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Card-aggregating fintechs look for the next thing

CardUp, ipaymy and Reap moved from loyalty points to cash management. Now it’s time for another jump.



Ethan Dobson, Nicki Ramsay, Daren Guo

Asia-based fintechs that promote new use cases for bank-issued credit cards have already changed their business model once. They are looking now to make another jump.

Card aggregating startups such as CardUp and ipaymy in Singapore, and Reap in Hong Kong, have found their original model based on loyalty points hasn’t worked on its own.

They extended to helping small businesses use cards as sources of short-term credit, for things like payroll, rent, and supplier invoices. But that is probably a temporary refuge rather than a home, as these businesses seek to broaden their offering.

Growing the credit-card pie

CardUp, for example, has expanded regionally to create new opportunities for businesses to use credit cards for new types of spend. This year it opened shop in Hong Kong and Malaysia, helping customers conserve cash by putting their cards to use for remittances and foreign-exchange transactions, says Nicki Ramsay, founder and CEO.

She disputes the characterization of changing the firm’s business model, saying it is expanding from a direct-to-consumer model to include B2B.

“Our technology creates a win-win for the whole cards payment ecosystem,” she said. “We help banks capture more spend on cards as they face off against new competitors like virtual banks.”

Nicki Ramsay, CardUp

These fintechs have also lately won the approval of payment tech companies like VISA and Mastercard, which have come to see the advantage of a merchant aggregating fintech. CardUp and others provide a layer of risk management and compliance to merchants that by themselves would never accept cards due to the fees. The payment companies offer APIs and other integration tools that facilitate business.

The big payment tech firms have come to appreciate these relationships. A spokesman at VISA said it partners with CardUp, Singapore-based payments fintech Nium, and others to expand B2B supplier acceptance and simplify reconciliations among all parties.

“Expanding B2B payment flows is a $120 trillion global opportunity, and Asia Pacific accounts for $52 trillion of this,” said the spokesman, adding that Hong Kong and Singapore are conducive to launching cross-border B2B payment solutions. “These partnerships will help businesses, especially SMEs, to pay and get paid in fast, secure, and simple manners.”

New business models

Such partnerships are helpful to big card processors; they are existential for these fintechs. But they also leave these startups at the mercy of banks, a lesson they learned when their original model focused on loyalty points drew banks’ ire.

The pitch was to help people use cards for new types of large payments in order to win loyalty points like air miles. The model was pioneered in the U.S. by Plastiq, which launched in 2010 after its founder realized he couldn’t pay his Harvard University tuition by credit card.

But some banks didn’t like being on the hook for points at that scale – and the type of people who value such rewards were a little too eager.

“When customers are doing the math, that’s not where you want your business to be,” chuckled Ethan Dobson, founder and CEO of ipaymy.

Points were a nice-to-have; cash is a need-to-have

Ethan Dobson, ipaymy

These companies then shifted to helping small and medium-sized enterprises (SMEs) use credit cards to pay for untraditional categories of payment, as a means of short-term cash management.

“Points were a nice-to-have,” said Dobson, “but cash is a need-to-have.”

Unlike a closed-loop payments service like PayPal, which requires both sides use the service, these fintechs only need the merchant to provide their bank details and they use their tech layer to enable card payments via a bank transfer. This lets customers pay with a card and settle with their bank account.

Ramsay says her banking partners continue to support initiatives based both on rewards points and on cash. “We work closely to ensure the economics of each transaction makes sense to them.”

The majority of transactions are recurring payments such as payroll and rent, for companies that face a month or two of cash shortfalls, she says.

Daren Guo, Reap

“We’re a channel for banks to grow their business,” said Daren Guo, co-founder of Reap. “They provide an allocation of capital, and we distribute it.”

Bank buffers

This B2B approach has its limits, however. These credit aggregators can bring new business to banks, but at lower fees: the merchant discount rate, what banks charge merchants to process their card-based payments, often declines as volumes increase.

“Issuers are being paid less,” said Varun Mittal, global emerging-markets fintech leader at EY in Singapore. Moreover, banks don’t see the data from these purchases: that information rests with the fintech.

“If there’s loyalty points on top, bulk acquisitions become a cost to issuers.,” Mittal said. “They will prefer merchants set up their own card acquirer relationship.”

Varun Mittal, EY

Banks are also wary of credit cards being used as cash tools. When people or businesses take out cash from an ATM using a credit card, the charge is high. These aren’t debit cards, and banks can’t be sure that cash going out the door will come back.

Fintech aggregators bring trust to this aspect. They also widen acceptance because they work across all credit cards, whereas a bank could reproduce this lending program but only for its own card franchise.

That hasn’t stopped banks from copying the fintechs, though.

Last year Citi introduced PayAll in Singapore, which lets customers use their credit cards on recurring, non-discretionary big payments through mobile while earning rewards and miles on their spend; it has recently expanded this to Hong Kong. DBS and Standard Chartered have similar products.

COVID-19 buys time

The fintech strategy works best when it comes to finding customers that banks would find too costly to win.

The current environment has given fintechs new tailwinds. First, interest rates are so low that banks aren’t making as much money from lending. Therefore they are happy to promote spending as a better use of their capital. If fintechs can grow spending through cards, banks will find this helpful.

COVID-19 has also created new impetus for businesses to use cards.

Traditionally, businesses use credit cards to pay for travel and entertainment expenses. But the coronavirus has put a halt to that. Meanwhile small businesses are struggling. Why not redirect T&E budgets to payroll or rent – and use a card that’s already been approved, instead of asking for a loan or having a company director pledge a personal guarantee?

Fintechs lack a lending book

Varun Mittal, EY

This pivot has probably bought these fintechs time but may not offer a permanent path to profitability. These companies all enjoy revenues but not profits.

Ultimately, the fintechs are providing a credit rollover that ultimately has to be repaid. And although they partner with banks, banks can operate this business at a much lower cost of capital than a tech startup.

“Fintechs lack a lending book,” Mittal said. “They’re just rolling over someone else’s book.” This means they are still dependent upon banks. Given banks’ cheap cost of funding, these fintechs can operate for only as long as their bank partners want them to.

Reinventing, again

The fintechs have expanded from B2C roots to a B2B business model. They have a window of opportunity to transform their businesses into something even bigger. What are the options? One is to be bought and the other is to radically expand their own business.

First, getting bought. An acquirer could be another digital financial institution, such as virtual bank or a merchant acquirer in the mold of India’s Pine Labs or Singapore’s FOMO Pay.

Or they could be bought by a traditional bank or a credit card company’s business: in Australia last year, VISA co-founded Yak Pay as yet another digital credit-acceptance business.

There aren’t comparables to look at valuations in this space. The closest might be in the peer-to-peer lending marketplaces, but that may not be a comparison that fintechs want right now. Kabbage, a leading SME lending player in the U.S. last valued at $1.2 billion, has agreed to be acquired by American Express – for possibly as little as $850 million, Bloomberg reported.

The alternative to selling is for the fintechs to get their own lending license, issue their own cards, and develop their own books of business. Easier said than done, especially as these would require more partners.

“We want to go broader,” said Kevin Kang, Reap’s co-founder. “We began with familiar, painful things, like access to payments and cash flow. We want to demonstrate our value and then go into lending, payments collection, accounting, and expenses management.”

CardUp, beyond eyeing new cross-border services, is extending its partnerships to companies like accounting-tech player Xero. It is looking at products that play off the work-from-home trend and other COVID-19 conditions that make digital services more attractive.

Dobson at ipaymy said he’s also looking at future models but declined to reveal his hand. “The fintechs in our industry need to be focused on the next level of innovation,” he said, “or by the next 24 months we’re all out of business.”

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