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Shopify Launches a Business Credit Card

Business cards are the new hotness. Just a few weeks ago, I covered Square’s new business credit card. I also published a very timely deep-dive on This Week in Fintech with my friend Julie VerHage-Greenberg to look at the progress and changes amongst the largest fintech corporate card providers: Brex, Divvy, Ramp, and Navan. We try to answer the question: Has fintech remade the corporate card?

Last week, Shopify announced its new credit card product. Shopify is marketing the card as a “pay in full business credit card,” that is, a charge card. So many new charge cards! Indeed, Brex, Divvy, Ramp, Navan, Square, and Shopify are all charge cards. (So is your traditional American Express card, as well as a version of Chase’s Ink business card.)

What is the difference between charge and credit anyway? It’s the “pay in full” feature. A credit card, which is what most consumers are carrying in their wallets (excluding traditional American Express Green, Gold, and Platinum cards) allows users to pay their card in full to avoid any interest charges or revolve a portion of their balance from month-to-month and pay interest on the loan.

Charge cards, on the other hand, require that you always pay your balance in full on the due date. You may not revolve the balance (hence, no interest rate), although many do have a late fee. If you don’t pay your balance on time, the card is simply frozen for future use.

Charge cards carry much less risk than credit cards because of the lack of revolving balances–you know pretty fast if your user is going to pay and whether or not you want to continue to extend them additional credit. In the current non-zero interest rate environment, charge cards are popular amongst fintech providers because less capital is being used.

Just two years ago, many fintech providers could raise capital to lend out to their customers at rates between 6% and 12%, even for new products. While these rates aren’t amazing (especially compared to that 3% thirty-year mortgage some folks timed just right), they do allow you to lend money at average credit card APRs of 17-20% (at the time) and make some money. Today the net interest margin is compressed, with fintech lines running above 12% and average credit card APRs at 20-21% (per creditcards.com).

While traditional financial institutions can continue to lend because their cost of capital remains closer to 5% (between the SOFR and customer deposits), the capital most fintech card companies are lending is not backed by a bank but by private investors who demand higher returns for the implied risk.

The money market is so tight that there is another little-known twist to the fintech charge cards. While your traditional American Express charge product provides a 21-day grace period between when the cardholder’s statement closes and the payment is due. In contrast, most fintech cards (e.g., Ramp) require payment the very next day via automated ACH (e.g., your statement closes on July 31, and your debit occurs on August 1). Not very graceful.

All of this brings us back to the plethora of charge cards. These exist not because customers want them but because it is more capital efficient for the provider. We see in the marketing the benefits of “no interest” or “pay in full” to try to convince prospective cardholders that these are benefits. I don’t have the survey data at hand, but my guess is that most small business owners would prefer the flexibility. One of my favorite all-time small business credit cards is the American Express Plum Card.

The key feature of the Plum card is the built-in flexible payment schedule on a charge card. You can choose to pay within ten days of the statement close and earn 1.5% cash back, or you can pay only your minimum by the due date (21 days) and then the remainder within 60 days and pay no interest. I used one of these as my primary card at Wallaby (2012-2014) and loved cash back, except during a few cash flow crunches, which we survived thanks in part to our Plum Card.

The Shopify card does have some very interesting features. First, they do provide a grace period before the statement balance is due: 25 days. Second, like many fintech cards, underwriting does not require a personal guarantee or credit check. Typically, a small business card is secured by the owner’s personal credit, not by the business itself. (Company guarantees for startups was a key innovation by Brex.)

After digging into the reward program, however, I think something may be amiss. The card earns:

• 3% Cashback Rewards on Eligible Purchases in your Top Spend Category for up to US$100,000 in Eligible Purchases during each Account Year (“Top Spend Threshold”). After you reach the Top Spend Threshold, earn 1% Cashback Rewards on Eligible Purchases in your Top Spend Category for the remainder of your Account Year.
• Earn 1% Cashback Rewards on Eligible Purchases in all Other Spend Categories.

So, what are these categories? There are three categories:

1. Marketing: Eligible Purchases of marketing or advertising products and services from Google, Meta, Microsoft, Pinterest, Snap, TikTok, and Twitter and through Eligible Marketing Apps.
2. Fulfillment: Eligible Purchases of shipping and fulfillment products and services from United States Postal Service, United Parcel Service, DHL Express, Flexport, and Pirate Ship and through Shopify Shipping, Shipsurance, and Eligible Fulfillment Apps.
3. Wholesale: Eligible Purchases of inventory and supplies from Faire.

The way I read this is that outside of these categories, your reward rate is 0%. That’s not good.

Also, not surprisingly, and as with Square, you need to be a Shopify customer.

I love embedded finance, and I think that there is a huge opportunity to build targeted card products based on merchant types. Shopify is focused on e-commerce brands. Square is known for offline brands. Brex focuses on high-growth startups, etc.

However, I think there are some concerns about tying your financial product directly to your sales platform and that this card has some major drawbacks if I read those reward terms correctly (these are the terms at the time of this posting, and Shopify states "Spend Categories may be subject to change without notice”). The terms clearly state, “Eligible Purchases that do not fall into the Spend Categories are not eligible to earn any Cashback Rewards.” Most cards earn 1% on a base rate on “all other spending,” so a 0% is out of market; even with many cards earning a 3%/2%/1% structure, this is a 3%/1%/0% structure.

If I were a Shopify merchant, I would probably steer clear of this card. I think you could get more rewards and more payment flexibility from a traditional card provider.

Mastercard is Not Cool with Cannabis

Last week Mastercard announced it is demanding that banks prohibit the purchase of cannabis with its debit cards. While cannabis purchases with credit cards have long been prohibited, this push on debit cards is new. One possible workaround is for ATM operators to place ATMs in or near these cannabis retailers and then make it easy for cardholders to withdraw cash and hand it to the retailer.

Personal opinion notwithstanding, cannabis remains illegal on a Federal basis, and Federal law governs the money transmission under which Mastercard and its member financial institutions process transactions. Cannabis sales really can only be made with cash today (although, I suppose we have all heard about drug deals transacted over Cash App, Venmo, etc.)

What I want to know is, how was cannabis being purchased with Mastercard cards in the first place?

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.

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