The world of financial technology is not just hot right now — it is fast becoming a force to be reckoned with. Investment dollars are flowing in at an alarming rate. It is a land grab in which the hottest competition is for the space in Americans’ wallets.
Fintech companies are competing to have their debit cards be consumers’ No. 1 choice, even if it sometimes doesn’t make sense for the company to provide this service. In order to lock-up that interchange rate (the charge that covers the handling and risk of card transactions), fintechs are targeting younger consumers. 73% of customers 18-34 said they would be willing to try a card from a tech firm they already use.
This information from customers fits the business model, and legitimately adds value to the customer. Offering a debit card is a valid strategy. The revenue associated with interchange (every time a card is swiped, that fintech earns a portion) can be significant for a fintech startup.
But with the recent influx of cards — it’s essential to do something unique. “Just another card” is not going to penetrate the zeitgeist.
There’s Gold Out There
Take a look at Acorns, a six-year-old investing and savings company. For every purchase with the Acorns card, the partner retailer will deposit a reward into the consumer’s account. With recent backing from Comcast Ventures, NBCUniversal, and Bain Capital Ventures, Acorns’ valuation skyrocketed to $860 million.
But that also highlights the scary thing that’s being whispered around Sand Hill Road. There is irrational exuberance from venture capitalists pushing their fintech startups toward debit cards and that oh-so-beautiful interchange rate. These debit cards — dare I say “fads” — are not based in real use cases. Funding for fintech startups hit $11.89 billion in 2018, the highest in five years. The monetary flood is inflating valuations way too soon in startups’ growth cycles.
It’s founders’ responsibility to push back and do the right thing for their businesses, but having venture capitalists pushing that “hot strategy” on their investments is a scary proposition.
Positioning for Success
Again, if fintech startups wish to embrace the debit card strategy, they need to put some more profound thought behind the offering.
Instead of just chasing the latest fad, companies need to truly create the most value for their customers.
1. Don’t reinvent the wheel.
Charge for the product. Digit, the popular money-saving app, took a lot of heat in 2017 when the company announced it would implement a $2.99 monthly fee. Added features did little to salve angry customers, many of whom said they’d pull their funds. A year later, CEO Ethan Bloch said Digit had helped clients set aside more than $1 billion. Digit made a decision that dramatically shifted the economics and significantly increased sustainability. If a product indeed provides value, consumers will pay for it.
2. Provide value through recommendations.
If the fintech startup has built significant trust with its user base, recommendations and third-party offers can be a scalable monetization strategy. Credit Karma is a great example of this. Users trust Credit Karma to provide an up-to-date, accurate credit score. This relationship is a perfect platform to suggest credit cards, loans, etc., that all flow from the quality of the user’s credit score. Every card and loan is monetized. Value for the user. Revenue for Credit Karma. Mutual alignment.
3. Partner for profit.
Find a partner that adds value to your platform, integrate it, and charge for it. Accounting apps are an excellent example of this. Often dependent on free software to run their books, freelancers and solopreneurs generally don’t withhold enough on their taxes. Integrating with a company such as Track could provide a path to additional revenue. Track, one of the first cohorts of nbkc bank’s partner accelerator Fountain City Fintech, uses machine learning to analyze freelancer earnings, differentiate between W-2 income, and withhold taxes. Integrating Track’s application programming interface and charging an additional fee for tax withholding and remittance could be a lucrative strategy.
4. Don’t rule out tipping.
The “pay what’s fair” model has picked up steam as Aspiration, and many others have brought the standard to the world of fintech. Aspiration’s product is free, and consumers can decide how much they’d like to tip. The information is not public, but according to folks close to Aspiration, the numbers are favorable compared to what similar companies make per customer.
There are a lot of dynamics at play that determines which card consumers choose to use for purchases. On average, Americans have 2.6 credit cards. And credit cards generally come with much more significant rewards than debit cards. Consumers are incentivized to use the card that benefits them the most. The likelihood that a fintech startup’s card will have staying power is low.
Consumers are fickle, and businesses are hard to build for the long term. The need for fintech startups to develop business models with diverse revenue streams is paramount.