The Man From the Diners’ Club

Credit card fans know that Diners Club invented the modern credit card in 1950. Although the franchise carries less prestige today, it was the first and best charge card a business person in the 1950s America could have in their wallet.

I’m not just a credit card fan; I am also a huge fan of Danny Kaye. I’ve recently been watching these movies with my children, and we happened upon 1963’s The Man from the Diners’ Club, Danny Kaye’s final theatrical release. (Available on Amazon Prime!). Although the movie is often at the bottom of ranking lists for Danny Kaye’s films (it’s no The Inspector General), I have a newfound love of it and all the things it correctly hit on about card issuing.

The movie's basic plot is that Danny Kaye plays Ernest Klenk, a kind but timid and error-prone employee at Diners’ Club, where he is responsible for application approval. A gangster, Foots Pulardos, played by the always amazing Telly Savalas (best known as Kojak), is trying to flee the country and has no access to his cash. His girlfriend applies for a Diners’ Club card so that they can make travel arrangements to flee.

We see Klenk processing application postcards, getting in trouble for approving someone’s dog for a card, and, in the big plot point, approving Foots Pulardos’ card under Foot’s real name (Robert), even though the Klenk’s mean boss has recently added Pulardos to a chalkboard listing people who Diners Club must not approve for a card. In a clear sign of the era, the film also includes a ridiculous computerized file machine that makes bizarre noises and spectacularly flings index cards across the room (more than once). (Shades of the current fear of AI present back in the former fear of the computer from the 1960s.)

This movie has foreshadowed today’s card industry challenges: know your customer procedures, OFAC and sanctions lists, fraud management, and more. The film also feels like an advertisement for cards, with the characters flipping through a list of merchants that accept the card to order rental cars, messengers, flowers, plane tickets, and temporary workers.

These topics are all the same ones that echo through modern issuers and financial technology companies:

• Do we have strong, but not overwhelming, know your customer procedures?
• Are we verifying our cardholder list against OFAC and Treasury Sanctions?
• Are we monitoring for fraudulent purchases and behaviors?
• Are our cards accepted at merchants that people are shopping at?

I am delighted that the industry has computerized. Foots Palardos keeps charging absurd amounts of things to a card he steals from Ernie Klenk. Still, the approval team at Diners’ Club keeps saying, “Yes, that’s fine.” Today all of these tasks are completed by algorithms and APIs. However, companies continue to use manual reviews to ensure they achieve the correct balance of approvals while minimizing false negatives.

The Man from the Diners’ Club (1963): Five Stars. Recommended for all CardsFTW readers.

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CFPB Warns on Apps

Last week, the CFPB warned that “popular digital payment apps are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe.” The agency calculates that billions of dollars sitting as balances in apps like PayPal, Venmo, and Cash App are not insured by FDIC insurance or otherwise protected. Some digital wallets do make FDIC protection statements based on how you receive or spend the money in the wallet.

When you get a debit card attached to a digital wallet account, most users gain FDIC coverage from the card, which is attached to a form of a demand deposit account issued by a regulated financial institution as an account with pass-through FDIC coverage. If you keep your funds in an account without a card, they may be in a comingled account that the bank holds in the name of the app provider.

Many consumers don’t realize that FDIC insurance doesn’t help you specifically if an app fails. FDIC covers your funds if a bank fails. Apps and prepaid debit cards typically hold your funds on a virtual account or external ledger. The bank’s core ledger doesn’t record your account, but it is effectively a sub-account of an omnibus account that holds funds for your benefit. Banks require their fintech providers to publish either all transactions or a daily ledger file to them so that in the event of a bank failure, the FDIC has a place to find who is owed what.

While it is improbable that Square or PayPal/Venmo will fail, the rules that govern certain of these accounts differ from those that cover demand deposit accounts held at a bank (or at a bank through a neobank debit card). Consumers should pay attention to this. In short: Don’t keep large balances in your digital wallet.

Stripe Credit

This week's big news is in every newsletter: Stripe is launching a charge card program! But wait, you say, don’t companies like Ramp or Navan (fka TripActions) already issue charge cards on Stripe? Yes and no. These companies have been using commercial credit BINs to issue cards to their customers that look and feel like a charge card but, in fact, are prepaid as far as Stripe is concerned by the program manager (in this example, Ramp or Navan).

From my limited outside perspective, it looks like Stripe has transitioned to allowing some programs to provide charge cards from allowing only pre-funded charge cards (wherein the program manager funds the charges) to allowing also post funding the accounts and buying the receivables via Stripe’s platforms as the loans are generated. By making this shift, the complexity and amount of capital required to run the program decreases substantially.

Some Fintech Goodbyes

The last few weeks are continuing to see turmoil in fintech land. Let’s remember some card-centric companies are on their way out.

Plastiq enabled consumers to pay bills that don’t accept credit cards. Doing so rarely made economic sense, but there was an argument for some rewards maximizers or businesses that could deduct fees. The margins were razor-thin to negative. The company is working through bankruptcy.

SableCard developed a credit builder product for recent immigrants and those without a credit history. The company is no longer accepting applications. No longer accepting applications can indicate that a banking or provider relationship is changing, the product is retooling, or the business is closing.

CardsFTW

Thanks for reading CardsFTW, a debit and credit newsletter by Matthew Goldman. Matthew is the founder of Totavi, LLC, which provides GSD Product Consulting with real operational value. Visit totavi.com to learn more and engage us.