What’s Next for Challenger Banks & Card Programs?
Card programs are an important component of most challenger bank offerings today. But with so many fintechs competing for attention, it is difficult to make a program stand out.
The traditional route to market for a US card program doesn’t make this task any easier. In this model, a fintech has to connect with, and effectively become an agent of, a sponsor bank, riding on the back of its compliance — for Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements and so on — in order to onboard customers.
These bank-sponsored card programs subsequently become reliant on the issuing bank’s (often outdated) legacy technology and infrastructure. The card program also has to connect to a processor, which adds another layer to an already cumbersome process.
Tech Partners Enable Innovation & Speed to Market
Many of the smarter start-ups are following another path and taking advantage of the API-powered banking technologies being pioneered by the likes of Marqeta. As a dual issuer/processor, Marqeta provides an API layer that connects fintech card programs directly to a sponsor bank, while also taking control of the onboarding and KYC requirements. These technology firms also make it much easier for the program to be creative with reward systems, digital use, and even physical card design.
For fintechs such as Brex, which used Marqeta to launch its corporate card for start-ups in 2018, this means getting to market much quicker and with a much more innovative customer offering. Brex initially attracted a lot of users by offering a rewards program designed for digital-native businesses. They’ve since evolved to offer free transfers and high-interest checking accounts with aims of becoming a bank replacement. But as more and more fintechs embrace the opportunities offered by API technology layers, they will also need to differentiate their customer experience.
Challengers are already doing this in a number of innovative ways, from providing consumers with an option to invest leftover change following everyday transactions into stocks like Acorn, to offering services on the B2B side such as expense management tools and payments like Bill.com or Square for example. Some of the exciting areas for the future are invoice financing and cash advances for small to medium businesses (SMBs). We’ve seen new firms such as Clearbanc, Behalf, LSQ, and SellersFunding offering short term cash advances to business customers helping them eliminate cash flow problems that inhibit growth. From there it’s possible to see these firms evolving to offer more traditional banking & payment services.
One thing is clear: it won’t be enough for a fintech just to offer simple transfers, as there are too many players — the Venmos and CashApps of this world — already doing just that. To succeed, fintechs will need to identify a niche in the market and have a clear strategy for attracting customers.
Low-Interest Rate Environment will force change
Many fintechs are currently pitching high-yield savings accounts, but the forthcoming economic downturn will lead to a low-interest and potentially negative rate environment in the US. These firms will be forced to figure out an alternative strategy.
Some think cross-border payments could come into play. With more and more start-ups operating internationally, particularly e-commerce merchants and life sciences firms, some of the sharper challengers have realized they can differentiate by offering these businesses FX and international payments services.
Most US businesses still face critical issues when moving money internationally and no US fintech as of yet has truly addressed them. These are manual data entry, lack of transparency, and speed of settlement. In the traditional correspondent banking model, international payments must be manually entered or the best case processed via bulk upload. Further, the archaic structure used to transfer money globally through different central banking systems inhibits speed and causes a massive lack of transparency with cross-border payment.
So What’s Next…
It’ll be interesting to see how the COVID Crisis and evolving economic environment will cause fintechs to adapt their offerings to meet customer's needs. Equally exciting, will be watching new innovative firms pop-up to address these changes and create opportunities from the crisis. B2B payments will be a good area to watch and see how the leading edge provides solutions to help SMB’s that need it most right now. Providing a seamless solution for sending and receiving international payments, coupled with GPS-like payment tracking, could be the next stage in their efforts to differentiate.