identity driven. The core thread of aligning a product against a user's personal needs and preferences remains, but the approach is very different.

Banks for your identity or your situation

Last week, I mentioned Greenwood Bank (not a real bank; the name is sure to be changed), which focuses on serving the Black and Latinx community. There is also Tenth and One VIP (live this past week), both with a similar focus, Be Money, focusing on LGBTQ+, and I am sure many others in the works that I am missing. What I find fascinating is that these are race or identity-based services. Do we want to segregate banking services further by identity? Is it a matter of comfort for customers? Many other services have focused on the needs of these communities (Green Dot and Current both have found success in these communities), but they have not explicitly labeled themselves as serving that particular community.

Some neobanks align with consumers by situation instead of identity. For example, you have several lenders focused on immigrants, or students, or immigrant students, such as Stilt, Deserve, and Sable (among others). There are services for people attempting to build credit. My company, Vertical, which is building credit cards around your passion or hobby. To me, this seems very different in approach to the identity model. You can be a student and be any racial identity or sexual orientation, and you can be Black and be a student, an immigrant, or none of the above.

Consumers will decide

We are at the start of a new trend of community banking, but in a virtual, non-geographically defined community. We won't see the neobank of New York. There will be broad, mass-market neobanks (e.g., Chime), and there will be niche-oriented neobanks. There may be room for both approaches of identity-based banking and situation-based banking. The overlap in these two could be substantial (being an immigrant is also a big part of a person's identity). I am concerned that banking on identity will lead to disadvantages for specific communities. We saw in prepaid that the Russell Simmons prepaid card, aimed at Black consumers, was substantially more expensive than other mass-market offerings. If these new entrants can bring the same quality and pricing to these communities that historically has not had access to or awareness of the many banking opportunities, there is a clear net improvement.

Either way, consumers want to be services based on who they are and their specific needs. In this respect the biggest of the big banks in America are failing with generic, one-size-fits-all solutions. No one loves Bank of America or Wells Fargo, and their leadership continues to show how poorly they understand regular Americans, particularly minorities.

Yelp Moves On from CLO

Last week we highlighted card-linked offers. One popular type of card-linked offer is restaurant cashback. Restaurant CLOs are one of the oldest forms of these offers. Rewards Network manages the majority of these programs that allow you to earn miles for dining. Many of these programs are independent of the bank reward programs and operated by airlines or hotels. Consumers register any Visa or Mastercard with the rewards program and earn a set number of miles or points for each dollar spent at participating restaurants.

Yelp rolled out a cashback program several years ago in partnership with Empyr. This newer card-linked aggregator started as a direct-to-consumer play called Mogl, then pivoted to provide an API to other providers as Empyr, and was recently acquired by Augeo in April of this year.

Yelp announced last week that they are ending the cashback program on October 31st. I don't have enough information to speculate if this is a result of the Augeo deal, a pullback by Yelp, or just a sign of a lack of consumer adoption. These programs have suffered from coverage issues (not many restaurants participate). There are extensive measures against double-dipping, meaning that you have to select Yelp vs. Southwest Dining vs. Marriott Dining, etc. Given consumer preferences for travel programs, I imagine Yelp was not at the top of this list.

I think this is a minor setback in terms of card-linked offer program growth. Yelp may be out of the game, but others continue to enter it.

Pay with Points

I am a huge fan of pay with points, allowing consumers to use their existing credit card rewards at merchants directly at checkout. Amazon, for example, supports paying with points with their co-branded credit cards, Chase cards, and American Express cards. FIS, a major infrastructure player in the credit card world has been growing its network for pay with points and recently added drugstore giant Walgreens to the list. Other existing retailers include BP and Shell.

In FIS's system, customers can pay with points after starting the transaction via a terminal prompt. (There is a limit of $10 per transaction.) Most pay-with-points options to date have been online-only, likely due to the challenges of integrating with point-of-sale terminals. Additionally, adding prompts to in-person terminals is usually a very bad thing at retail as it slows down the line.

I am excited to see more of this rolling out, but I am confused by the $10 limit. I don't know why you would do this. Limiting the amount of rewards seems to add a negative component (a limit) to an otherwise rewarding experience.

Yet Another All-in-One Payment Device

I have a collection of exciting payments devices on my office wall. Starting back in 2012 with my work on Wallaby, many hardware-based competitors built all-in-one card solutions. These devices solve the George Costanza-overly full wallet problem. They digitize each of your credit cards into a single credit card-sized electronic wallet. The device on the top left is the LoopPay, which was a fob and phone case that used both NFC and a new technology called Magnetic Stripe Transmission to turn any payment into a contactless payment. Samsung and MST acquired LoopPay, which was then integrated into Samsung phones.

Other than LoopPay, which lives on in Samsung phones, none of these products survived. The companies behind them were sold or went out of business. The ubiquity of built-in mobile payments for mobile phones via Apple Pay and Google Pay makes these kinds of solutions unnecessary, as your phone can be your wallet.

Yet, the team behind LoopPay are back with OV Valet-SuperKey on Indiegogo. I have so many questions here. How much did it cost to reacquire the rights to the MST technology? Why would you want to use this? How is this better than a phone? How good will this one look on my wall? (Yes, I already backed it.)

While there are still card readers out there that don't have the NFC support required for Google and Apple Pay, the number of these devices is dwindling fast. There is more to this play than just the hardware component, with some host-card emulation technologies acquired from SimplyTapp and a team that has been at work for quite a while. The Indiegogo page includes information rewards, bill pay, and other payments features that may make this more useful than the first generation hardware devices. I'm not convinced this won't just end up on my wall of fame (or shame) for payments, but it's hard to bet against this team.

A return to marketing and spending for card customers

Bank earnings season has shown a few highlights in an otherwise challenging and weird year. The WSJ reported American Express is seeing growth in non-travel and entertainment categories (which dropped 70%) in the third quarter. One percent growth isn't that good usually, but it's looking good through the lens of 2020. Meanwhile, American Banker reported that both American Express and Capital One would be returning to actively marketing credit cards. At the start of the pandemic, some super-regionals, such as Commerce Bank, shut down entire cards from new applications, while others tightened underwriting standards, reducing approval rates. Both companies committed to significant spending on acquisition in the fourth quarter, despite a time of uncertainty. So, keep an eye out on your mailbox, as the mailed offers will be back.

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. If you enjoyed this, please share it with a friend! Follow me on Twitter @magoldman.