CardsFTW #7: Repayment Rewards

2% is better than 1.5%. We checked the math.

SoFi is a nine-year-old fintech startup with billions of dollars in funding. It started in the student loan space with alumni of a school (Stanford in this case) lending to current students to finance their education. Today, it is a broad-based financial services leader with many services like loans, deposit accounts, insurance, investing, and now, a credit card.

It was a big week at SoFi, which announced both preliminary approval to receive its own bank charter as well as the launch of its new credit card product. SoFi, like many other fintech lenders, has focused on loan consolidation, friendlier repayments, and debt reduction plans. Their new credit card product fits into this brand messaging with a rewards incentive around repayment and savings.

Cardholders will earn 1% flat cashback on purchases. When cardholders redeem that cashback by either paying down a SoFi loan or depositing it into a SoFi savings or investment account the reward is doubled to 2%. The card immediately reminded me of two other cashback cards.

The first card is the Citi DoubleCash card earns consumers 1% on purchase and 1% when you pay your bill. You can pay the balance over time or immediately and still earn the bonus, as long as you pay your minimum. This card was the first big offering from a major bank to create a rewards emphasis around paying your card, where most cards incentive users for spending.

The second card is the Fidelity Rewards Visa Signature card, which earns a flat 2% cashback, but you can only redeem those rewards into an eligible Fidelity account. This Fidelity card isn’t widely advertised outside of Fidelity customer mailing lists, but has long been a favorite of low-cost investors. The Fidelity card is issued and serviced by Elan Financial Services, which is a unit of US Bank.

SoFi’s new card is issued by The Bank of Missouri and is a Mastercard product. This is one of the few banks that has been willing to act as a sponsor bank to fintechs or other credit solutions, along with players like WebBank, Celtic Bank, and, more recently, Stride Bank and Evolve Bank & Trust. Other cards issued by The Bank of Missouri include Continental Finance, Fortive, and Ollo Card.

SoFi moving into a consumer credit card is another strong sign that consumer credit cards are the next frontier in fintech development. Fintech companies have focused on debit cards, savings accounts, and investing over the past 10 years and they are looking for new avenues of growth. The credit card market is much more concentrated than other financial products, which has led to product stagnation (most innovation is simply on pricing) and a sense that it is hard to jump in and compete.

I think that fintech companies will find that consumer credit is a lot more difficult to build than debit. There are fewer parties that can help with the infrastructure (although more are working on it) and there are a lot of complex regulations (even for a financial services company) to address. There’s one more big challenge: credit approval. With debit, savings, and investment, consumers put money on deposit. There are financial risks for the issuer, but tremendously less than in lending. SoFi started out as a lender and has much more experience than most fintech startups in lending. However, unsecured credit cards are often last in line in terms of what people pay and the ability for lenders to recoup their losses. (People pay rent, cars, and other secured loans first in most situations.) Unlike an installment loan, there is a higher fraud risk as transactions come in anytime and anywhere.

As always, I am excited to see new options, but cautious about the long-term commitment of these entries. The SoFi card offer is unlikely to move a ton of volume, as it does not include a signup bonus or any unique benefits. There are a number of other 2% cashback cards on the market. As a product line extension, they will likely see some cross-sell success, but they won’t be acquiring new customers with this.

Upgrade Also Adds Rewards

It’s always amusing when similar news hits in the same week. Upgrade, which is a fintech lender aimed at customers with fair credit and average income also announced a rewards program. Upgrade is an installment lender, but has used a credit card for funds delivery. You can apply for and receive approval for a credit line, then you can use the card to buy something (originally thought of as a big ticket item) and then you have a fixed 36 month repayment period.

Upgrade is now adding a 1.5% cashback feature to the card. You earn the full 1.5% cashback after you pay your bill. I was surprised to see this, as I had assumed the APR and line of credit was the key driver of customers here. That 1.5% cashback will be funded by higher APRs (I assume) and for these customers, that seems like a negative new feature.

More Changes in Credit Cards & Food Delivery

We covered the end of the Mastercard Postmates deal and it seems like every few weeks we’re hearing of some changes to how traditional travel credit cards are attempting to provide value to consumers with food delivery services. Chase has a substantial DoorDash partnership and this week American Express announced changes to their Uber features. These announcements are always complicated by legal language and different options for different users, but I’ll try to keep it simple.

In the before times, the American Express Platinum card had a benefit for Uber with a $15 monthly credit that could be used for rides and food(use it or lose it each month, $200 total with a December bonus). That remains, but now Platinum, Gold, and Green cardholders also get an Eats Pass membership, which gives consumers a delivery fee waiver and a discount. This is the equivalent of the Dashpass from DoorDash discount that Chase gives its Sapphire Reserve cardholders. Nothing very exciting here, just keeping up with the Joneses. Next year, Amex will also provide a $10 per month credit to Gold cardholders for Uber spend. It’s all better than nothing, but a general distraction from the fact that these are travel cards in an era of no travel.

Coinbase Launches Crypto Debit Card

Coinbase, a leading cryptocurrency marketplace announced its new debit card last week. This is far from the first debit card for bitcoin and I was a bit surprised Coinbase didn’t already have this product. The award for the first bitcoin card goes to the Apto Payments team, I think, when they were Shift. I had one. For my first purchase I bought a latte at my favorite cafe with what is now $158 worth of bitcoin. Ouch.

The Coinbase card lets you spend directly off your crypto balance anywhere that accepts Visa and has some sort of rewards program. Crypto is really an asset due to its price volatility rather than a payments tool (original idea notwithstanding) and I think spending crypto at retail is a great way to buy a very expensive latte and regret it later. The card is issued by MetaBank and powered on the Marqeta processing platform. How much you earn in rewards depends on what currency you use and I figure that it’s probably not a very good deal somehow. I would skip this card if I weren’t a payments nerd. (I’m on the waitlist!)

Buy Now, Pay Later

Before we had credit cards and providers like Affirm and Klarna, many consumers had a line of credit with their local retailers. I can’t find the figures, but there was, is, and always will be lots of demand to buy something now (and take it with you) and pay later when you have the money. In the old days, you received a statement from the store or at some point they would demand a payment. Many accounts took more than 30 days to true up and then the cycle started.

Credit cards were successful in part due to the influx of bank lending to this retail process. Merchants could be paid more rapidly, consumers could continue to pay later and banks bore the financing cost. Banks also managed the transactional history and billing for a relatively small fee (which has turned into that ~2.5-3% interchange) instead of individual retailers needing to manage their own accounts.

In the past decade Affirm, Klarna, and many others have created an in between option that isn’t a card, but is a fixed short-term installment loan you can pay off in three or four payments. The startups here have grown tremendously and offer point-of-sale financing for many goods online when a consumer doesn’t have (or want to use) an available credit card.

This past week Alliance Data Systems, owner of Comenity Bank, announced its purchase of Bread, which is a white label buy-now/pay-later tool. ADS is known for its white label credit cards at major retailers such as Williams Sonoma. With the purchase of Bread, ADS can integrate more buy-now/pay-later options with its retail operations.

No one can decide if it’s a good year or not

I keep covering reports and analysis of how issuers feel about whether the pandemic is good or bad for them. In the early days, government stimulus and a reduction in activity and spending outside the home led many consumers to pay down debt. This week’s Wall Street Journal analysis described it best as “discordant.” Consumers are both paying down debt (which is always a sort of good, sort of bad thing in that issuers earn less interest but also incur fewer losses) and are using their cards for more with the massive growth of online spending and reduction in use of cash. Either way, I think we can all agree that little makes sense in 2020 and we’ll just have to take it one day at a time.

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.

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