Stripe has introduced a new charge card program for Stripe Issuing, Stripe’s commercial card issuing product.
Stripe Issuing is the infrastructure that allows fintechs and platforms to create, manage, and distribute virtual and physical payment cards to their customers. For example, Ramp uses Stripe Issuing to provide its business customers with spend cards that are connected to Ramp’s expense management software.
Stripe’s new charge card program enables entrepreneurs, fintechs, and brands enrolled in Stripe Issuing to provide credit to their customers, but lets Issuing users fine-tune spend controls. Fintechs and platforms using Stripe to build a charge card program are able to set the terms, including whether to charge fees for their programs.
Stripe Issuing partner banks are the lenders for the charge card program, allowing Stripe Issuing users to facilitate their own charge card program by purchasing receivables – which is the debt created when the bank funds a charge made on the card. Stripe Issuing clients purchase the receivables owed by their customers from partner banks and put them on their institution’s balance sheet. Stripe Issuing users can then hold that debt for their customers until it is due. The debt is extinguished after customers pay Issuing clients.
Stripe’s Banking-as-a-Service (BaaS) functionality allows fintechs and platforms that work with Stripe and partner banks to set individual credit limits and repayment schedules that fit their businesses and their customers’ businesses, including weekly or monthly repayments, or repayments on specific days. As Issuing users’ customers spend, available credit amounts are automatically updated at that specific time.
Once a charge card is used to make a purchase, the transaction needs to be funded. For this reason, most charge card programs require the platform offering the card to cover the transaction immediately, which forces fintechs and platforms to maintain large cash balances with their BaaS provider.
“With Issuing, Stripe users can send funds to Stripe after the transaction settlement date. This helps them reduce the funds they need to keep in reserve, freeing that cash for other purposes,” explained Denise Ho, head of product for Banking-as-a-Service at Stripe.
Charge cards are conceptually similar to credit cards — they allow cardholders to spend ahead of available funds and then repay a platform after the funds have been spent. Both cards enable account owners to spend on a line of credit.
Additionally, fintechs and platforms that use Stripe Issuing to build their own charge card programs can also create their own rewards programs. A platform that serves car mechanic businesses can build a reward points program that accrues points, which can be spent with auto parts manufacturers, for instance.
Financial services platforms like Karat, Ramp, Emburse, and Coast have employed Stripe’s charge card program in their operations. Ramp uses Stripe Issuing’s charge card program to offer charge cards to its business customers as part of its expense management solution since charge cards enable its customers to spend on a line of credit.
The offering is currently only available in beta in the US and is restricted to commercial use. However, Stripe plans to expand the offering to the EU and the UK in the future.
Tearsheet Take: Charge card vs. credit card – the better choice for SMBs?
Recent data by Codat shows that over a fifth (21%) of US SMBs couldn’t access the credit they needed in 2022. While banks are important sources of credit for small businesses, the loan approval process at big banks is ungenerous even in normal times. The recent loan approval rate for big banks came in at just 13.8% – the lowest number for big banks since July 2021.
Many small businesses are phased out every year in the US due to a lack of equal access to credit among other reasons.
Charge cards may help businesses in ways like managing cash flow, especially in the case of small businesses that depend primarily on credit to purchase inventory, covering cash flow shortages that may arise from unforeseen expenses, spells of insufficient income, paying salaries, or growing business. But while charge cards may sound great in the ideation stage, the program comes with a lot of challenges including high annual fees, which might seem like a small amount to pay in the beginning but could accumulate over time leading to costly debt.
Small businesses can likely weigh their expenses, cash flow, and short and long-term goals to decide whether a charge card or a credit card is a more viable payment solution for them that suits their individual needs and supports their growth.