The growth of digital banking has also welcomed the emergence of virtual cards. Virtual cards exist only in digital form, in a digital wallet. Say bye to plastic and hello to code. 

Some digital challenger banks allow customers to create virtual cards in a matter of seconds. To shop more securely online for example, one can create a virtual card and even destroy it after the purchase was made. 

This is a big reason why virtual cards are increasing in popularity – they offer more robust security measures, making it harder for hackers and fraudsters to skirt the system. 

There’s also very compelling business use cases for virtual cards. Corporate expense management might be moving from tediously having to submit all that boring info about that client lunch to just tapping a virtual corporate card with a smartphone. 

Some have even called this a revolution in business expense management – no more boring time consuming software, now a company can issue however many corporate cards it wants and each card can have its own restrictions.

I’m talking about all of this today with my guests Kalpesh Kapadia, CEO at Deserve, a credit-card-as-a-service provider, and Brian Barnes, CEO at personal finance platform M1.

The credit card has essentially evolved from plastic to code, and Kalpesh I’d like to start with getting your overview of this transition. How do you see this evolutionary step? 

Kalpesh: As you rightly pointed out, money in general is moving from cash to plastic to code. It’s a 50 year transformation of money, and we are in the middle of the transformation. Apple launched their credit card product in 2019. 30 years prior to that, the industry was organized in the analog era – mainframe, manual processing, batch processing, plastic, all that. The mobile app was kind of an afterthought that you could download. 

Apple flipped the paradigm. There are about 50 devices over the course of the 15 years that have been sucked into the iPhone. I think driver’s licenses are going to be next, credit cards are already in digital wallets. So we believe that over the next 10 years, as more and more terminals start accepting Apple Pay, Google Pay, contactless payments, more and more cards are going to become part of your digital wallet, and you’ll actually ditch your actual wallet. 

So there’s two camps here. One camp is advertising heavily saying what’s in your wallet, which are the Capital One’s of the world, and Apple wants you to ditch your wallet. So we believe that, ultimately, the digital experience is superior in all respects, so the industry is going to move in that direction. And we want to be there.

Digital is slowly but surely becoming the default way in which we operate, and financial transactions are at the heart of that. Brian, what do you think? What’s the role of a credit card in a digital economy?

Brian: I 100% agree with Kalpesh on everything that he said. In the most abstract form, the credit card, the more interesting part of the credit card is the credit portion that people need to pay for everything in cash. That’s what retailers accept. That’s what people expect as they get paid for various things. For an individual managing their finances, it’s relatively expensive to keep all the liquidity on hand to manage that. And so the credit card came out and the line of credit came out where it says the bank says, We will give you free access to liquidity up to a certain limit. If it’s free for 30 days, if you go beyond that, we’re going to start charging you but it is an extremely powerful concept for an individual to manage their day to day spending. 

The card aspect of that is just how you access it. And I think if the least interesting part of it, there’s no reason why it needs to be tied to a piece of plastic, there’s no reason why it can’t be accessible via a lot of things, whether that’s your mobile device, a watch token on the internet and the like. I think by going digital, you just have a lot more forms that are more convenient, more secure, easier to access on you at all times, it’s not an additional piece of things, the piece of plastic that you need to carry around. And so being able to abstract away the credit and the card portion from the credit card just makes it a lot more beneficial for the end user.

Going fully digital is making everything more accessible. It’s reaching a wider audience. But with increasing scale also comes a rise in fraud. I think a lot of a big reason why virtual cards are increasing in popularity is because they do offer more robust security measures. And I want to ask both of you on this front, what are you observing? And why is this the case?

Kalpesh: Clearly, the device footprint, the ID associated with the device, in the card authentication, all these things taken together is providing more security, if you will, to each transaction because of the awareness as to where you’re using the card. 

For instance, if someone gets my card number and starts using it in the Philippines, there is a flag that, hey, this person typically doesn’t travel outside of this geolocation or this radius. How come this card was swiped somewhere halfway across the world, right? With phones and cards, you can marry those two together and have better awareness of the person’s patterns, if you will, and manage security better in a seamless way in a frictionless way.

If you go to a gas station you have to enter your zip code every time. If I’m in Ohio, and have a rental car, I have to enter my Palo Alto zip code –  these are sort of very basic rules that people have on the code base or transaction pattern base or velocity base rules. Digital reduces friction, it can give rise to fraud, but you can also manage fraud better. 

The Apple Card is a perfect example or Deserve Card, where we don’t have a number on your card. So for any reason I lose my card, people can’t get access to my 16 digit account convert or CVV or expiry date. Right there, you have security, and then you can freeze the card from your app. How many times have people lost their wallet or had it stolen, and then you have to cancel all your credit cards? You can do all of these things in a digital world, much, much better than calling each car company and saying, Hey, cancel my card, or calling the credit bureau and putting a freeze on things?

Brian: I think the reasons for fraud are, unfortunately, relatively obvious. I really do think that the modern day bank robber, so to speak, is not someone who wears the cowboy hat and holds up a bank, but it’s really someone who has a laptop in a remote location and is able to access things digitally. They’re trying to get money through illicit means and profit from that. 

The big thing that a finance firm has to contend with is for every transaction, how likely is it that that person who owns the card, who has authority over it, is making that transaction. In the analog world that Kalpesh talked about, it’s really only holding on to the physical piece of plastic and typing in something that you may know, something like a zip code of where you live in the digital world, you actually have a lot more information. You have a phone that may have a PIN code, or a face ID or a thumbprint authentication on it, you can have location services enabled, if every transaction that you do is digital, you have a very robust data set of the patterns that every single person goes through, you can match that on their individual patterns on holistic patterns. 

And so it is really, by moving everything to the digital world, you just get the powers of computers to analyze every single transaction and make a much more robust decision on who should own the card making this transaction. It’s an arms race, so to speak. There’s different fraudsters that are trying to beat that. But the fraudsters get a benefit through not having to be in person to commit the fraud, being able to do it in a remote location with an internet connection. The digital finance firm gets the ability to have a whole lot more data to base their anti-fraud decisions on and really make it robust, to decide to decline to remove and track all of these things.

Kalpesh: That’s an excellent point, Brian, and I would even add, physical card security can be improved by marrying it to the device. We are all used to two factor authentication. Apple is now sort of talking about the vicinity – if your phone and your laptop are not in the same vicinity, it gives you an alert. You could do things like in a car and the phone are within 30 feet of each other. So if you forgot your phone, in your car and your target, it will still work as long as it’s in the periphery of where you are. You could create some sort of rules which are two factor authentication and improve physical card security as well.

It’s a really interesting thing that you said, Brian, regarding all the data points that can be gathered. And I wonder who owns the data in this case? Is it the credit card provider, the payments company, or is it the bank? Do we even know who has control over all these data points on the consumer?

Brian: It is a very good question, and truthfully, probably above my paygrade. I know that this is going to be debated. Ultimately, I actually think it’s beneficial for both parties to have access and control over the data, that the individual is the one taking the action to make the data – there’s helpfulness and transportability to be able to do with that data what you want. To help people improve their finances, having more data on the individual helps us do that. 

We are investing incredibly heavily in building systems and technology and processing, all of which take time, energy, money, and the sheer intellect of the engineers that do the work. We do need that data to provide the customer experience that, truthfully, the customer wants. The legality of it, I’ll let our congress people debate that. I do think the finance firm has a big benefit of having a lot of data on the customer, I think it drives a better consumer experience. And I do think that there is a little bit of a tilt that if they have data is nefarious, and I just don’t view that to be the case. We’ve come to work every day trying to help people improve their finances. And so that is our motivation and why we collect the data that we do.

Kalpesh: I would add that it’s an opt in basis. So the consumer opts in to add the security features. It is data used in that context. Our terms of service have to be very clear as to why I need this data, and what benefits you’re gonna get from this data. And we’re not going to share it with anyone else. Apple is at the forefront of privacy. Now, I believe the CFPB is coming out with an open banking data policy, so there’s a lot that is going to be decided or regulated over time. But ultimately, as Brian said, we are on the consumer’s side. So you want to help them improve their finances, help them reduce their fraud, and go through the hassle. If you are explaining it properly, and you’re messaging it properly, I believe consumers will opt into it.

Today it’s all about personalized financial services, and you can only do that with massive amounts of data points. But yeah, on the consumer side, a lot of those data privacy aspects will be decided in the future. I’d like to talk about the corporate use cases of digital cards as well. There’s been a lot of interest with virtual cards in business expenses management. What’s the demand like from the corporate sector for these types of services? 

Kalpesh: I believe that on the corporate or small business side, as Brian earlier mentioned, the 30 day credit cards are important when you’re managing cash flows of your businesses. Forget about the cash flow as a household. For business cash flow, providing that float to businesses is one thing that’s powerful. 

The second thing is card controls for your employees or by department. If you are a marketing person, you can spend $500 a day on Facebook or Google search, marketing. You have controls as a CFO saying, ‘Okay, this department needs this much budget to spend on this merchant for this service’. 

Also, transparency, expense management, budgeting, integration with accounting software. Once you make a card transaction with a digital entity, you can move data around in your stack, and you can integrate with other service services seamlessly. And I think that is why it is super important to make cards and transactions and payments digital. So that you have better controls, better transparency, better accountability, all of that. And I believe that is happening in corporate expense management, the likes of Ramp and Brex.

Brian: I think of credit cards almost as a pyramid of needs, for lack of a better term, and the base of the pyramid, it’s truthfully, just the access to credit. We talked about that at the beginning of this interview, of people needing liquidity to manage their day to day life. And it’s expensive to hold all of that on hand yourself.

The banks can come in and facilitate that. We’ve talked about security – it’s not just good enough to have access to credit that anybody can access, you have to lock down the parameters and only have the person who is authorized to use it, use it. 

Moving up the pyramid is cashback, I think that’s a huge aspect of the way the economics of the credit card work. There’s truthfully, just a little bit of excess profit in it. And a lot of these companies compete, and they’re rebaiting the excess profit back to the customers through cashback. It makes for a very efficient industry, and the customer benefits as a result of that. 

And then I think at the peak of the pyramid, it’s all the analytics that Kalpesh talked about, of when it’s digital, how can you use this information to make very personalized insights, recommendations and analytics for all these things. That’s where I think a lot of the interesting stuff exists, and I really do think of it as foundational stuff. Some of that has been handled by traditional credit cards over time. As we digitize everything, the analytics just become super powerful and impactful in the ability to provide insights and recommendations on how people want to manage their money.

It’s true, and this is really innovative for corporates that are used to spreadsheets or cumbersome software when expensing things. And also why I’m curious to hear your thoughts about credit-card-as-a-service; which is a very interesting example of embedded finance, really. Kalpesh, Deserve is a key player in this sector, can you give us a quick overview?

Kalpesh: We pioneered the term credit card as a service — we are the leader in this space. We believe that the next frontier in banking as a service is credit cards. A lot of companies can do sort of prepaid cards, debit cards as a service. I think that credit is complex, underwriting is super important when you’re issuing debit cards. People are putting money with you, right? So, you have to do KYC. It’s their money, they’re spending it over time. That’s one thing here, that is different, that credit card is underwriting because you are giving money away. And you need to know who you’re giving money to whether they are credit worthy or not. There are many ways to determine credit worthiness, not just through credit scores. So that’s one aspect of it. 

The other aspect of it is, interchange is higher. Most debit cards are very low interchange, at least the ones that are powered by large banks. So there are no rewards associated with it. So that’s underwriting, rewards capability or catalog or policy, whatever you want to call it, disputes and chargeback is another key aspect of it. 

And then credit has many years of regulations that are different, there are about 13 regulations that apply to credit cards, and you need to be compliant in every way. Because this is one product where you reject customers, so you have to be very careful in being compliant from a fair lending standpoint. So that’s another differentiation there. And then servicing when you’re halfway across the world, and you need to call someone to understand why the fee was charged, or you lost your card or things of that sort. So a lot of nuances that make it super complex to manage, and we bring it under one roof with one contract and one API. 

As consumers, Gen Zers are proving themselves to be quite different from previous generations – and that doesn’t just have to do with being digital-first.

Short for ‘style and ease’, Steez marks Tearsheet’s dive into understanding the unique financial demands and preferences of this emerging generation of adults, including in-depth research into consumer behavior and conversations with leading experts in the field.

The industry is light years behind conquering the Gen Z mindset. That’s why we’ve partnered with Publicis Sapient to create #STEEZ, a hub for finserv potentials to learn more about Gen Z and what it means to capture and delight them (download The STEEZ Guide to Gen Z readiness, here: https://steezlife.co/).

First episode of the Steez Podcast

We’re kicking off the first episode of our Steez Podcast with a bang and a common message: youth are the future.. Host Rebecca Cohen was joined by Kristy Kim, CEO of TomoCredit, Michael T. Pugh, CEO, and President of Carver Federal Savings Bank, and Lule Demmissie, CEO of eToro.

Topics discussed

You’ll learn:

• The data: Gen Z already has $360 billion in disposable income, and they’re just getting started.
• How Gen Z is impacting the investment industry and how firms are changing to better serve them
• Why Gen Z sees money differently than previous generations and how that’s impacting payments and credit cards
• The role financial education plays in Gen Z decisioning and how FIs are leveraging their learning assets to increase financial literacy
• How the changing nature of work for young people is impacting what they’re looking for from their financial institutions

Head on over to Steez to listen/watch the first full episode of the Steez Podcast.

We’re halfway through the fourth quarter of a turbulent 2022, and financial results from Q3 have been coming in. Financial services providers, big and small, have been affected by poor macroeconomic indicators, shrinking consumer spending, and nosediving VC investments. 

Despite this, revenues and customer bases for some of the leading challenger banks have continued growing. In this report, we are going to review the Q3 2022 results for three neobanks: Nubank, SoFi, and MoneyLion.

A growing trend we’re seeing in the industry is that firms are now focusing more on returning customers, and less on new ones. This is for two interconnected reasons: first, acquiring new customers is costly and risky – the creation of fraudulent accounts surged across platforms. Secondly, as firms have more data on existing customers, it is now more profitable and safe to cross-sell and upsell to them. This is particularly true for lending products.

This helps fintechs to continue expanding their products while decreasing risk and increasing revenue. The phenomenon was reflected across all three fintechs that we are reviewing in this report.

Nubank

Nubank reported a strong quarter, with growing revenues, users, and products across its multiple markets. Its growth outside of its home market was quite impressive – becoming the biggest new card issuer in both Mexico and Columbia. Just in these two markets combined, the firm has added around 500,000 customers this quarter. 

Across markets in Q3 2022, Nubank grew its customer base by 5.1 million, showing a 46% growth YoY, taking its total up to 70.4 million customers. Nubank has been following a product-led growth model, and hence, has gained these users at a very low customer acquisition cost. 

However, it’s not enough to just get more users on the platform – it is important to ensure that they’re also using it, and Nubank has managed to balance the two. The company has successfully flexed its cross- and upselling muscle, driving customer engagement.

The average activity rate on their platform this quarter was 82%. That’s up almost 10% from last year, and 3% from the previous quarter. In terms of active users, the bank estimates that it has now become the fifth largest in its home market of Brazil and the sixth largest in Latin America.

Furthermore, the bank has increased its average revenue per customer to $7.9. Controlled for the change in exchange rates, that’s a 61% increase YoY. To put that in context, their cost to serve each customer came to $0.8. Nubank has driven usage and revenue per customer on the back of expanding product offerings while keeping customer acquisition costs low with a product-led growth model.

The firm offers a variety of products that include:

• Credit cards, which now have 32 million active customers.
• Checking accounts, called NuAccounts, which currently support 50 million active accounts.
• Personal loans, which now count 5 million customers.
• An investment platform, called NuInvest, with 6 million users.
• A crypto trading platform, called Nucripto, which was launched in May 2022 and now has 1.3 million active users.
• SME products, which have attracted 2.3 million SMEs.

Analysts noticed the firm’s loan origination volume decelerated in Q3, and NuBank attributed this to a decrease in personal loan origination volume. For lending products, they’ve decided to focus on cross-selling – only handing out loans to consumers for whom they have sufficient transaction data available. This helps make their portfolio less risky and reflects their appetite to lend in the current economic climate.

Source: Nu Holdings

Nubank expects an uptick in its personal loan portfolio in Q4 2022. And going into 2023, they’re looking to introduce secure loans, which may serve to expand the portfolio altogether.

“In 2023, we do expect to begin the ramp-up of our secured personal loans business composed of investment-backed loans, payroll loans, and FGTS loans,” Guilherme Lago, Nubank’s CFO, said in the firm’s earnings call. “It is quite hard to foresee how fast this ramp-up will happen. But we are super excited with the prospects of complementing our unsecured consumer credit portfolio with secured credit portfolios starting in 2023.”

On the holding level, Nubank reported a break-even in the quarter, posting a net income of $7.8 million and $1.3 billion in revenues, up 171% YoY, adjusted for changes in foreign exchange. The company also posted its highest-ever gross profit at $427 million, up 90% YoY.

Going into next year, a key focus for the firm will be the high-income segment. As they stand, around 8% of the firm’s customers, or 5 million users, fall in the affluent segment – that’s a sizable amount. However, Nubank still doesn’t claim the biggest share of wallet for that market, with aspirations to do so. 

The firm has been unable to cater to that market more due to lacking technology and products. For example, the firm sees its low account limits as a strong factor.

“A lot of the time [the limiting factor] is missing limits, so we tend to have too low of a limit for this customer segment. Or the product is missing certain attributes, either the credit card product, or we’re missing products in the investment side or the insurance side,” said David Vélez, Nubank’s CEO.

Over the past year, the firm has had a strong focus on increasing limits on its platform.

Overall, Nubank, the only profitable neobank on the list, fared well – beating both revenue and EPS estimates. The stock price, though, has fallen from $4.57 on the day they announced their results – November 14th – to $4.32 at the end of November 18th.

SoFi

SoFi reported a strong quarter across multiple metrics. In terms of usage, it saw active users on its platform increase by 424,000 this quarter, up 61% YoY. This brings the fintech’s total customers to 4.7 million. Additionally, they sold another 635,000 products to these customers, showing a 69% increase YoY, taking their total to 7.2 million products. 

The firm credits the growth of its products to have gained a banking charter. Total deposits on its platform grew to $5 billion, growing 86%. SoFi has done well here considering these deposits are generally high-quality, as 85% of them come from direct deposits, with a median FICO rating of 750.

Source: SoFi

In the financial services division, in particular, the firm has shown a general increase in products across its multiple functions. Year-on-year, SoFi Money grew 72% to 2 million products, while SoFi invest grew 68% to around 2.1 million products, and SoFi Relay grew 113% to 1.6 million products. Lending products, the firm’s core business, struggled and only grew by 24% YoY this quarter, as against 22% last quarter.

SoFi’s original business, that of student loans, continues to see a decrease in demand. In comparison to Q3 2021, the firm originated 53% less of these loans in Q3 2022. Home loans fell too, by 73% YoY. These were offset by an increase in the demand for personal loans, which saw a 71% uptick to $2.8 million this quarter.

“Student loan refi continues to be negatively impacted as federal borrowers await the end of the moratorium on federal student loan payments. Home loans face macro headwinds from rising rates, while we continue the process of transitioning to new fulfillment partners,” said CEO Anthony Noto during the firm’s earnings call.

SoFi’s total revenues this quarter came down to $424 million, up 56% from $272 million in Q3 2021. However, net losses this quarter were up to $74 million from $30 million in Q3 2021. The firm says this is because in Q3 last year, they benefited from a $64.4 million change in the fair value of warrant liabilities. Had that not been the case, they would’ve seen a $20.2 million improvement in their net losses YoY.

SoFi marginally outperformed industry estimates, and though their stock fell initially, it is now hovering slightly in the positive. From November 1st, when they released their reports, their stock has gone up by $0.55 to $5.18 at the end of November 18th. 

Investors are alarmed, though. They find SoFi management’s plans for transitioning into a full-blown bank insufficient and vague and are also concerned about the prolonged duration for which loans are held on their balance sheet. 

Chris Lapointe, SoFi’s CFO, recognized that the firm has been holding loans onto its balance sheet longer in the previous quarter and this one, enabled by the acquisition of Golden Pacific Bancorp, grants them additional ways of accessing funding.

The firm has also made some of its forward flows such that it has the first right of refusal when a buyer seeks to sell.

“We’re starting to see more and more of that where, from time to time, we see a whole loan buyer come to us with the first refusal to purchase loans, and given the credit quality and loss profile and return of the loans that we originally underwrite, we strongly consider that. So, that’s something we’ll also take into consideration,” Lapointe said.

The fintech also revised its earnings guidance for the year 2022. It now expected revenue between $1.517 billion to $1.522 billion, up from previous estimates between $1.508 billion to $1.513 billion.

MoneyLion

MoneyLion recorded a good quarter too, with Q3 2022 becoming their 7th straight quarter of three-digit growth in adjusted revenue and in line with their guidance.

They showed a 101% YoY growth in their customer base, which is now 5.4 million strong. In the same time frame, their total products grew 63%, standing at 11.3 million now, while total originations also grew 63% to $446 million. 

The growth in customers and products can be attributed to a bigger total addressable market following the acquisition of the consumer finance platform Even Financial. This also reflects in their revenue, where diversified streams have helped garner a good result.

Source: MoneyLion

Furthermore, the firm’s acquisition of the media platform Malka Media Group has helped further its customer acquisition and retention efforts. 

The firm’s really doubled down on marketing. They entered into a marketing partnership with NBA G League team Ignite, and also produced a docuseries called ‘Money Like a Girl’, which tells the stories of women who have developed their passions into careers.

“We continue to see our investments in content and culture translate into higher levels of engagement through our consumer ecosystem, including our mobile app, our website, and all for social media properties and shows,” Diwakar Choubey, MoneyLion’s CEO, said in the earnings call. “As we noted last quarter, we saw a strong increase in day zero customer engagement driven by the expansion of our content feed.”

The fintech reported adjusted revenue of $82.5 million, up from $42 million this time last year. Their adjusted gross profit rose too, by 82%, to $49 million. In terms of adjusted EBITDA, the firm is still loss-making, though its losses have decreased from $20.4 million in Q3 2021 to $14.3 million this quarter. 

Monleylion expects its adjusted revenues to continue on an upward trajectory. In 2020, they reported $80 million, in 2021 they reported nearly $165 million, and at the end of 2022, they expect to report between $320 million and $330 million.

Moneylion’s Q3 2022 results didn’t fall far from the firm’s guidance; however, their stock price has since been on a downward trend. It started on November 10th, the day of the result, trading at $1.00 a stock, and was down to $0.68 at the end of November 18th.

According to the firm’s guidance for 2022, it expects adjusted revenue between $320 to $330 million. Furthermore, their Adjusted Gross Profit margin guidance is between 55% to 60%, while their Adjusted EBITDA is between $70 to $65 million.

After three-quarters of consecutive drops in fintech funding, we can safely say that the investment activity of 2021 was an outlier. This year, the looming recession and uncertain macroeconomic conditions are making fintech investors more hesitant to sign large checks. 

Looking at the current status of fintech funding, startups raised $12.9 billion across 1,160 deals last quarter – a drop of 64% year-over-year (YoY), according to the State of Fintech Q3 Report by CB Insights. 

The report showed while fintech funding returned to 2020 levels, the US continued to lead global funding share by a large margin. Every fintech category showed a slowdown, including banking, payments, wealth management, digital lending, capital markets, and insurtech. However, insurtech saw the smallest quarterly decline, experiencing only a 4% drop. 

Here are the main takeaways, in four charts:

1. Global fintech funding drops to Q4 2020 levels

• The global fintech venture landscape showed a slowdown for the third consecutive quarter. Fintech raised only $12.9 billion across roughly 1100 deals. 

• This also marked the weakest quarter since Q4 2020, with a 64% drop in year-over-year investments and a 38% drop quarter over quarter.

• The deals dipped slightly from 1,280 in Q2 to 1,160 in Q3. This reflects how investors are still eager to make deals despite cutting smaller checks.

The war in Ukraine, high inflation, and rising interest rates are concerns for investors. However, looking at the big picture, we can see that while funding and deals showed a sharp drop in 2021, it’s just recovering back to normal levels. Year-to-date, funding is around $320 billion, which exceeds the total funding we have seen in the three years prior to 2021.

2. The US leads in Q3 funding, followed by Europe and Asia 

• The US attracted the most fintech funding, securing $5.1 billion, roughly 40% of the global investment. Europe followed with $3.5 billion in fintech funding, and Asia with $3.3 billion. 

• However, the US raised 43% less funding than the previous quarter, making it the lowest point since the fourth quarter of 2020.

• Despite the drop in investments, the top fintech deal went to Pie Insurance, a US-based Insurtech company, which received $315M for Series D evaluation.

The report showed that the US continues to lead the global funding share by a large margin. The number of deals, only slightly down, shows keen interest, and perhaps the biggest impediment to investor confidence is the uncertainty in macroeconomic conditions.  

3. Payments funding and deals dominate, though dropping to 2020 levels

• Payments funding and deals dropped to their lowest levels since Q4 of 2020. The sector managed to raise $3.9 billion over 178 deals. 

• Banking funding reached its lowest level since Q4 of 2018. The sector raised only $1.2 billion, an 86% decline from all-time highs. However, the deal count increased from 74 in Q2 to 76 in Q3. 

• Insurtech funding remained relatively flat throughout 2022. It saw the smallest QoQ decline of any fintech sector, ticking down 4% from $2.4B to $2.3B. The deal count also fell slightly from 143 in Q2 to 140 in Q3. 

Overall, all sectors saw a drop in funding to 2020 levels or below. Banking funding saw the largest drop, down to 2018 levels. However, fintech companies still receive significant funding from investors, and funding remains larger than pre-pandemic levels.

4. Coinbase Ventures leads investments rounds 

• Coinbase Ventures was the most active fintech investor in Q3, backing 16 fintechs and surpassing Tiger Global Management, which topped the list during the previous two quarters.

• Other Q3 highlights include a drop in mega-round funding at $4.4B, the lowest level since 2018.

• And finally becoming an endangered species, fintech unicorn births fell below double digits for the first time since 2020. There were six new unicorns in Q3.

Coinbase Ventures was the most active fintech investor and 1 of only 2 Corporate Venture Capitalists (CVCs) to make the top investors list (alongside Kraken Ventures). The report showed that while institutional investors shied away, crypto CVCs doubled down on bets.

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Last week we covered: Could lowering the FY guidance hurt Affirm? And, has Marqeta underperformed this year?

Stepping aboard the ‘Banking-as-a-Service’ train: 3 questions with Simon Khalaf, CPO at Marqeta

Card issuing and management platform Marqeta is the latest entrant aboard the BaaS train, having launched Marqeta for Banking.

The suite of products includes new Demand Deposit Accounts (DDA), Direct Deposit with Early Pay, ACH with Plaid Integration, Cash Loads and fee-free ATM access, Bill Pay, and Instant Funding capabilities. 

I spoke with Simon Khalaf, Chief Product Officer at Marqeta, to dig into what went behind the company’s expansion, how Marqeta’s new offering differs from its peers, and the company’s playbook for extending the new offering to its customers – old and new.

Here’s what he had to say.

What was the drive for Marqeta to step into the BaaS realm with Marqeta for Banking?

Simon Khalaf: Marqeta’s products power innovation, and that framing led us to launch Marqeta for Banking. Our earliest customers were developer-led companies that expected open API technologies, like Instacart, Google, Uber, and Doordash. As they began integrating payments solutions, the range of customers who needed to build financial services into their products quickly expanded. Marqeta’s card-issuing platform met that demand — now, we see a shift in consumer behavior toward accessing banking services through trusted brands vs. traditional branch locations. In this evolving environment, the possibilities for companies and brands to engage their customers while opening up new revenue streams are impressive, and Marqeta for Banking empowers our customers to do just that.

How is Marqeta for Banking different from the wide range of BaaS technology providers out there?

Simon Khalaf: Banking-as-a-Service is not a new idea in today’s market – there’s an existing, demonstrated demand for these products. I view scale and customization as the frontiers right now. Our focus is on empowering our customers to efficiently bring banking products to market, customized for their unique user experiences, and delivered at scale. With the foundation of our modern APIs, we’re well-positioned amongst competing products to provide the customization, flexibility, and modularity that our customers value. We provide these capabilities in a single platform and at a scale that really differentiates Marqeta for Banking.

What strategies will be implemented to create customer loyalty for Marqeta for Banking, as in the case of a bank?

Simon Khalaf: We built Marqeta for Banking from the ground up as part of a single, integrated platform. For our customers, this means customization options beyond the more commonly provided program-level controls of a ‘bank in a box’ solution. Marqeta’s platform empowers our customers with control at the user and transaction levels so that they can create hyper-customized experiences. From the perspective of our team, one of the key advantages of this approach is that we can co-create with our customers as their trusted partners. This means designing customized experiences for their end users and working with them to bring their roadmap to life, which in a way will build consumer engagement and loyalty.

Top stories of the week

AMERICAN EXPRESS
American Express and Square team up on credit cards for US SMBs
American Express and Square have partnered to create a forthcoming credit card designed for Square sellers. The card will be the first-ever Square credit card offered to its small business owner community in the US, and it will integrate directly with the company’s extensive ecosystem of solutions, enabling sellers to organize their finances and manage their cash flow from the same platform they use for running their business. More details and benefits about the card will be announced by Square in 2023. (Seeking Alpha)

American Express and TikTok are working together to help small businesses grow
American Express has partnered with TikTok to launch the #ShopSmall Accelerator, a new program to help small business owners reach a new generation of shoppers on Small Business Saturday, which is on November 26, 2022, and runs throughout the holiday shopping season. The Accelerator is a video toolkit that provides best practices and resources for SMBs to reach Gen Z and Millennial shoppers on TikTok. (Yahoo)

FED
Fed announces FedNow 2023 pricing schedule
The Federal Reserve has unveiled the price scheme that banks will pay for its new instant payment system, FedNow, which is scheduled to roll out next summer. For the year 2023, the 12 regional Federal Reserve banks will waive the monthly participation fee for banks. In 2024, banks will pay $25 per month per routing transit number to use the FedNow service. Likewise, the reserve banks will drop the cost of up to 2,500 FedNow credit transfers per month next year and charge 4.5 cents per item afterward. (PYMNTS)

WELLS FARGO
Wells Fargo is rolling out Flex Loan, a small-dollar loan option
Wells Fargo has launched a new digital-only credit offering to help customers meet short-term cash needs and prevent potential overdrafts. Named Flex Loan, the new product is a small-dollar loan that offers convenient and affordable access to funds, for a fee of $12 or $20. Eligible customers can receive credit in sums of either $250 or $500. Flex Loan does not require any application and can be accessed via the bank’s mobile app. The loan is exempted from late charges or interest fees, deposited into the customer’s account after it is accepted, and a repayment schedule of up to four months is set by the customer. (American Banker)

WISE
Wise and Deel accelerate payment speed with a new service
Wise has launched a new service with the global HR and payroll company, Deel. Deel enables hiring and payments services for companies hiring international employees and contractors. The new feature lets customers send funds via Deel using only an email address, opening up 10 new currencies in Deel’s payments infrastructure and further simplifying global payroll for over 10,000 Deel customers – from SMBs to publicly traded companies. It will help customers who have had to fund payroll by sending a USD or EUR international SWIFT transfer from their bank, which can be expensive, slow, and inefficient. (Crowdfund Insider)

Tweet of the week

Chart of the week

Cash App vs. Robinhood ARPU over time

What’s trending

• How Chase plans to revolutionize rent payments with a digital solution (The Financial Brand)
• Coinbase partners with TrueLayer to offer open banking-powered payments in the UK (Fintech Finance)
• Digging into KeyBank’s conversational AI strategy (The Financial Brand)
• US Treasury calls for closer supervision of fintech-bank relationships (Finextra)
• Jack Henry teams with IDScan.net to have smoother mobile onboarding (Crowdfund Insider)

Banking-as-a-Service is on its way to mainstream adoption in the next few years, as its market size is expected to reach $51.2 billion by 2028.

BaaS is opening the door to new sources of growth across the industry, evidenced by the rising number of financial institutions continuing to enter the space. Card issuing and management platform Marqeta is the latest entrant to hop aboard the BaaS train, having launched Marqeta for Banking.

Beyond its bread-and-butter business of issuing cards, Marqeta aims to broaden its platform by deploying a portfolio of seven new features under the umbrella of Marqeta for Banking, in a push to bring additional banking services to its institutional clients.

The suite of products includes new demand deposit accounts, direct deposit with early pay, ACH with Plaid integration, cash loads and ATM access, bill pay, and instant funding capabilities.

To help clients offer new capabilities, Marqeta will let businesses access more than 40 new banking APIs to create tailored banking solutions that best suit their needs, analogous to how its existing card-issuing service works.

I spoke with Simon Khalaf, Chief Product Officer at Marqeta, to dig into what went behind the firm’s expansion, how Marqeta’s new offering is different from those of its peers, and the company’s playbook for extending the new offering to its customers – old and new.

What was the drive for Marqeta to step into the BaaS realm with Marqeta for Banking?

Simon Khalaf: Marqeta’s products power innovation, and that framing led us to launch Marqeta for Banking. Our earliest customers were developer-led companies that expected open API technologies, like Instacart, Google, Uber, and DoorDash. As they began integrating payments solutions, the range of customers who needed to build financial services into their products quickly expanded.

Marqeta’s card-issuing platform met that demand and empowered groundbreaking companies to build innovative payments experiences. Now, we see a shift in consumer behavior toward accessing banking services through trusted brands vs. traditional branch locations. 

In this evolving environment, the possibilities for companies and brands to engage their customers while opening up new revenue streams are impressive, and Marqeta for Banking empowers our customers to do just that.

What do companies need/expect from the financial services infrastructure that Marqeta will fulfill through this offering?

Simon Khalaf: Our customers have diverse needs and are committed to providing a unique experience to their end users. Marqeta for Banking allows us to unlock value across a range of use cases – including brands embedding financial services for the first time, fintechs expanding from point solutions into broader banking products, and existing challenger banks looking to migrate to a platform that will help them keep up the pace of innovation in a highly competitive market.

Overall, we are hearing that these customers want more flexibility in how they bring their offerings to market; they don’t want to be limited by out-of-the-box solutions.

How is Marqeta for Banking different from the wide range of BaaS technology providers out there?

Simon Khalaf: Banking-as-a-Service is not a new idea in today’s market – there’s an existing, demonstrated demand for these products. I view scale and customization as the frontiers right now. 

Our focus is on empowering our customers to efficiently bring banking products to market, customized for their unique user experiences, and delivered at scale. With the foundation of our modern APIs, we’re well-positioned amongst competing products to provide the customization, flexibility, and modularity that our customers value.

We provide these capabilities in a single platform and at a scale that really differentiates Marqeta for Banking.

What strategies will be implemented to create customer loyalty for Marqeta for Banking, as in the case of a bank?

Simon Khalaf: We built Marqeta for Banking from the ground up as part of a single, integrated platform. For our customers, this means customization options beyond the more commonly provided program-level controls of a ‘bank in a box’ solution.

Marqeta’s platform empowers our customers with control at the user and transaction levels so that they can create hyper-customized experiences. From the perspective of our team, one of the key advantages of this approach is that we can co-create with our customers as their trusted partners. This means designing customized experiences for their end users and working with them to bring their roadmap to life, which in a way will build consumer engagement and loyalty.

Do more big names entering the BaaS space potentially mean more consumers will switch from traditional FIs to a digital bank as their main financial provider?

Simon Khalaf: That’s an interesting question, but I certainly can’t predict the future. I do believe we’re at the beginning of a shift in consumer behavior that will fundamentally change how account holders interact with their financial services providers. 

As Gen Z enters the marketplace, what are they looking for from a bank? 

This next generation of financial services consumers prefer mobile-first experiences, expect instant payment capabilities, and will likely choose financial services provided through a brand they have an affinity with vs. a traditional banking branch location. 

In this evolving environment, there are opportunities to innovate and engage that companies and consumers are beginning to define.

Welcome back to the Power of Payments podcast. I’m your host Ismail Umar, and in today’s episode, we will discuss why JPMorgan Chase is launching a digital rent payment solution, and how American consumers plan to use more flexible payments this holiday season. We will also talk about MoneyGram’s recent crypto expansion, and the potential role of digital currencies in the remittance industry.

Before we move on, I’d also like to inform you that in response to a lot of requests, we at Tearsheet have decided to turn our upcoming Big Bank Theory Conference into a virtual event, which will be held on December 8-9, 2022.

We’ve got a great list of speakers lined up from firms including Chase, Citi, Synchrony, Shopify, Cross River, Citizens, Affirm, and many more.

If you’d like to join us, you can sign up for free here.

And now, on to today’s episode.

Subscribe: Apple Podcasts I SoundCloud I Spotify I Google Podcasts

The following excerpts were edited for clarity.

Chase wants to disrupt rent payments with new digital solution

Let’s kick off today’s discussion by talking about JPMorgan Chase. The banking giant is rolling out a digital payment solution for landlords and tenants, tapping into a growing demand for digitized rent payments.

The new tool, called Story, will automate the invoicing and receipt of online rent payments for property owners and managers. Since not all tenants pay rent on time or in full, Story aims to help landlords track which tenants have paid up and which ones haven’t. Additionally, it will provide property owners with analytics to help them determine rent prices and make future property investments, and will also offer a tool to screen new tenants.

And for tenants, Story will automate their monthly rent payments, send them reminders for upcoming payments, offer them multiple payment options, and provide an online dashboard showing their payment history and lease agreement.

Story currently has a beta version available in 15 states across the US, but it’s expected to be fully released for the public in 2023.

Landlords and tenants don’t need to be JPMorgan customers to sign up for the platform.

So far, Chase hasn’t yet finalized its fee structure for the product, but it has indicated that it will not charge a transaction fee for ACH, debit, or credit card payments for the first year. After that, clients that hold an unspecified minimum balance will continue to receive free ACH payments.

The bank says that its goal with this platform is to cut out the age-old use of checks in rent payments. While digital payments have steadily taken over various types of transactions, particularly since the pandemic, monthly rent payments still lag behind in this area. That’s because the US market is highly fragmented, with most of the country’s 12 million property owners running small portfolios of less than 100 units.

As a result, about 78% of rent payments are still made using old-school methods like checks, money orders, and cash, according to JPMorgan. Besides having to manually collect paper checks and depositing them, landlords typically also use decades-old software like Microsoft Excel to keep track of payments.

Chase estimates that more than 100 million Americans pay over $500 billion in rent every year. In recent times, a number of fintechs have tried to disrupt this market, but haven’t been able to gain widespread adoption. Now, the country’s biggest bank is using its scale and reputation to try and get a major share of this massive market.

Zooming out, this project is part of JPMorgan’s broader ambition to create more digital experiences, fend off fintech rivals, and solidify client relationships. Under CEO Jamie Dimon, the bank has committed to spending more than $12 billion a year on technology, which is an enormous figure considering the current global macroeconomic climate.

Consumers are increasingly turning to flexible payments to counter inflation

Next up, let’s look at how American consumers plan to use more flexible payments to be able to afford gifts for themselves and others this holiday season.

For much of this year, American consumers have been feeling the pinch of rising interest rates and the climbing cost of goods. People living paycheck to paycheck, or those with nonprime or subprime credit, are especially vulnerable to the effects of inflation. For many of these consumers, the ability to split payments and pay over time allows them to get the items that they need but may not be able to otherwise afford.

New research from lease-to-own payments provider Katapult finds that more than three-quarters of consumers with nonprime credit scores or lower say that they would use a flexible payment option – such as BNPL or LTO – to purchase gifts for themselves and others this holiday season, if these options are offered by the online or physical stores where they shop.

Despite historically high prices, almost a third of shoppers expect to spend more than last year on gifts this holiday season, according to the survey. And over half of consumers are more likely to shop with a merchant that offers flexible payment options, especially as many traditional lenders have tightened their lending criteria and increased interest rates.

Younger consumers are particularly eager to use alternative payment solutions, and many of them specifically seek out retailers that offer these options. 60% of Gen Z and millennials say they are more likely to shop from a merchant that offers flexible payment options, compared to 45% of their Gen X and older counterparts.

So, what does this research tell us about how rising prices and interest rates influence consumers’ use of different payment options?

I spoke with Orlando Zayas, CEO of Katapult, to get some more insight into the implications of this research. Here’s what he told me.

“The holidays can be expensive even in rosier economic times, and that’s likely to be even more true this year, with consumers paying more for less due to higher prices. Without the flexibility to split larger payments over time, many nonprime shoppers will have a hard time affording items such as video game consoles, laptops, TVs, and other popular gifts for themselves or others.

We’ve found lease-to-own and other flexible payment options appeal to younger consumers since they are more likely to pick up on newer trends, less likely to have established credit, more wary of incurring credit card debt, and often struggle with larger purchases since they have yet to hit their prime earning years. By offering flexible payment options, retailers can reach younger customers now and earn their loyalty for years to come.

Nearly two out of three Americans say that currently, inflation is causing them to delay or skip purchasing big-ticket items. This likely explains why more than half of consumers say they are more likely to shop with a merchant that offers flexible payment options, such as BNPL or LTO.

Higher inflation is also causing traditional lenders to tighten their lending criteria or increase interest rates, and without flexible payment options, the majority of Americans wouldn’t have the funds to obtain the goods they need. Alternative payment solutions that split payments over time enable consumers to stretch their dollars further when items across the board are more expensive and money is not going as far as it used to go.”

Of course, it’s important to mention here that these alternative payment options may provide a temporary respite to consumers against high inflation, but repeated use of flexible payment methods like BNPL could potentially further weaken the financial health of nonprime consumers by leaving them with growing debt that they may be unable to pay off later.

It would be interesting to see whether lease-to-own – which has been touted by some as a “recession-proof” alternative to BNPL – gains more adoption as consumers continue to seek out flexible options to break up their purchases into manageable payments.

MoneyGram deepens crypto push with crypto trading service

A couple of weeks back, money transfer firm MoneyGram launched a service that allows US consumers to buy, sell, and hold cryptocurrencies from the company’s mobile app. MoneyGram is currently offering Bitcoin, Ether, and Litecoin, with plans to expand into more markets and add support for additional tokens next year, depending on global regulations.

The new functionality is being offered through a partnership with Coinme, a cryptocurrency exchange and crypto-as-a-service provider.

The crypto trading service is the latest in a series of crypto-related initiatives taken by MoneyGram in an attempt to set itself apart from competitors in the money transfer space like Western Union, Wise, and Remitly.

Alex Holmes, chairman and CEO at MoneyGram, says the company’s move towards crypto is part of a broader strategy to further its reach by tapping into a new demographic of young, digital-native consumers sending funds internationally. Holmes says that as consumer interest in digital currencies continues to grow, his firm – with its global network and compliance solutions – is uniquely positioned to meet that demand and bridge the gap between blockchain and traditional financial services.

At the start of this year, MoneyGram expanded its relationship with Coinme by acquiring a minority stake in the crypto firm. And in June, it launched a global crypto-to-cash service with the Stellar Development Foundation, which allows users to send USDC payments that can be withdrawn in cash by recipients in different countries.

Even though the global crypto market continues to struggle – with the recent FTX saga only making things worse for the industry – institutional interest in the space still doesn’t seem to have waned. Companies in the remittance industry appear to be laying the foundations to expand into crypto as well. Just a few weeks back, Western Union filed three trademarks that covered managing digital wallets, exchanging digital assets and commodities derivatives, issuing tokens of value, and brokerage and insurance services.

There seems to be continued demand from consumers as well, many of whom are open to the idea of using digital currencies for international remittances, particularly in emerging markets. A recent report by crypto payments firm Wirex found that over half of consumers in the US, UK, Mexico, and Singapore see crypto as a valid alternative to sending money overseas using traditional methods, and 45% have already used crypto to send money to another country.

Driving the shift towards crypto as a cross-border payment method is frustration with existing systems, with 53% of people feeling they paid too much in fees for international remittances using traditional means, and 37% not knowing how much they paid at all.

Today, the oldest Gen Zer on the planet is twenty-six years old.

Slowly but surely, more Gen Zers are entering adulthood, and subsequently, the workforce.

Here’s why this matters:

As consumers, Gen Zers are proving themselves to be quite different from previous generations – and that doesn’t just have to do with being digital-first.

As it is now, most financial institutions haven’t fully caught on to what it means to serve the Gen Z consumer. But with these newly minted adults continuing to flock into the workforce, time is literally money, and if FIs can’t get their act together, they’ll miss out on the next generation of adults, and maybe even their future relevance as institutions.

Enter Steez:

Steez is a collaborative project we’re launching with our friends at Publicis Sapient.

Short for ‘style and ease’, Steez marks our dive into truly understanding the unique needs, demands, and preferences of this emerging generation of adults, including in-depth research into consumer behavior and conversations with some of the leading experts in the field.

Available for download now, Steez is your opportunity to get a leg up in the competition and understand just what it is Gen Zers are all about.

Ready to learn more? Click here to download the full guide.

A few weeks ago, Karma, a shopping app that helps consumers find the best deals and coupons for their purchases, published a pretty unique ad. The goal of the ad was to promote its new product, Pay with Karma, an embedded checkout option it launched in October.

As a shopping app just recently dipping its feet in payments, Karma seems to represent this intersection between financial and lifestyle products. Its new ad speaks to this, by showcasing the new financial product but also speaking to consumers’ wish for entertainment.

Apart from the attention-grabbing opening (another adjective may be a spoiler here), there are other things that set this ad apart. For one, it has a full-on storyboard. In it, two detectives must work together to solve an unseemly crime – all concerning the use of the Karma app as a shopping tool.

The ad ends with a cliffhanger, leaving the viewer wondering, what on earth did I just watch, but also – what happens next?

The strategy behind this specific commercial, says CMO of Karma, Mor Pesso Eblagon, was to create a script that was entertaining, but with the brand’s main message written into the story’s jokes, rather than its central plot points.

The ad, which is three minutes long, addresses a challenge Karma was facing with its previous videos – drop-off rates. Making a commercial long was risky, said Eblagon, but it was a tradeoff to making it interesting.

“If you create something interesting, then people will want to watch it,” said Eblagon. “(…) I knew it was a risk, but I wanted to create something that people would want to watch.”

Karma’s main audience is its main user base – younger adults looking for the best deals and easy payment solutions.

To spread awareness for this ad among the core audience, Karma worked with several well-known influencers in the space, who posted videos of themselves reacting to the ad. In the video below, for example, we see celebrity drag queen duo Trixie and Katya, who have a YouTube following of 288K subscribers, watching the video and commenting throughout: 

The purpose behind these reaction videos was to keep comments on the Karma app itself between the lines, rather than in the forefront of the influencers’ commentary.

“They don’t talk about the product,” said Eblagon. “They talk about the content, which is a commercial, which eventually [leads to talking] about Karma.”

To create the ad, Karma worked with writing-directing duo Noam Sharon and Tal Rosenthal and Mamash Productions Group. The commercial itself was filmed in Georgia.

One challenge that popped up along the way, said Eblagon, was creating a plot that feels relevant to people no matter where they are.

“We didn’t want a commercial that requires any localization,” said Eblagon. “This one just feels very international.”

The bigger obstacle, though, had to do with hitting the right level of funny and serious.

“We had to ask ourselves, how do we create this balance within the narrative of the commercial to not look too serious, because there is an element that can be a bit spooky,” said Eblagon.

Zooming out, Karma’s ad may speak to this need financial products are facing in appealing to their users on an emotional level, and keeping their attention. In other words, it’s not enough to send a propelling message – you need a propelling package as well.

“We knew we were competing with a lot of companies that might have bigger budgets, so we wanted to create something that will stand out,” said Eblagon.

As for what’s next in this series of commercials, she couldn’t share too much. Though, one thing’s true – the story will get weirder.

“I can tell you this is the safe one. It just escalates from here,” she said. “I’m really waiting to see all the creators’ reviews and reactions. I think it’s going to be mind-blowing.”

In the next six to eight months, the Federal Reserve will start rolling out FedNow, its newest instant payment service. Unlike its pending CBDC project, FedNow services will use the existing financial infrastructure to help FIs enable real-time payments (RTP).  

Right now, over a hundred banks and payment processors are participating in FedNow’s pilot program. Upon release, the Fed’s country-wide RTP network initiative is expected to become one of the biggest payment and clearance settlement systems in the world.

Poised to play a pivotal role in the future of payment transactions, the initial rollout, as with any new tech, has a few wrinkles that need ironing out. Tearsheet sat with payments solution veteran Balaji Devarasetty, CIO of Paya, to discuss the benefits and potential pitfalls of implementing FedNow’s RTP for B2B clients. In addition, Devarasetty shared how Paya, a B2B payments solution provider, is actively planning for the upcoming rollout.

“FedNow is an alternative to other real-time payment solutions such as ACH, credit cards, and debit cards. The Federal Reserve is creating an internet-based infrastructure using ISO 2022, an international standard for money transmission,” says Devarasetty.

According to him, FedNow is an alternative to Automated Clearing House (ACH), which has been around since the early 70s. ACH is currently the preferred B2B payment method because of its cost-effectiveness. Although it moves close to $50 trillion annually within the United States, the system is over 50 years old. 

In essence, ACH is a ‘file-based’ system – modeled after paper-based filing systems – which explains why it takes three to five working days to process transactions. It is not instantaneous and is thus considered cumbersome.

The benefits of FedNow services

FedNow would address the pitfalls of a file-based system by incorporating the clearing functionality into the payments settling process. Using the existing traditional payment rails, it aims to increase accessibility and efficiency in payment transactions. 

Its mission is to boost the economy by enabling FIs of every size and in every town in the US to offer secure and effective instant payment services.  

Instant transactions will help businesses manage their cash flow, and consumers will benefit in times of emergency expenses, amongst other things. But most compellingly, it will operate 365 days of the year, including on weekends and bank holidays. 

FedNow’s B2B pain points

In reality, however, execution can make or break the perfect tech solution. Thinking months ahead, Devarasetty identifies the potential problems around implementing FedNow services in B2B transactions.  

The first issue is that only a few banks are currently involved in the FedNow pilot program. Only 121 banks have joined out of the 4,236 FDIC-insured commercial banks in the US. That means adoption could take some time – Devarasetty suggests it could take well over two years post-launch to onboard all the banks into the new system.  

The second issue is that FedNow will only roll out to registered banks. In other words, merchants, consumers, or non-bank payment service providers will have to access the service through bank partnerships. And that means fintechs will have to jump through technical hoops to enable FedNow as a payment alternative for their customers.  

Finally, the most challenging aspect of FedNow for B2B payment providers is the initial $100,000 credit limit set by the Fed, adjustable up to $500,000. “Today, when you look at B2B payments, the average transaction is about $1,500. And then our [Paya] highest tickets are as high as a million dollars per transaction,” says Devarasetty.

Having thought through some of these issues, reserve banks will offer a liquidity management tool alongside the FedNow Service. This will allow non-banks and consumers to transfer funds instantly amongst each other. In addition they will also waive customer credit transfer fees for the year 2023. 

Paya’s path to enabling FedNow services

Paya started as a spin-off of Sage Payments. As the company grew, it expanded its services and built its own ACH network. It now works with software providers to offer payment solutions to various professional services, including nonprofits, and the healthcare sectors. “Last but not least, we are a dominant player in government payments. We serve about 2000 municipalities, cities, and townships,” says Devarasetty. 

Paya processes over a billion dollars in payments for the government sector. Therefore, the company is compelled to provide FedNow as a payment alternative to its long list of clients.

“So we are right now evaluating what we need infrastructure-wise. Do we want to go direct? Do we want to go through a partner?” says Devarati.

Looking six to eight months into the future, Paya is exercising caution, careful not to jump head-first into the race. It is working closely with its current banking partners and evaluating whether to partner with another bank from the pilot program, to first learn how the new system works, before setting out to build. 

When it comes to enabling FedNow payments, the company aims to be a very ‘fast follower,’ in an effort to avoid the blows often absorbed by first movers.  

In closing, when considering the mandatory nature of FedNow’s rollout in 2023, it seems fintech companies that plan ahead and adapt to the new changes will continue to thrive in the payments space. 

Elizabeth McCluskey, director CMFG Ventures

CB Insights reports that fintech funding has decreased 64% year-over-year; the $12.9 billion raised in Q3 2022 is the lowest level since Q4 2020. This is indicative of how venture capital firms may be shifting their investment strategy due to changing economic conditions. Fintechs may be challenged to present a compelling pitch and demo that stand out in this highly competitive environment.

While there’s no one-size-fits-all approach, there are best practices to ensure success in both raising capital and securing the right investor. Fintechs should start with preparing these three steps to successfully pitch investors. 

Use a pitch deck the right way

Effective pitch decks are high-level, simple, and easily digestible. The deck should include key information on the problem being solved, product and vision, and a high-level timeline or roadmap. Potential investors will want to know where the company is today versus where it’s planning to go; this includes fundraising, product enhancements/developments, partner launches, etc. Other slides can include details on the team members and notable advisors, as well as traction made with customers.

Send the deck ahead of time and be prepared to walk through it in an initial meeting to help investors familiarize themselves with the company. Information that doesn’t make the deck should be included as follow-up materials if an investor shows interest in the round (i.e., longer pitch decks, sales pipelines, financial projections). 

In the fintech bull market of 2021, some companies probably raised money with little more than a pitch deck and a vision. However, investors today are scrutinizing deals much more closely, so it’s important that entrepreneurs can clearly distinguish what currently exists from a revenue, customer, and product perspective, and discuss the tangible progress of their company.

The pitch deck should be a conversational tool, not something read or recited. The conversation should be fluid and flexible, adapting if investors have questions or need additional insight. Start the conversation by sharing more on the origin of the company, its mission, and why the company exists. And don’t forget to turn the focus inward; while details about the company and product are important, investors are also investing in the founders themselves, and want to hear the founder’s personal story. 

Consider all demo options

If the company has a software product, consider providing a demonstration during the pitch or in a follow-up call. There are several different options for demos, depending on the product’s state of development.

Investors always like to see a live demo of a product if possible. Although it is a slightly risky choice due to internet issues or broken links, it’s authentic and allows the investor to see the product in the real world. If a product is still in a testing or beta environment, it’s also common to see a more “static” demo, consisting of screenshots or Figma mockups. Similar to a pitch deck, a demo should be an opportunity for conversation, so make sure to really listen to the questions the investor is asking. 

Increasingly, we are seeing companies share pre-recorded demos of 2-10 minutes in a data room or a follow-up email. This allows investors to watch it in their own time and come back to the entrepreneur with questions in a subsequent call. Again, make sure to be clear about the current state of the product and what exists today versus what is in the roadmap.

Do research and ask questions

There will be a multitude of questions throughout the pitching process, and it’s not one-sided. Just as investors are determining fits for their portfolio, fintechs should ask questions to ensure the right partner for their business. Consider preparing a list of questions in advance to help guide the conversation and inform decisions, such as:

• What kind of investments have they been looking at lately? 
• What type of company fits best into their portfolio? 
• How do they support portfolio companies? 
• How do they see themselves adding long-term value? 
• What does the diligence process look like? How do they get to a decision?

Fintechs should also research the investor’s portfolio to see if there are any competitors, companies they’d like to collaborate with, or companies they admire. And it’s fair to ask about these companies specifically. This shows investors that the fintech has done their homework and has an informed perspective. 

Taking this one step further, don’t be afraid to have conversations with these companies and ask what it’s like to work with this investor. Much of an investor’s credibility and reputation comes from their portfolio companies. Hearing a portfolio company’s firsthand experience and perspective may help determine if this investor will fit from a business and cultural standpoint.

As the fundraising environment continues to tighten, fintechs are challenged to make the most of every meeting and interaction with venture capital firms. This is best accomplished through a pitch deck, demo, research and questions. Although the pitching process can be exhausting and disheartening at times, it’s best to focus on what founders can control – being prepared and knowing their business. 

Elizabeth McCluskey is a director at CMFG Ventures, the venture capital arm of CUNA Mutual Group. She leads the Discovery Fund, which invests in early-stage fintech companies led by underrepresented founders. To learn more about CMFG Ventures, visit https://www.cmfgventures.com/

The interpretation of digital transformation varies across organizations but true transformation happens when a business becomes future-oriented and keeps pace with evolving technology solutions. 

For traditional FIs, this may mean changing lanes with the way they have been doing things for years and identifying new opportunities. This can be done by innovating their business models, focusing on growing customer needs and preferences, and evolving the brand to be in line with a digital-first world.

It is easier said than done – adopting and managing digital tools is an uphill battle for incumbent institutions that involves a variety of challenges from both external and internal environments.

The increasing pace of change in the payments ecosystem – driven by regulatory changes, security challenges, and other local factors – increases the complexity of managing payments. In addition to a stream of new payment methods – digital wallets gaining adoption, and commerce moving across new channels and surfaces. 

Despite the hurdles, many traditional banking institutions continue to develop, implement, and bolster their digital offerings to align with the growing needs of their customers.

Citi is the latest among incumbent banks to augment its digital services. The bank has integrated its digital payments service, ”Spring by Citi”, into “Citi Present and Pay”, its electronic bill presentment platform.

Spring by Citi is a digital payments service that enables e-commerce and B2B funds flow. The service provides different modes of payments to businesses that are connected with the bank’s back-office treasury management systems and cash management solutions.

Previously reliant on an external third party, the new solution offers Citi’s institutional clients a simpler way to collect payments across a broad range of U.S. payment methods as well as provide digital billing capabilities to their customers – both through a single technical integration.

“Looking across our clients and the market as a whole, we see that nearly all large enterprises are on a journey to transform their platforms, processes, and solutions to be nimbler, more client-centric, 24×7, and digital,” told the Global Head of Spring by Citi, Vineeth Subramanyam to Tearsheet.

This move aims to address the pain points associated with accepting digital payments for its institutional billers. 

These may include the lack of resources to upgrade in-house systems from manual, time-intensive paper-based processes, or the scarcity of resources to support integrations with third-party providers in order to manage digital payments on their behalf. This cost and complexity can be a barrier, making it difficult for institutional customers to accept digital payment methods that their customers want to use. 

Additionally, companies that choose to work with external third parties may at times experience problems related to mismatched or fragmented reporting files due to multiple data handoffs. This in turn can make reconciliation between the two parties difficult.

With the rapid pace of change and innovation in the B2B payments category, solution providers across the board have the scope to do more in order to improve the experience for their institutional clients.

This can be accomplished by making it easy for clients to accept a comprehensive range of card payment methods and non-card payment methods including digital wallets, and offering flexible solutions that span multiple new payment channels (e.g. pay by link, QR code) – as well as the basics of the web, mobile, SMS, and phone. While in some cases, fulfilling the special payment data needs of clients in certain verticals (e.g., support for L2/L3 data, surcharging), according to Subramanyam.

In the present climate, the number of digital fraud attempts – from identity theft to phishing attempts – is increasing. Because of the prevalence and growing concern of fraud and its potential effects, the new integration mandates fraud compliance when accepting payments.

“This combined solution is built with robust fraud management tools that monitor transactions across all digital payment methods – including credit and debit cards, ACH direct debit and real-time Requests for Payment, and alternative payment methods such as digital wallets. Our clients can also validate payer bank account details in real-time to help ensure compliance with NACHA rules that are intended to help reduce potential fraud or erroneous payments made via ACH direct debits,” added Subramanyam.

As Banking-as-a-Service is opening the door to new sources of growth across the industry, Citi plans to continue to build its BaaS offerings going forward. It aims to provide cash management strategies to companies – in the form of managing incoming and outgoing B2B payments, streamlining reconciliation, and providing visibility across the ecosystem.

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Last week we covered: Did Robinhood deliver a “confetti-worthy” financial performance?

Could lowering the FY guidance hurt Affirm? And, has Marqeta underperformed this year?

AFFIRM

Affirm Holdings posted its first quarter 2023 results last week:

• Revenue increased to $361.6 million, up 34% from Q1 2022.
• The number of active consumers surged to 14.7 million from 8.7 million at the same time last year.
• Net loss was $251.3 million, narrowed by 18% from Q1 2022.
• $0.86 loss per share, improved from a $1.13 loss in Q1 2022.

The revenue was in line with analyst estimates; however, the Earnings per share (EPS) missed analyst estimates by 10%.

“While results were solid, primarily marked by better-than-expected net revenue, lowering the FY guidance is the stain on the shirt, which will likely be poorly received — given the ~20bps downward revision in the FY23 implied RLTC margin guide,” predicted analysts at Mizuho Group.

MARQETA

Marqeta reported its latest quarterly earnings on Wednesday:

• Revenue hiked $191.62 million from $131.51 million in Q3 2021.
• The gross margin was 42% in the third quarter of 2022.
• Total Processing Volume increased by 54% year-over-year, rising to $42 billion from $28 billion in the third quarter of 2021.
• Net loss increased to $53.16 million from $45.73 million in the same quarter last year.

Analysts at Mizuho Group believe Q3 was strong for Marqeta but they worry that the stock may not receive its well-deserved cheer amid “a more competitive landscape (e.g. from companies like Stripe), which has driven at least one customer to migrate a portion of their volume elsewhere by offering similar services at attractive prices.”

PAYPAL

PayPal announced its financial results for the third quarter of 2022:

• Revenues rose 11% year-over-year to $6.85 billion.
• GAAP EPS of $1.15 compared to $0.92 in Q3’21, and non-GAAP EPS of $1.08 compared to $1.11 in Q3’21.
• Total Payment Volume reached $337.0 billion for Q3’22, up by 9% (14% FXN) whereas Venmo TPV reached $63.6 billion, up by 6%.
• Net income (loss) increased to $1.33 billion from $1 billion same time last year.
• The number of active user accounts rose 3.8% year-on-year from 416 million in Q3 2021 to 432 million accounts at the end of September 2022.

“Weaker than expected TPV will likely weigh on results. PYPL reported $337bn, which is somewhat below cons. $343bn. Venmo TPV increased 6% to $64bn. This too fell below expectations ($70bn), which were arguably overly ambitious, to begin with,” said analysts at Mizuho Group.

PayPal shares fell more than 5% in after-hours trading after the company posted its earnings. The company had beaten earnings and revenue expectations for the third quarter; however, its Q4 revenue estimate came in behind analysts’ expectations — $6.85 billion, vs. $6.82 billion expected, according to Refinitiv.

Top stories of the week

AMAZON
AWS and Deloitte team up to provide cloud-based digital banking services
Amazon Web Services and Deloitte will jointly develop cloud-based banking services to help financial organizations introduce digital banking tools and modernize fintech solutions. As part of the partnership, Deloitte is bringing its ConvergePROSPERITY BankingSuite platform to AWS’ public cloud, while AWS contributes a range of fintech solutions, including contact center product Amazon Connect, customer interaction environment Amazon Pinpoint, and security service Amazon Cognito. (Insider Intelligence)

CITI
With Citi and Barclays’ ongoing job cuts, Wall Street layoffs don’t seem to be easing off
Last week, Citi slashed nearly 50 trading employees and dozens of investment-banking employees. Additionally, Barclays reduced around 200 staff members, making up less than 3% of the bank’s global headcount. The job cuts come as each bank reported sharp declines in investment-banking fees. Citi last month saw a 64% dip in that department in its latest third-quarter earnings, compared with Q3 last year — whereas Barclays saw a 45% slump in investment-banking fees y-o-y. (CNBC)

JPMORGAN CHASE
JPMorgan, Mastercard team up to bring ‘Pay-by-Bank’ to US merchants
JPMorgan Payments and Mastercard have teamed to develop Pay-by-Bank, an open banking ACH payment platform that enables billers and consumers to allow their financial data to be shared between trusted parties to let them pay bills directly from their bank account for payment. The partnership also aims at the ease of user experience and the security of data sharing. Both companies have agreed to start rolling out the offering with a small number of U.S.-based billers and merchants this year and expand the platform further in 2023. (Finextra)

JPMorgan, Citi to bank some Russian firms
The country’s largest banks are caught in the push-pull between the Biden administration and Congress on sanctions to do work in Russia. Behind the scenes, the Treasury and State Departments have urged Wall Street big banks including JPMorgan and Citigroup to keep doing business with certain strategic Russian firms. The quiet effort is part of the administration’s push to minimize the adverse impacts of the sanctions regime designed to punish Russia. (Bloomberg)

MORGAN STANLEY
Morgan Stanley is set to slash headcounts worldwide in the next few weeks
Amid slow growth in its dealmaking business in the light of increasing inflation and an economic slump, Morgan Stanley is planning to reduce its workforce. Most of those employees are part of teams that look after business related to the bank’s capital markets units in Hong Kong and mainland China. In addition, the layoffs will impact Morgan Stanley’s technology investment banking arm, which employs more than 30 people in Asia Pacific. Morgan Stanley will also carry out layoffs across the globe during the same time. However, the bank is yet to take a final call on the extent of the job cuts. (Seeking Alpha)

PAYPAL
PayPal is adding support for Apple’s Tap to Pay technology 
PayPal in its latest earnings report shared that the PayPal and Venmo iOS apps will soon offer Apple’s Tap to Pay on iPhone functionality, allowing merchants that use PayPal or Venmo to accept contactless debit or credit cards and mobile wallet payments, including Apple Pay. (TechCrunch)

SQUARE
Square has provided $1.14 billion in loans to businesses in Q3
Square beat revenue and earnings estimates in the third quarter, despite economic challenges with the support of its two growth ecosystems — Cash App and Square merchant products. Square Loans, a subsidiary of Block, originated 126,000 loans for a total of $1.14 billion in Q3. Overall, originations grew by more than 10% over the previous quarter. (Seeking Alpha)

TWITTER
Elon Musk plans to add more financial features to Twitter
Elon Musk has unveiled a vision for Twitter to process payments, in cohesion with connected debit cards and bank accounts. In the future, users would be able to send money to others on the platform, extract their funds to authenticated bank accounts, and might be offered a high-yield money market account to encourage them to move their cash to Twitter. A week ago, Twitter filed registration paperwork with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) that would allow it to process payments. (The New York Times)

Tweet of the week

Chart of the week

Wise saw its total cross-border volumes rise 50% in Q3 2022

What’s trending

• JPMorgan and Goldman Sachs battle for British customer deposits (FT)
• Why neobank Dave expects to be a profitable fintech survivor (The Financial Brand)
• Mastercard announces access to McAfee protection for US cardholders (Crowdfund Insider)
• Q3 M&A highlights: deal volume down, number trending up (Finovate)

Welcome to the Tearsheet Podcast. I’m Tearsheet’s editor in chief, Zack Miller. I recently got back from Money 20/20, and a big theme this year was embedded finance. There were a host of old and new players vying for position in the financial tech stack. It makes sense – a few years ago, you could have counted the embedded platforms on one hand. Now there are dozens, just in the US. 

Enter Lithic, a software infrastructure company that enables companies to launch new card programs. I sit with co-founder and CEO Bo Jiang, who shares his firm’s genesis story and describes the impact being born out of a consumer app has had on Lithic. We talk about how the firm stacks up against other embedded finance players and the need to scale as a platform in the space.

Bo Jiang is my guest today on the Tearsheet Podcast.

Subscribe: Apple Podcasts I SoundCloud I Spotify I Google Podcasts

The following excerpts were edited for clarity.

Payment infrastructure players

I started the company back in 2014, originally as a direct to consumer company called Privacy.com. We had this idea for an easier and safer way for people to spend online. And over time, it’s grown to become one of the leading providers of virtual cards for consumers. And in the process of doing that, we ended up having to build all this infrastructure for ourselves. And that informed our point of view around what the industry needed. Our point of view really has been customer informed. It’s way too hard [to launch a card]. Usually, it takes  6,12, or even 24 months to launch your card program, and oftentimes millions of dollars of investment. And once you’ve launched, oftentimes, you’re at odds with your infrastructure provider. So, we’ve made it easier and faster. And we’ve also built this more modular and configurable way that kind of slots into growth stage companies, as well.

Standardizing card programs

Until now, companies really had two options for building card programs. They could either use a sort of productized, narrow offering – like, if you’ve got a really simple use case for B2B payments, you might be able to use someone else and get started relatively quickly. Or you could kind of go down this really expensive and time intensive route, which a lot of companies end up doing, of customization. We’ve kind of broken this either/or model where we’ve productized a bunch of different use cases, but customers can also mix and match and incorporate our API’s in a fully customized solution.

Positioning programs for different types of clients

If you think about the stakeholder, or the components that you need to launch a new card program, you’ve got the sponsor bank, which can also be launching their own programs. You’ve got the networks, like Visa, MasterCard, and Discover. And then you’ve got the processor, which is sort of the technology layer. We mostly focus on providing that technology layer. And what we found is for some customers, they enjoy having an all in one solution, where we can also bring in a partner bank, which obviously has full visibility into what’s going on. We also found that some customers prefer to bring their own bank. We mix things up because we have this modular solution that can expand or contract depending on what your needs are.

Lithic vs. other competitors

Marqeta tends to be a little bit more expensive. They tend to be highly customizable, which can be really great but can also take a really long time to get a program launched. Historically Marqeta focused on fairly large customers like Block and DoorDash. And that means that smaller customers may not get the same level of attention that they need or desire. Galileo is interesting in that they’re good if you’re just looking for that processor and you want to bring in your own sponsor bank, and you want to pick and choose and do all your KYC, compliance, AML, and bank partner stuff. It’s highly customizable, so you have to do everything in house and ends up being pretty expensive and takes quite a long time to get to market. So the way we generally positioned ourselves is like, we are generally much faster to market. Our technology stack is quite a bit newer, so we’re able to be a little more nimble to customer needs as a cutting edge technology company.

Deciding where to go with product

A friend of mine who has been in fintech for much longer than me said problem selection is one of the hardest challenges as a fintech company, especially for a relatively new entrant. And that’s definitely true. There’s definitely tension around what, internally, we think about – we’re building a lot of these building blocks that people can mix and match and put together, but each one of the building blocks that we’re building, we should have a unique right to win. And something unique to say to the market. We’re never going to just do something and tack it on, because – maybe – we can generate a bit more revenue here and there. It’s sort of this principled approach, which sometimes has tension: sometimes we do have to tell people, hey, we can’t do this for you, but we’ll work very nicely with this other provider that you can bring yourself.

Target customers

We target two types of companies. First of all, companies of all sizes use Lithic to build their unique card programs. There’s a few where they’ve launched on a legacy provider, and they’re scaling and finding technology, operations, or partnership constraints with the legacy provider. They want us to bring more of the technology in house. That often is a really good fit for our processor-only model and you see more scaled players taking that approach. 

The other one that is really interesting are companies that have relatively simple and like productizable use cases, and they’re actually creating net new use cases. So my favorite is a vertical software company or procurement platform that does a lot of ACH or check payments. And they find that, hey, I can actually move, say, 10% to 20% of my payment volume over to cards, and I can monetize that. It’s a much better user experience. It shows up in real time on your dashboard. There are a host of benefits there. And what’s cool is we made it faster, easier, and cheaper to launch these programs, and you end up having all these net new use cases.

Finding you own path to scale

This definitely goes back to being informed as a customer ourselves – sort of the legacy ecosystem and the constraints there. We were very motivated to solve the problem for startups and smaller companies just because of the pain that we had in launching our current program. But over time, we’ve realized we can’t do everything. And the way to grow our customers is to allow them to take more control over the process. 

If you’re neobank, one thing you really care about is that KYC process and having a direct dialogue with the sponsor bank around that, and around the trade offs there. We’re the only player in this space that has a smooth graduation path from where we’re the program manager and helping to streamline a launch to graduating to a processor-only model, where you can have that direct dialogue with the bank and bring your own LEGO pieces.

Teaching fintechs how to launch

One thing we found is launching a financial services product is tough. It takes a lot of effort – no matter how good the technology is, there’s a huge education component. And so one thing that we’ve really invested a lot in is putting the content that we have as a team.

Wwe have a legal library, a podcast, and a bunch of how-to guides. It’s good marketing for us. It’s also genuinely helpful information that’s informed by our point of view, having launched a card program. What did we wish that we knew or existed in the ecosystem when we were launching Privacy all those years ago?

Running Privacy.com on Lithic

Privacy runs as a kind of a subsidiary of Lithic with sort of a small contained team, that basically runs and scales business. I think the benefit of having it running as a customer of the platform is that you have a really fast feedback loop when things are changing, and you maintain that customer point of view. 

One challenge that we had with some of the legacy providers prior to launching Lithic was that there wasn’t a lot of customer empathy. When things broke, it’s like, oops, something broke, and we’ll fix it next week. And on the flip side, as someone that’s interfacing directly with the customer, it’s you taking that NPS hit. You feel that pain. We’ve found it really helpful, actually, to have that kind of point of view in house.

Lithic Send

Our infrastructure is generally a pretty horizontal option. We saw use cases across payouts for insurance claims, class action settlements, clinical trials, corporate Incentive programs, or payroll/earned wage access programs. We solve these common product elements across all these different verticals. Send makes it easy to launch. Instead of taking a couple of weeks or months, you can do it in days.

Next for Lithic

For us, it’s really about following the customer and that we’re really focused on making the experience flawless, like end to end, and productizing more of these use cases. The theme for us as a company is narrowing the focus and really tight execution on what we do. So you’re not going to see us go and do a bunch of different new product initiatives. It’s really kind of doubling down on that core and delighting our customers.

Travel is having a resurgence, and with the holidays quickly approaching, the pace of travel bookings is only getting busier. While spending is still slightly behind pre-pandemic levels, in the U.S. there has been a 40% increase in travel spending compared to 2021. Now just below half (41%) of American adults are making plans to travel during the upcoming holiday season, an increase of 13% from the previous year.¹

As the holidays inch closer, the expectations travelers hold for customer experiences are looking different. In fact, according to new research conducted for Visa by Morning Consult, nearly three years since the onset of the pandemic, roughly 40% of travelers have reported changing their travel behaviors.¹ Digital-first options have taken hold widely in the consumer world. Now as they head out, travelers are taking those expectations along with them.

For the travel and leisure space, this shift marks a critical opportunity to ask the question – does our customer experience model align with the digital-first traveler? As travel continues to pick up, travel and leisure businesses will need to turn to the kinds of digital solutions and experiences that will be essential for building long-term success.  

Consumers are rethinking expectations

A lasting effect of the COVID-19 pandemic has been an increased awareness and emphasis on public health and social distancing. And as a result, digital payment methods like contactless mark an important opportunity for growth. In fact, in Q3 of this year, tapping to pay made up nearly one in four (24%) of face-to-face transactions in the U.S.² In some travel-related sectors, the digital payment method has quickly become the norm. For example, Visa’s Future of Urban Mobility survey found that 91% now strongly or somewhat expect contactless payments to be an option in their transit experiences.

What travelers ultimately want is one cohesive experience that blends seamlessly across every stage of their journey. From the moment they step into an airport all the way through to their destination, travelers expect contactless options to follow along. Whether it’s digital in-app check-in before the flight or making a contactless payment for a drink mid-flight, travelers want a more connected experience.

The time is right for a customer experience refresh

With so much change in the air, there’s no better time to reevaluate the state of customer experience and digital payment offerings. Contactless and digital offerings run the gambit of possibilities from biometric scans and digital passes to in-app room keys and robots that handle luggage and cleaning.

For travelers, digital, omnichannel experiences are the norm, and those expectations are coming along with them throughout their journey – a factor that will need to be accounted for in any customer experience model moving forward. When building an omnichannel experience for travel, apps and digital profiles can help create a sense of brand loyalty while also making it easier to buy tickets, drinks, or food at a venue. And other options like card-on-file can make shopping in a new city easier.

The benefits of these solutions don’t stop with the traveler. By leading with digital payment options, businesses can streamline their own internal processes and employee experiences. Looking at solutions like digital tipping can make it easier for patrons to tip employees who, in turn, gain instant access to those tips without the need to wait for payroll. 

Preparing for the digital-first traveler

While more businesses start to rethink their approach to customer experience, the answer is clear. Travelers want, and need, digital payment methods every step of the journey. Incorporating the right digital tools and solutions will leave businesses more agile and better prepared to meet these expectations for an enduring, long-term travel resurgence. 

¹ The Holiday Travel poll was conducted by Morning Consult, on behalf of Visa, between September 21-22, 2022 among a sample of 2,210 US adults. The interviews were conducted online and the data were weighted to approximate a target sample of the US general population based on gender, age, race, educational attainment, and region. 

² Visa Inc. Q3 FY22 Earnings Call

³ Visa’s “Future of Urban Mobility” survey: May 2022 (conducted by Wakefield Research among 11,550 adults who take public transportation in 14 markets: U.S., Canada, Australia, New Zealand, France, Italy, U.K., South Africa, UAE, Qatar, Kazakhstan, Peru, Saudi Arabia and Egypt.