CardsFTW #29: Student Loan Cashback

Plus, Another Neobank, Better Plastics, and More

Laurel Road’s New Student Loan Cashback Card

KeyBank isn’t known for its credit card issuing business. Despite being a top-25 bank, it falls outside the top-25 credit card issuers. Outside of the top-ten credit card issuers, most of these banks offer a generic set of cards: one for prime customers with 1.5-2.0% cashback (with restrictions or limits), a low-interest rate card for revolvers, a secured card, and a simple student card. You can review this lineup from KeyBank on their website.

KeyBank operates a student loan issuer and servicer named Laurel Road. Last week Laurel Road announced a new cashback credit card offering aimed at the millions of Americans with large outstanding student loans. The Student Loan Cashback credit card offers a 2% cashback rate when rewards are redeemed to pay down student loans at most student loan servicers, not exclusively at Laurel Road.

While the product has unimaginative naming, the inclusion of a rewards boost at other servicers is an interesting take on most of these products that only provide you a full cashback benefit when rewards are redeemed or invested directly back to the financial institution at hand (e.g., earn 2% cashback on the popular Fidelity Visa Card when you put those funds into a Fidelity investment account).

In addition to the core rewards, the card launches with a $500 student loan cashback bonus or a $250 statement credit after spending $5,000 within the first 90 days of opening a new card. Although $5,000 is a high spend requirement, that is a good size bonus, with most sign-up bonuses being in the $1,000 to $3,000 range for all cards outside the ultra-premium luxury category.

The card does not have an annual fee or a foreign transaction fee. It is a very solid offering for anyone who can use the rewards to pay down student loan debt (many people).

Student lending giant Sallie Mae has a revamped lineup of cards with up to 2.5% cashback during the first twelve months, but this bonus expires, and the underlying rate is 1.25% or 1.0%, depending on the card. There is no sign-up bonus.

The day after the Laurel Road announcement, Vox published an article questioning credit card rewards. As this article and many before it point out, merchants pay a large portion of card rewards directly through the merchant discount fees. Merchants will incorporate this cost into their overall cost and pricing structure which affects all purchases, including paying with debit cards or cash. As a result, affluent customers who carry rewards cards earn cashback or rewards at a higher rate than they pay for with higher prices. Cash customers, who tend to have lower incomes, bear the cost of this.

The value of cards, rewards, and interchange costs continue to be a topic of heated debate. Those of us in the industry don’t want to admit that we are part of this wealth transfer. It’s unclear to me if this effect is as pronounced as stated. There are costs to cash, checks, or house credit accounts, which preceded open network credit cards, and that may have been higher than 3% in many cases. In addition, net interest margin is a meaningful source of income that can fund rewards. Even some wealthy consumers carry credit card balances and pay interest.

I bring this all up in the context of the Laurel Road card because using cashback rewards to drive payments towards student loans sounds like a good thing. Support cardholders spend $10,000 per year on these cards and generate $200 in rewards. The $200 in rewards is a meaningful amount, although not something that will eliminate their loan balance by itself. It’s unclear from the marketing materials what the credit requirements are for the new Laurel Road card, but based on the product, I would estimate that it will take good income and a high credit score to earn approval.

The tension between merchants, consumers, and issuers around interchange and rewards will continue. Overall, I am excited to continue seeing new products in the space that are innovative and have a consumer-friendly approach. It’s even better to see this innovation coming from a traditional issuer and not a fintech startup.

Fintech Lender LendUp Launches Neobank

LendUp, a ten year-old digital short-term loan lender, announced its entry into the debit card and neobanking space with a new subsidiary, Ahead Money. LendUp previously spun off Mission Lane credit cards in 2018. In the last issue, I noted that Mission Lane acquired startup HoneyDue, aiming to add neobanking services. Now, its former parent is launching a debit card in partnership with Bancorp Bank.

The new Ahead Money service looks and feels like most neobanks: early payday, no overdraft fees, etc. The card includes a no-cost overdraft feature. The competitive market for fintech debit cards is growing, with many new cards. It is increasingly hard to see differentiation between the services.

We will continue to see online or modern lenders add banking and debit services (we’ve seen many of them do this already), which brings a stronger relationship and more steady income to the lender. Each of these fintech companies launches with a particular purpose. With success, they each naturally aim to grow their product lines. Over time they end up looking a lot like traditional banks with multiple lines of service. We’ll need to check back in a year from now and see which of these offerings is surviving or if there is room for all of them (at the expense of traditional banks).

Share CardsFTW

An Update on BNPL Cards

Buy now-pay later giant Klarna announced a new shopping app in the UK that will allow its customers to checkout with Klarna at any retailer. American, Australian, and Swedish Klarna customers have access to this app today. The Klarna shopping app allows consumers to fill in card details in ecommerce stores with a virtual card number, routing the payments to the merchant over traditional card rails (they are not affected and pay the same fees as usual). At the same time, Klarna converts the purchase into a three-part installment.

Klarna pitches this feature as a way to pay over time and avoid credit card fees. Depending on what payment option you choose from Klarna, you may pay their fees instead. As I’ve noted before, you could also use your traditional credit card from certain issuers like Chase and convert the purchase to fixed installments.

It’s all sort of becoming the same thing, with BNPL providers arguing that they are better than card companies. It’s not as though BNPL operators are beloved by everyone either, as a recent class-action lawsuit filed against Afterpay accuses the company of deceptive practices. That’s not to say that this lawsuit is a slam-dunk win, but in a world of lenders accusing other lenders of being predatory, you usually find that every lender has more fine print than you’d like to see.

Better Plastics

Mastercard is rolling out a new logo you can add to the many already on your card that signifies that your plastic credit or debit card is made with slightly less PVC than before. To quote:

“Cards carrying the sustainable card badge will be verified by an independent, first-of-its-kind certification program that assesses sustainability claims. Using current industry benchmarks, cards will be certified if they meaningfully reduce energy consumption, material consumption, carbon footprint and waste. Each year, the benchmarks will improve as overall sustainability levels improve, continuing to contribute to better environmental management.”

Cards are problematic to make environmentally-friendly because they have metals in them for EMV chips, NFC antennas, and more. Making them more eco-friendly is good. Believing that consumers will choose their card based on the plastic…seems unlikely. Whether you personally love them or hate them, people love metal cards, people love rewards, and people have difficulty getting approved for cards. Issuers will need to lean on this to make a difference as consumers will choose a card for many other reasons before they reach finding the new eco logo.

Share

CardsFTW

Thanks for reading CardsFTW, a weekly-ish 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.