WORKWEEK

3 Fintech News Stories

#1: The Credit Card for Greedy, Lazy Transactors 

What happened?

Following its acquisition of X1, Robinhood announced a credit card:

The investing app Robinhood is making headlines with the announcement of the Robinhood Gold Card. This credit card features a minimum of 3% cash back on all purchases and there’s even a limited-edition 10-karat gold version. When compared to other cards, that rewards rate is typically capped after a certain amount of spending or to a specific category of purchases (i.e. gas or dining), but with this card you’ll be able to earn 3% cash back on all purchases — with no limit on the amount you can earn.

It’s not open for applications yet, but you can add yourself to the waitlist. While it’s technically a no-annual-fee card, it’s only open to Robinhood Gold members, which costs $5/mo or $50 a year.

So what?     

This one was the subject of a lot of fintech Twitter commentary and back-of-the-envelope math last week. Allow me to summarize all the chatter – there’s basically no chance this card makes money as a standalone product.

A 2.2% interchange rate, an annual fee (for all intents and purposes) of $50, and some interest income won’t be able to cover unlimited 3% cash back, some credit losses, and the cost that Robinhood will incur to fund these revolving credit lines (to say nothing of the fees that it will pay its bank partner Coastal Community Bank).

Obviously, Robinhood understands this. Like all credit card issuers, it will have a mix of transactors (low-risk users who pay their full balance every month) and revolvers (higher-risk and more profitable users who carry a balance month-to-month and pay interest). According to Robinhood’s CEO, the company will make money on revolvers through the interest they pay, and they will monetize the transactors by cross-selling them additional products through Robinhood Gold. 

A few thoughts on this:

• Making money on revolvers is a tricky business. You want customers who will rack up big balances and revolve them routinely, but you want to minimize the number of those customers who default. X1, in its pre-acquisition days, talked a lot about its ability to approve customers for higher limits using their cash flow data. This will be an interesting test of X1’s underwriting prowess.
• According to Simon Taylor (who had a great write-up on the Robinhood Gold Card in his newsletter), the card comes with its own mobile app, separate from the main Robinhood app. If this is true, it’s absolutely wild. I know X1 is the product under the surface here, and they had a separate mobile app that they were quite proud of, but come on! The plan for making money on transactors is to cross-sell them additional Robinhood products and services. Having two separate apps would seem to make that more difficult.  
• And speaking of transactors, which segment of transactors is Robinhood targeting with this card? If you don’t care about maximizing your rewards, then the unlimited 3% isn’t going to matter to you. If you do care about maximizing your rewards and are willing to put in the requisite amount of work (as Brian Kelly encourages), then this card doesn’t actually help you that much (according to super nerd Kiah Haslett). So, I guess Robinhood is looking for folks who are both greedy and lazy? Wait a minute … that sounds perfect for Robinhood! Maybe this will work out well for them after all!         

#2: Payment Steering, Coming to a Store Near You.

What happened?

More credit card (and debit card) news! Visa and Mastercard reached an agreement to settle a long-running dispute with merchants:

Visa and Mastercard reached an estimated $30 billion settlement to limit credit and debit card fees for merchants, with some savings likely to be passed on to consumers through lower prices.

The antitrust settlement announced on Tuesday is one of the largest in U.S. history, and if it receives court approval would resolve most claims in nationwide litigation that began in 2005.

Some critics believe it may not go far enough, saying the savings would be temporary and fees would remain high. 

So what?     

This is a story for payments geeks, and if you’re not a payments geek, it’s easy to miss what’s significant here.

For example, the author of the Reuters article quoted above is clearly not a payments geek. He does not understand that A.) absolutely no savings will be passed on to consumers because they never ever are, B.) most merchants won’t save anything as a result of this settlement because only the big merchants are on interchange-plus pricing (smaller merchants are all on bundled pricing), and C.) the significant part of the story is the loosening up of the networks’ anti-steering restrictions.

On that last point, here’s what’s changing:

• Merchants are now allowed to surcharge (i.e. charge more) for credit cards. There is a cap on the amount merchants can charge (between 1% and 3%, depending on how it is implemented), and merchants are allowed to surcharge at a card-type level, meaning that they can charge more for a Visa Signature card than a standard Visa credit card. They are not allowed to charge differently at an issuer level, nor are they allowed to charge more for debit cards (neobanks breathe a sigh of relief).
• Merchants are allowed to offer discounts to customers to incentivize them not to use a credit card or debit card or to use a different one than they might otherwise choose. The amount of the discount is uncapped, and the discount can be applied at both a card-type level and an issuer level. However, merchants are required to display the discounted and non-discounted prices next to every single product. They are not allowed to simply mark down/up at the point of sale.
• Merchants will be permitted to discriminate among digital wallets (Apple Pay, Google Pay, Paze, etc.), meaning they can choose to decline one wallet and not another.

What do these changes mean?

It’s too early to say exactly, especially given that there will be A LOT of work that needs to get done at the merchant acquirer/PSP/ISV level, just to enable merchants to take advantage of this newly granted flexibility (the big merchants will obviously be the first movers).

However, my best guess is that surcharging will be used more frequently by smaller merchants who are looking for a blunt tool to lower payment costs, while discounting will become a more subtle game, played by larger merchants, primarily in e-commerce (where the price display constraint will be less onerous).

And digital wallets are about to become a lot more competitive. The big issuers may suddenly see Paze as a more viable opportunity for displacing Apple and Google, if they can win over enough merchants. The big merchants may dust off the old CurrentC playbook and see if they can move some volume off of cards and onto ACH or faster payments rails (with the help of open banking).

(Shoutout to Ben Brown and Scott Wessman, two uber payments geeks who have been sharing some great insights on this news.)  

#3: Difficult to Believe In

What happened?

Building on its small-dollar line of credit product (Varo Advance), Varo is introducing a new lending product – Varo Line of Credit:

Varo Line of Credit provides a unique way for consumers to access credit. Customers can be pre-approved up to $2,000 to cover unexpected expenses, such as medical bills or car repairs, and pay it back over time. Varo Line of Credit has transparent fixed pricing and no late or hidden fees.

So what?

Transparent pricing (a fixed fee and 0% APR) and no late or hidden fees sound lovely, but it’s also a comparatively expensive option, as this Axios article points out:

Rather than being able to make draws on the line whenever they need to, Varo customers have to take the full amount up front — and they have to pay all the interest up front, too. 

The repayment schedule is then fixed rather than flexible. That means borrowers can’t repay the loan early to reduce its cost.

This “0% APR” product looks a lot like a term loan. If you calculate the APR as though it were a term loan, it comes out to 34.6%. 

Also, I thought this section of the press release was pretty interesting:

Varo Line of Credit uses proprietary technology to underwrite customers based on their banking history with Varo—extending access to credit beyond their credit score. The more customers bank with Varo and establish a track record of regular deposits and on-time payments, the more they might be able to borrow.

Why is Varo going out of its way to reassure customers that they can get access to credit without having to rely on their credit scores when Varo has been, for years, trying to help customers improve their credit scores with its credit builder card product – Varo Believe? Wouldn’t you want to position this new Line of Credit product as a graduation product for customers who have successfully been using Varo Believe? Isn’t that the whole point of offering a credit builder product?  

Hear me out, because I know this will sound crazy, but is it possible that Varo Believe isn’t furnishing believable repayment data to the credit bureaus?

2 Fintech Content Recommendations

#1: What Regulators Want From Banks Partnering With Third Parties, Fintechs (by Kiah Haslett, Bank Director) 📚

This is a timely piece from Kiah on what regulators want to see from BaaS banks (and any banks that work, in novel ways, with third parties). The article includes this timeless reminder: “Regulators hold banks accountable for their partners’ actions as if the bank performed the action itself.”

#2: How the wrong side won at Boeing (by Dan Davies) 📚

I’m becoming obsessed with trying to understand how Boeing got itself into its current predicament. It seems to be a story with a lot of lessons for any big, profitable company that may be at risk of losing touch with the value it provides to customers (we might have one or two examples of this in financial services).

This essay does a nice job outlining a theory on what happened to Boeing’s culture.

1 Question to Ponder

Where can large language models add value in the credit decisioning process?

Where is the obvious, low-hanging fruit? And what are the more-difficult-but-potentially-more-valuable use cases for LLMs in credit decisioning that we might get to eventually?