‘Since the Diners Card, it’s just been a distribution game’: Exploring the future of credit with Marqeta’s Simon Khalaf

In this Tearsheet Live, Marqeta CEO Simon Khalaf will dive into the credit space, discussing why there’s been such little innovation in credit cards in decades, and what’s on the forefront for innovation in credit technology.

New technologies enable brands to offer personalized rewards based on individual spending habits and preferences, creating unique incentives that foster customer loyalty and significantly increase digital engagement. Marqeta’s recent study found that 36% of US consumers plan to apply for a new credit card in the next 12 months, with that number booming to 55% among 18-44 year olds. And there is demand for this type of personalization, with 74% of cardholders citing there is more room to personalize rewards based on individual habits.

He’ll share what this means for brands hoping to reimagine how they foster customer loyalty, and for consumers who are increasingly savvy about using credit to further their financial goals.

Simon will also discuss how embedded finance will fuel the growth of credit for brands seeking a new “homepage” of their digital experience.

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The following excerpts were edited for clarity.

The big ideas

1. Lack of Innovation in Credit Cards: Despite credit cards being widely adopted, they haven’t seen significant innovation. They’re often still perceived as a piece of plastic rather than a digital gateway to a broader experience.
2. The Potential of Digital Transformation: Viewing credit cards as digital products opens up opportunities for innovation. Comparing the lag in financial experiences to how news evolved digitally, there’s immense potential for personalization, instant rewards, and dynamic offerings.
3. Technology’s Impact on Credit Technology: Technology, particularly FinTech, has enabled just-in-time lending, seen prominently in the “buy now, pay later” model. This dynamic, instantaneous underwriting reshapes the traditional credit landscape.
4. Dynamic Rewards and Shopping Experience: While rewards have been used to vie for top-of-wallet status, dynamic rewards could revolutionize the shopping and payment experience. Manipulating rewards dynamically based on specific items or transactions could transform the way consumers shop.
5. Payment Events as Brand Engagement Opportunities: Every payment event becomes an opportunity for brands to engage, inform, and delight customers. Transforming payment experiences into discovery and merchandising opportunities can create a more engaging customer journey.
6. Embedded Finance’s Influence: Embedded finance presents various opportunities, from transforming employer-to-employee payment structures to improving expense management and revolutionizing financial services engagement within digital brands.

Lack of innovation in cards

Simon Khalaf, CEO, Marqeta: It is actually fascinating. If you actually look at the stats of payment cards, in general, or credit cards in particular, it’s by far the most adopted technical product. It has more distribution than clean water, wheat, Google and Facebook combined. But yet you look at it, for the vast majority of people, it’s still a piece of plastic. But when you think of the credit card itself, as a digital product, you start thinking that it is a gateway, a doorstep, to the digital experience. Then everything changes.

For the last 20, maybe, 30 years, we think what happened to news: news used to be a day late. You waited for the newspaper to come. And that’s at 24 hour latency from when the news happens. Now news moves in micro seconds or milliseconds on social network platforms. And you look at the financial expedience, it is still like the news was in 1994. So the idea that a credit card is going to be the homepage of the internet — it’s going to be the front page of the mobile experience.

Think about massive innovation, which is around personalization, about instant rewards, about dynamic rewards. The card for the brand, the bank, or any institution becomes that homepage. No one types www.homepage.com anymore. They discover things that are marketed to them in their social network feed, or they discover something in Google search, or it’s the app they have on the phone, and that’s the homepage. But if people start thinking that a payment experience, which is tapping, swiping, or doing whatever you want in a digital way, that’s how you start introducing other services for a brand. That’s when innovation is going to start becoming huge.

Since the Diners Card, it’s just been a distribution game versus an innovation game. I think the next decade is going to change that massively.

Fintech’s impact on cards

There are many examples we can give about the concept of just in time funding or just in time lending. There’s no question at this stage whether buy now, pay later is here to stay. It is actually what is creating a great holiday season for a lot of US retailers. Now what is buy now pay later? At its core of buy now, pay later is dynamic, instantaneous underwriting. It is transaction-level underwriting versus human level underwriting that has been enabled by technology.

At Marqeta, we made by now, pay later plug into the existing ecosystem. So it plugs into the traditional payment ecosystem settlement through the networks and merchants get settled. Not everybody has to change everything in order to adopt it. I would say buy now, pay later, is one of the first innovations in credit that technology has enabled, which is the ability to intercept the buying behavior. You are injecting yourself between shopping and payments, which is number one.

And number two, the ability for AI to quickly underwrite a consumer and a transaction at a point in time at a point of sale, so on and so forth. Now, take that and apply it to the credit space as a revolver, which is a credit card, which is actually underwriting a human. And you see where this could lead.

The second thing is cards have changed long term consumer behavior, because they allow you to buy ahead of your paycheck. Now that has sent many nations into debt. It has increased GDP. So as a percentage of GDP, that is fine. But if we actually think about it, cards have not yet optimized the purchase funnel. If somebody wants to buy something, they put it in the cart, and then they buy it.

If you think of what rewards have done, they have allowed brands and banks to fight for top of wallet, but they have not impacted the shopping flow. Why? Because it’s universal rewards: you get 2% on everything. But if you start using technology: our platform does dynamic rewards, or just in time rewards. So let’s say in aggregate, there has to be 2%. But today on that item, it is 15% cashback. It’s like a discount. You start manipulating rewards up and down — you’ve got a budget that you’ve got to spend on that person, and you allow brands to do it, you allow everybody to do it, then you have a card that is a game changer in the shopping, payment, and merchandising experience.

There’s another thing, which is not as instantaneous, but brands always love to communicate with customers. If you look at it, the payment feed, which according to regulators is a statement that’s a piece of paper that can be mailed to the house or you get it in a PDF. Lt’s talk about the digital brand. When was the last time you saw the statement from Instagram? Or Instacart? Or Airbnb? Or Google your last 30 days of searches? Think of statements as a phenomenal opportunity to be a live feed with everything you have — you can insert merchandising opportunities, you can insert thank you messages around loyalty, you can insert further discovery.

Every payment experience can be a discovery or a merchandising experience because it’s a moment of joy. Shopping is a very fun, eternal game.

Brands and customer loyalty

At Marqeta, we listen to customers and to consumers. We’ve done a survey and 74% of US and UK consumers believe there’s a lot more room for personalization. That is an extremely interesting stat. And I mean that in the sense of a credit card. Another interesting stat is like 64% of consumers who have a co-brand believe they are the customer of the brand and not the bank. So brands cannot ignore the stats anymore. The card doesn’t become a payment vehicle — it becomes a loyalty vehicle.

What can brands do? Let me take it down to the platform to analytics and engagement. Let’s talk numbers. I have a lot of a B2C experience. I used to work at Yahoo. Managing the Yahoo homepage was on my team. We had a billion users coming on a daily basis. That’s a lot of people. Anything you move, you can impact revenue a lot. But at the end of the day, you look at analytics and the analytics said that on average, consumers come, say, two and a half times a day. And each visit is seven minutes. Now, if I could have increased those visits from 2.2 to 3.2, you’re adding billions upon tens of billions of dollars for digital brands.

Let’s take a step back. The average visit is 2.2 times. How many times does a consumer in a digital world, a Gen Z, a young kid pull up Apple Pay and pay something? You’ve got data that shows all the way to seven times. Depending on the transactions, payment is a two to three times a day phenomenon.

Let’s say a brand issues a digital credit card and then enables push notifications from their app. Whenever you’re going out and paying, whether you’re swiping or doing something, there’s a push that comes from the app, saying thank you for this purchase. And then you click on it and you land in the app. And you have the carousel that shows you the information the brand wants to promote. What I have done, let’s say I send three pushes. I click on one, that’s the visit. So I’ve increased digital engagement by 33%. That is billions of dollars in advertising. There’s tens of billions of dollars in merchandising opportunities, and probably a huge addition to our GDP. Because if you look at the digital brands that Gen Z uses, it is Amazon. It’s Airbnb. It’s Uber. It’s DoorDash. It is Walmart. It’s many other brands that are fighting for the attention of the consumers on an iPhone or an Android. And that’s a phenomenal opportunity for them to gain that loyalty back.

Customers reaching financial goals

Rewards can be used to incentivize a purchase. They can also be used to train consumers for better financial management. I’ll give you a simple example. You can personalize a card. Let’s say you want to declare a certain goal, then shopping is a temptation. But discounts and deals is the bigger temptation. So rewards, let’s say that it’s something you need to buy — you can say, Look, if you’re spending on a discretionary item, it works. You’re set. You’re spending on a non discretionary item, you’re encouraged with rewards. So you can alter consumer behavior towards a financial goal.

I hate to use the word gamification, but people say shopping and payments is the ultimate game. It has been proven that you can guide consumers into the right behavior. AI can do that, right? If you’re trying to optimize for a certain goal, machines can do this much better than humans if you have very little time to do it. Eventually, humans can beat machines. But when you’re looking at sub millisecond, or milliseconds or seconds, decision making machines can alter the rewards and hence change consumer behavior.

Opportunities for brands in embedded finance

Let’s start by defining what embedded finance is, because it’s actually a great point that BNPL is a living example of how embedded finance can go perfectly right. Usually, there was a flow, or a brand experience that is separated from a banking and financial experience. There was a segment called banking, but you are waking up to a generation that has never been inside a bank. I would say in the next decade, this generation has never touched cash, a bank note, and most likely, in 10 years, they’re not going to touch a piece of plastic. So the only engagement they’re going to have with financial services is through an iPhone application, or a widget or an Android.

So what do people do today? They go to the brands they love, they’re addicted. It’s called addiction to Instagram, Spotify, to whatever you name it. So why don’t we think that these brands are significantly better positioned to offer the financial services to their consumers? They are. because they’ve got the engagement, and it’s an extension of what they offer. Now, that doesn’t mean the banks are going to go away. We’re taking the front end user experience, that engagement hook, and we’re telling the banks, you know what, you’re not good at it. You’re very good at treasury. You’re very good at investment.

I’m sorry, you’re not good at consumer experience. I bet you there isn’t a single bank ever in the world that has a dashboard in front of them that is looking at daily active users. They’re looking at average dwell time, but also active user, they’re looking at journey builders. That’s what digital CEOs do. The banks are not thinking about that. I bet you what is in front of them, it’s what’s my capital, what’s the return on capital, and then the ROI on any investment I make. So by taking the front end, and embedding it inside the brands people love through a co-brand — that’s what embedded finance can articulate.

Embedded finance example: Payroll

The second example is injecting financial services in the employer to employee payment. Let’s look at the last 20 years. News used to be a 24 hour delay — now it’s instantaneous. Music: I am old enough to remember 33 records, and then CDs, and then singles. Now music is streamed instantaneously. Let’s talk about this. But payroll is delayed by 15 days. Does that make sense? Technology can enable instant payroll through embedded finance.

All of a sudden, every company can become the new credit union of all their employees. In the United States, you’ve got 83 million shifts and gig workers. They’re not just underbanked — some of them are unbanked because they cannot provide proof of full time employment. Yet. That is 13% of the US GDP. If those folks were a nation, their GDP will be somewhere between India and Germany. And they are underbanked.

So imagine that embedded finance can unlock the potential and offer banking services. No one knows your propensity to get a gig job or to get a shift job better than the neighborhood marketplace, better than the employer, so they can easily underwrite you. That’s what credit unions were created for. So that’s another area of embedded finance.

B2B embedded finance

Now, let’s talk about non consumer experiences. When you look at B2B, we still live in a world that people get paper invoices. They get a scissors, open it, look at an invoice, or they get it by email, and then they sit on it. 30 days later, you decide, okay, I pay now. That was fine when working capital was free — the last 15 years working capital was at zero interest rates. Now working capital is up to 12% interest rate. So there is a lot of losses from this delay, why not instant settlement? Then you save every company 12% on working capital, going back to the consumer.

If you look at the 67% of the US population that lives paycheck to paycheck, those are the folks that are maxed out on credit cards with an APR of 22%. What is inflation, 6%? So add those two, it’s 28%. So out of every dollar they make, they lose 28 cents. So, if they get paid immediately, I wipe out 28% of waste — that creates value to the economy. So, the beauty about embedded finance is that it can be applied everywhere: money flows from an employee to a consumer, from a consumer to consumer, from a consumer to a retailer, from a retailer to its suppliers, and from a retailer to employees.

Top brands moving into embedded finance

A lot of brands over the last years attempted to enter in financial services, but they’ve shied away, because it’s an industry that they don’t understand and is highly regulated. Now, you’ve obfuscated the industry enough so that brands can comfortably go to it without having to incur a lot of costs from a regulatory perspective, program management, looking at Reg Z in credit, Reg E in debit — the list goes on and on.

Let me give you an example. In the early 90s, I was actually working for a company that sold networking gear or networking services. This is pre internet. There was CompuServe and AOL. We were selling to Ameritech, which I think eventually became AT&T, one of the telco companies. I was at the town hall, visiting my customers, and the CEO of the company announced the card, which now became the AT&T Card. One of the employees asked them, hey, what do we know about financial services? The CEO said, look, there are two currencies that banks have. The first one is loyalty. And the second one is the US dollar. And guess what? We as a telco have consumer loyalty — once they get a phone from us, that is a customer forever. And that’s why it positions us to be the best financial services organization, because no one is going to default, because they cannot afford to lose their phone. This was 25 years ago.

But if you look at it, many companies tried to do that, but I think the regulatory burdens were very high. But now, if you look at the platforms, and Marqeta is one of them. We’re not the only one, but we’re a good one. We obfuscate the regulatory compliance from a brand so they can safely go into the space without having to worry about program management, without having to worry about regulatory issues.

Look at Silicon Valley and digital brands. We love to code once and deploy everywhere. This is our mentality. Thinking global and acting local, though, is not something Silicon Valley is wired well to do. The beauty about working with a platform is you can build a single financial product that will work in the United States, in Brazil and Ecuador. At Marqeta, we’re working with brands, and they’re telling us I’m launching in Japan, I’m launching in Ecuador and Peru and Argentina. I need you to be there.

So Marqeta is listening to our customers, and we get ahead of them. We start working with local financial regulators, local banks, so that anybody who’s building on Marqeta can be assured that their product will work wherever bits flow.

Focus for 2024

There are two things that we’re focused on. The number one is credit. We don’t see credit as just one size fit none. It’s actually going to be many sizes that will fit everybody. Whether it is powering new innovative point of sale lending like BNPL, all the way to a revolver with great AI-driven underwriting and dynamic rewards, the ability to turn our plastic cards or archaic concepts into a digital product is one.

The second one is a program management layer across the globe. For every successful digital brand that has built a financial services product, the US is too small of a country. Believe it or not, digital brands want hundreds of millions and billions of users. And unless we increase the birth rate in the United States, we’re not going to get there. Every domestic company in the US has global ambitions. You have a lot of great innovation in Brazil, a lot of great innovation in the EU also wants to go to the US market and to the emerging markets and to the Middle East, to Turkey, to those have hundreds of millions of users. There are billions of people who are underbanked. I think the global nature is what is going to be in focus in 2024.