The Great Convergence Continues

3 Fintech News Stories

#1: The Great Convergence Continues 

What happened?

Product roadmaps continue to converge in the corporate card and expense management space:

After three years offering startups banking services, San Francisco-based Mercury is launching a corporate charge card called IO. The corporate card market is an increasingly crowded sector of fintech with companies including Brex, Ramp, Divvy and Rho all competing to leverage technology to offer better corporate financial tools, including cards.

So what?

I wrote about this product convergence a while back when Rho announced that it was adding expense management capabilities to its platform. This news from Mercury is yet more validation of my belief that within the next 12 months, the product suites of these companies will look (on the surface) almost identical.

The question is where will the differentiation sit? What products/capabilities will provide the killer functionality that venture-backed startups can’t live without? In the case of Mercury, it doesn’t appear that its corporate charge card is intended to provide that differentiation:

The IO card offers 1.5% cash back on all purchases, with no annual fee or personal guarantee by a company owner required. Mercury customers can issue corporate cards to their employees for expenses ranging from subscriptions for business-related tools to travel, and the cards also enable spending controls like customizable limits on an employee-by-employee basis.

That might be differentiated when compared to AmEx (although it should be noted that AmEx is really good at other things that fintech startups struggle with), but it doesn’t stand out compared to Ramp, Brex, Divvy, and Rho. 

#2: CCaaS is Getting Crowded

What happened?

Another credit-cards-as-a-service (CCaaS) provider has joined the fray:

Power, a fintech infrastructure startup, is now kicking off its full-stack credit card issuance platform after a year in stealth mode and with $16.1 million in seed funding and $300 million in a credit facility.

Power’s first product is the credit card issuance program, which is designed for companies, brands and banks to offer embeddable fintech experiences, like customized credit card programs, targeted promotions and personalized rewards, into existing mobile and web applications.

So what?

Power joins a long list of other fintech startups – Deserve, Cardless, Zeta, Imprint, Concerto – trying to disrupt the co-brand and private label credit card market, which is currently dominated by companies like Synchrony and Bread.

The bet being made here rests on two assumptions.

First, there is a long tail of B2B and B2C brands that would be interested in offering a credit card, but haven’t (for whatever reason) already taken up with the traditional banks (or other fintech companies) competing in this space:

Though [Randy] Fernando [co-founder and CEO of Power] would not go into specifics about revenue or customers, he did say that the majority of customers Power is working with currently have never offered a credit card program before. 

And second, those brands will benefit from a broader shift in their customers’ preferences for where they get their credit cards:  

“My belief is that over the next several years, consumers will go from banking with fintechs to banking with their favorite brands,” Fernando told TechCrunch. “That is the vision we are building at Power — building modern fintech to power commerce.” 

I’m not sure how confident I feel in either of these assumptions, but I guess we’ll see!

#3: 100% Worth It

What happened?

Varo CEO Colin Walsh has been doing a bit of a press tour over the last couple of weeks, with TechCrunch being the latest stop:

Last month, Varo Bank celebrated the two-year anniversary of obtaining its national bank charter. The move made Varo the first-ever all-digital nationally chartered U.S. consumer bank.

A lot has happened since Varo took the complex, and costly, bank charter route. I caught up with Colin Walsh, the company’s chief executive and founder, to get an update.

So what?

The whole interview with Mary Ann Azevedo is worth reading, but there are a couple of specific things that jumped out to me:

1.) Mr. Walsh argued that it was 100% worth it to get a bank charter because it allows Varo to control its own regulatory destiny:

If you’re partnering with a sponsor, anything could go wrong with any number of those partners that could create a risk for the business and the business model. So we effectively eliminated an intermediary.

And because it better positions Varo to lend money profitably, in a rising rate environment:

I’m the only one who celebrates every time the Fed raises rates 75 basis points and I think some of my non-bank lending friends see it as an existential threat.

These are great theoretical arguments, but in practice, neither of these seem to be huge advantages. Yes, there is more regulatory scrutiny being applied to BaaS right now, but it’s not as if regulators have shut down Chime or Current (nor does that seem likely). And sure, having a bank charter and consumer deposits can make it easier and more profitable to lend money (especially in a rising rate environment), but you have to actually be good at lending money in order to benefit from those advantages, and it’s not at all clear when Varo will start lending money at a significant scale nor how successful it will be once it starts. 

2.) Mr. Walsh also described the cost-cutting measures that Varo is taking in response to the changing macroeconomic conditions:

We did do a really big raise last year, which was hugely successful. And we were doing all the things we said we were going to do on the back of that in terms of dialing up the growth engine. Then the market has sort of changed very rapidly around us. So we repositioned the business to continue to invest and build products that customers are going to love and are going to fulfill the mission but scaled back a little bit on other areas of expense.

Our largest reduction in spend is coming from marketing. We reduced June Customer Acquisition Cost (CAC) by 64% relative to Q1. Although it was a tough decision, we also reduced our headcount [affecting 75 people] in the second quarter to ensure the long-term health of our business given the current macroeconomic challenges. At the same time, we are continuing to execute our robust near-term product strategy to support future growth.

I’m not in love with this framing. When he says “macroeconomic challenges” what he means is that VCs are no longer willing to shovel piles of cash into businesses that are trying to grow rapidly without solid unit economics. It’s not like this shift was unforeseeable or impossible to prepare for in advance.

2 Fintech Content Recommendations

#1: The Previously Undiscovered Bible of API Companies (by Brendan Keeler, Health API Guy)

My friend Brendan Keeler wrote the definitive piece on APIs, and you must read it (and part 2: The API Bible’s New Testament: Aggregators) right now. Brendan’s beat is healthcare and healthtech, but he’s also a fintech nerd in his spare time, and this piece does a wonderful job describing, in detail and using examples, the different playbooks for building API-centric businesses.

#2: Fintech’s Funk Smells Like Teen Spirit (by Ron Shevlin, Forbes)

You probably could have guessed, just from the title, who wrote this one. Ron makes a very apt comparison in this piece – fintech companies, which for the last couple of decades have been treated like the golden children who could do no wrong, are entering their teenage and young adult years and finding out what it means to grow up.

1 Question to Ponder

What’s the most interesting fintech or financial services trend playing out in a non-U.S. country that U.S. fintech companies should know about and try to learn from?

(Do not say open banking … we already know that one.)

If you have thoughts on this question, please hit me up on Twitter or LinkedIn.