CardsFTW #20: A Light at the End of the Tunnel

Plus, extreme credit card maximization and small business credit.

Perhaps it should go without saying that we live in incredibly odd times. There finally seems to be a light at the end of the tunnel that is the coronavirus pandemic. We are starting to know people who are receiving vaccines. We are seeing case counts subside, although the danger remains very real.

A big part of the weirdness that I've touched on a few times is that while ten million jobs have disappeared from the economy, consumers are paying down debt at amazing rates. Some consumers are still employed and limited in spending due to a lack of travel and entertainment options. Others may be out of work but are receiving substantial assistance from the federal government. 

As we watch the progress of the latest relief package slowly make its way through Congress, reports were out this week that credit card borrowing has fallen to its lowest level since January 2017. As the economy recovers, experts expect borrowing to increase, even as more people return to work. The demand to go out and spend will be astronomical. The people I know with vaccines are booking trips, visiting bars, and trying to make up for lost time.

Financial institutions I know expect credit card acquisition and spending to ramp up this year. Along these lines, we continue to see the expansion of new credit card offers.

This week Deserve and Seneca Women, "a global leadership platform centered on the principle that advancing women and girls will fast forward us to a more equitable and prosperous world," announced the upcoming release of the Seneca Women Card. The card will provide 3% cashback (up to $500 per month) in the Seneca Women Marketplace, a directory of woman-owned businesses.

The Seneca Women Card marks the second challenger credit card I know with a female focus, following Sequin Card, which is also in development. Both cards are additional markers on the roadway to more tightly targeted cards with unique benefits. Affinity targeting will be the future of cards and financial services as traditional, one-size-fits-all products from large players are disrupted by smaller, faster companies.

If we can draw any parallels from what we have seen in the neobank market for deposit accounts, we will see that some early movers will fail. While issuing a credit card is easier than ever before, thanks to program management providers like Deserve and Railsbank, it is still costly and challenging. While some debit card program providers are touting getting cards issued within days, credit card programs continue to take months, if not a full year, to get up and to run.

Also, approval rates remain a massive problem in credit and will continue to be so coming out of the enormous economic impact of COVID-19. If these new programs experience standard decline rates topping 70%, the cost of acquiring cardholders will be challenging.

Experience also indicates that cause-based marketing in financial services is very hard. A few brands have scaled this, such as the Susan G. Komen Foundation and World Wildlife Fund (both originally MBNA cards, now issued by Bank of America). However, many other cause-oriented cards have struggled as the cause itself isn't well-enough known or the underlying product is weak. People want to give back and feel good, but more people want their rewards.

These cards are rebranded Bank of America Cash Back Rewards cards, where BofA pays a signup commission and a minimal amount of interchange revenue to the organization. Other than the logo, there is nothing unique about the card from a rewards or product perspective.

Like the upcoming Seneca card, challenger cards do have part of the product that directly connects to the cause. In this case, it is the 3% back shopping at the merchant network. Payments products are middleware: the real value occurs between the consumer and the brand or merchant. We don't use credit cards for the sake of using them (except for folks running a scheme, see below). We use credit cards to conduct commerce, but the commerce itself is what matters here.

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Credit Card Maximization

My last startup, Wallaby, was all about credit card maximization. After I sold that company, I felt that the overall market for credit card optimizers was too small for a sustainable business. I may yet be proven wrong. I've touched on this a few times, so I'll try not to repeat myself at length, but more optimization tools and sites exist today than during Wallaby's time (2012-2018), and new ones keep appearing.

This week I learned about Card Curator, which joins Birch, MaxRewards, CardPointers, and others in a crowded space. Mote Money is also new on the market. Mote provides optimization as a browser extension for the desktop market (RIP Wallaby for Chrome). I am asked by aspiring credit card maximizers about building a new Wallaby frequently enough that I have developed a stock reply.

If you want to be a real maximizer, though, we might look to Konstantin Anikeev, who lost an important tax case regarding credit card rewards. Mr. Anikeev spent $6.4 million dollars in what is called manufactured spending to generate some $310,000 in rewards. In a split ruling of an IRS lawsuit, a court determined that some rewards from manufactured spending are income, while rewards from general purchases are safe for regular consumers.

Manufactured spending is the practice of using a credit card to buy a product that can then be turned back into cash. For example, you can buy a Visa gift card at a supermarket with a credit card. Then you can take that gift card and use it to purchase a money order, which you can in turn use to pay your credit bill. While there are fees along the way, if you can earn many rewards, say from a signup bonus, or because of an accelerated spend category (such as 5-6% cash back at grocery stores), this can be lucrative at scale.

It's typically against the rules, and many stores and card issuers have policies in place against this activity. It is expensive and against design, but in the case of cashback solutions, it may be a form of money laundering and may indicate fraud. When you have a points-only reward system, you might find a manufactured spend user having to buy some expensive chocolates with their points instead of getting a check. (Not that I have seen this on the Grand Reserve card or anything like that...)

It's a lucrative game, and there are blogs and Reddits with tons of information if you want to pursue this hobby. It's a lot of work and, if the card companies catch on to you, they can shut down your accounts as there are many rules in the fine print to prevent this activity, let alone what the IRS thinks about it. In addition, issuers have put new rules in place that limit the number of new cards an applicant can open in the past 12 or 24 months, exclusion lists exist for known bad actors, and more. Issuers accept that some level of cardholders will exist that acquire cards simply to run up rewards and cancel (churners), but if you stick out, you'll probably get knocked back.

Another New Business Card

This week I learned about Capital On Tap, a UK-based company now issuing small and medium business credit cards in the US in partnership with fintech-friendly issuer WebBank. Many of the recent entrants into the corporate card space, such as Brex, Divvy, and Ramp are technically charge cards. Businesses must pay charge cards in full each month, while credit cards can carry a balance. These big three corporate card startups underwrite with a strong emphasis on current cashflow and account balance for underwriting. This risk-limiting approach is combined with aggressive trimming of credit limits at the first sign of trouble. Capital on Tap's Business Credit Card does allow for revolving balances at rates from 9.99% to a whopping 34.99%.

Unlike traditional SMB credit cards from issuers like Chase or Capital One, Capital On Tap is not using a hard credit inquiry on owners (limiting immediate impacts on their personal credit). Capital on Tap also does not currently accept sole proprietorship applications, a big part of the traditional issuer's businesses. 

Small business credit is a very challenging space to underwrite, but there is tremendous demand for credit. I haven't seen this card in the wild yet. Time will tell us if they can apply their EU underwriting model successfully in the US at a time when small businesses are struggling more than ever.

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Thanks for reading CardsFTW, a weekly newsletter about all things debit and credit. CardsFTW is written and curated by Matthew Goldman, Founder, and CEO at Vertical Finance, a challenger credit card startup. If you're looking for insights into everyday payments beyond deal blogs, please subscribe for free at cardsftw.substack.com. If you enjoyed this, please share it with a friend! Follow me on Twitter @magoldman.