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A closer look at Stripe’s new charge card program for Stripe Issuing users

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.

Source: Stripe

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.

Source: Stripe

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.

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‘As a key tentpole of our strategy, we’re focused on accelerating the adoption of virtual cards’: 3 questions with Mastercard’s Chad Wallace

Very little appears to be staying the same for the payments industry in 2023 compared to where it’s headed in the next five to seven years. 

This holds true for B2B payments as well.

B2B payments are evolving. Moving away from check payments and leaning toward electronic transactions is perhaps one of the most recognizable trends within the B2B payments ecosystem.

I spoke with Chad Wallace, global head of commercial solutions at Mastercard, about what strategies Mastercard is implementing in its B2B business and where he sees B2B payments heading in the next few years.

What strategies is Mastercard incorporating to advance its B2B business?

Chad Wallace: We recognize the pace at which things are changing across the payments industry and are focused on delivering on the evolving needs of our customers for more convenience, flexibility, and choice in payment experiences. To do so, we are shifting our thinking beyond cards, focusing on delivering an embedded financial experience, and partnering with fintechs – by taking a consultative approach, shadowing and understanding the customer and their business to drive innovation and modernize B2B payment processes.

One of our primary areas of focus is driving embedded B2B financial services to deliver consumer-grade experiences in the corporate world. We’ve been embedding our products for many years and are continuing to integrate payments and services into corporate applications and marketplaces to help commerce ecosystem players deliver a user-centric and secure experience. For instance, we are working with procure-to-pay platforms and ERP (Enterprise Resource Planning) systems to place virtual cards at the center of these tools to deliver increased convenience.

In particular, virtual cards have the potential to play a significant role in simplifying complex B2B payments, and it’s a technology that we’ve been pioneering for over a decade at Mastercard. Businesses making the switch to virtual cards have quickly realized the core business and operational benefits of secure controls of payment, transparency into payment status for cash flow management, liability, and fraud protection, and detailed data for tracking, reporting, and reconciliation. As a key tentpole of our strategy, we’re focused on accelerating the adoption of virtual cards across new use cases and industries as diverse as travel, healthcare, insurance, freight and logistics, and education.

What cybersecurity concerns are keeping the payments industry up at night and how to mitigate them?

Chad Wallace: The frequency and impact of fraud and identity theft have increased with more digital interaction points and associated vulnerabilities, with the expected global cost of cybercrime projected as $24 trillion by 2027, surging from $8.4 trillion in 2022.

The shift to digital means organizations increasingly need to verify their customers are who they say they are, along with a smooth experience. As new technologies drive faster, frictionless checkout experiences, the ever-expanding volume of personal data also requires additional protections.  

At Mastercard, a single cyber-service is created that protects digital interactions even beyond payments with real-time assessment of identity attributes and behavioral biometrics. We are also planning for the future, as IOT (The Internet of Things) and new emerging technologies bring opportunities and challenges.

Where are B2B payments headed and what are some of the key trends accelerating the shift toward electronic B2B payments?

Chad Wallace: Business payments have long been plagued with slow approval processes and have historically been slower to adopt new payment technologies. However, coming out of the pandemic which disrupted traditional, legacy processes, we’ve seen a significant shift to digitization. In addition to consumers having expectations for digital-first solutions in businesses, we are also experiencing a generational shift that is permeating the business world. As more digitally native individuals ascend the ranks of organizations, there is a greater appetite to adopt automated technologies that will allow for intuitive, user-friendly interactions.

Simultaneously, the economic landscape and tighter margins have underscored the need for businesses to operate more efficiently. As a result, we’ve seen an increasing emphasis on data-centric digital payment technologies that enable businesses to better manage their operations and protect the health of their supply chains and working capital. 

With each of these dynamics at play, the B2B payments landscape around the world is ripe for transformation. We can expect to see a continued shift towards the digitization of workflows and processes, and payments will become increasingly accessible with the migration to the cloud and the rise of API-driven access.

This convergence of SaaS platforms and payments products will continue to fuel the emergence of business models placing the virtual card at the center. Additionally, we can expect to see more robust applications of AI allowing businesses to focus more on strategic priorities.

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Challenges facing Paze: Jostling for position in a crowded digital wallet space

EWS unveiled its digital wallet service called Paze earlier this year in a move to capture value in a space where fintechs like PayPal and Apple have the upper hand. EWS is also the operator of Zelle, the money transfer system. 

But Paze faces an uphill climb in the digital wallet industry, contending with incumbents that have become deeply rooted within their merchant networks and established a name for themselves with consumers. 

Increasingly, digital wallets are becoming a staple of the payments industry. In 2022, 51% of consumers report using mobile wallets at some point within the last three months according to J.D. Power. 

Consumer preferences

When it comes to digital wallets, consumers prefer different brands for different use cases. While PayPal is the choice  of 37% for online purchases, Apple Pay is most popular for in-store payments. In Q2 2022, customers spent 3.1 cents of every in-store dollar using Apple Pay — that tallies up to $199 billion out of $4.9 trillion in total sales at U.S. merchants that accept payments through Apple Pay. 

Despite being in the industry for longer than Apple Pay, Google Pay trails behind in both awareness (53%) and preferences. Only 6% of consumers prefer Google Pay in online transactions and only 7% choose it for in-store purchases. This shows that while being in the payments game for a long time can be beneficial, as in the case of PayPal, it does not guarantee adoption. 

On the other hand, Apple Pay has established itself as a popular choice with both merchants and consumers by using consistent marketing strategies. For example the company first lowered the barrier to entry to Apple Card, becoming an effective marketing strategy for Apple Pay. 

Apple’s ‘Lose your Wallet’ campaign that ran in 2017 for the second time. The campaign came with discounts at 14 merchants.

Jumping over walls low and high

Unlike other digital wallets, consumers will only be able to use Paze if they are a customer at one of Paze’s participating banks, though the banks backing Paze expect it to enter with the enrollment of more than 150 million credit cards — equivalent to the accounts that the banks represent. 

Moreover, Paze will have to build its own merchant network from scratch. Adoption by consumers at the point of purchase may be directly dependent on how many merchants offer the payment option. 

To gauge the competitiveness of the digital wallet sector, observing the recent moves made by Amazon Pay with its integration with Citi Flex Pay can be a good start. Digital wallet providers stay relevant by ensuring their availability at numerous merchants and by offering additional value through features such as BNPL options and flexible payment plans.

All of this, Paze will have to build from the ground up. 

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Santander embraces the Earned Wage Access trend, taps DailyPay to strengthen client relationships

Earned wage access (EWA), while still relatively new, is making its way into the mainstream market quickly. 

Post-Covid payment systems continue to innovate at full tilt and workers’ expectations are changing within the fast-growing gig business. Americans are in various stages of pandemic recovery and are now trying to survive the recent surge in inflation. To avoid tapping rainy day funds, employees are looking for flexibility when it comes to pay structure – to close the gap between paychecks and quickly get the money they need to get a grip on their expenses.

A vast majority of working Americans want to be paid on-demand and for this reason, many financial institutions are now supporting on-demand pay plans to offer a free or low-cost benefit for business customers.

Financial institutions like Citizens Financial, PNC, and U.S. Bank are among the early adopters of on-demand pay. Citizens Financial, and PNC, including TD Bank leverage DailyPay, an EWA provider, to offer EWA solutions to their clients. Santander Bank has followed suit and tapped DailyPay to incorporate the new EWA offering into its treasury management in a move to benefit its commercial banking clients in the US.

Through DailyPay, Santander’s commercial banking clients can allow their employees to have immediate access to their pay as they earn it at any point in the payroll process. A user’s earned pay can be transferred to their preferred account, from where they can withdraw their money before a biweekly pay cycle or specific payday.

How does the Earned Wage Access offering work?

EWA programs are employer-enabled services that operate through a partnership between a provider and the employer. The offering lets an employee opt-in to accessing payroll information, which helps determine their actual earned wages. At the end of a shift or hour/day, the employee can use the provider’s mobile app to access an allowed percentage of their income for that period. Costs for the service are backed by the employer as part of their employment benefits package. Most often, this results in free or lower-cost access for the employee to withdraw their earned pay. On payday, the provider collects funds directly from the employer for any earned wages disbursed prior to the payday. The employee is still eligible for a periodic paycheck from their employer on payday including the adjusted difference of any wages already paid. Responsible access to already earned income through an employer’s partnership with an EWA provider gives the possibility of loans or debt traps a wide berth.

What’s in it for banks?

The EWA offering can serve as an impactful tool for bank clients, bolstering the bond between the employee and the employer as well as establishing a sound footing for their businesses. In turn, it deepens the relationship clients have with their banks and reinforces the growth that they can achieve together.

“DailyPay’s solution has several key components that enable our clients’ workforce to not only control how and when they get paid, but also provide them the opportunity to save, earn rewards, and process off-cycle payments,” said Greg Murray, managing director, head of payables and receivables product management, Santander commercial banking.

Ensuring payment accuracy and timely disbursements are critical parts of job satisfaction and employee retention. According to recent research, the average turnover rate improved by 35% for workers who had earned wage access solutions like DailyPay. Additionally, offering flexibility into when and how employees are paid is a key differentiator among employers and a competitive advantage during a tight labor market.

Amidst the economic uncertainty, people want to feel financially secure and not worry about their next paycheck. Earned wage access can provide workers with a sense of security by giving them more control over their finances. Moreover, employees find this model more viable when it comes to managing finances without having to pivot to high-interest loans. 95% of those who were previously dependent on payday loans either stopped taking out a loan (81%) or decreased frequency (15%) after using DailyPay.

“We’re looking to bring earned wage access everywhere. Whether inflation is high or low – America’s top employers and institutions recognize the positive impact on-demand pay can have, empowering their employees and customers to pay bills, spend, save, or invest according to their own schedule, and not on an arbitrary payday,” said Rob Nardelli, director of commercial banking and business development at DailyPay.

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Wirecard’s Deirdre Ives: ‘Our customers are driving innovation’

Wirecard is a global technology group that enables companies to accept payments from all sales channels. The German company operates in 35 countries and in over 100 transaction currencies with connections to more than 200 international payment networks, including American Express, Alipay, WeChat Pay, Apple Pay and China UnionPay, among others.

With its acquisition of Citicard’s prepaid business in 2016, the firm is expanding its presence in the U.S. Deirdre Ives lead Citicard’s prepaid business and now is the managing director for Wirecard North America.

Deirdre Ives is our guest today for the Tearsheet Podcast.

Subscribe: iTunes I SoundCloud

Below are highlights of the episode, edited for clarity.

The driver of payment innovation
Ultimately, I see customers driving innovation. It’s their preferences and comfort level with things like convenience and security that we need to meet. In the end, that’s what drives all our technical innovation. It’s not tech for tech sake or trying to convince consumers to use what’s best for us but the needs and preferences of real people.

Security in payments
I see two major themes when it comes to innovation: security and increasingly flexible, personalized mobile payments. If you look at the rise of Europay, Mastercard and Visa and contactless terminals have been a boon to U.S. retailers, especially for brick and mortar shops trying to stay competitive in a ecommerce-focused environment. It’s helped merchants stay competitive and ease consumer concerns about the safety of their personal information. As part of that, there’s been a tremendous advances in tokenization. It’s quite possible that credit cards are the most secure form of transaction out there especially when integrated with a mobile wallet.

Biometric identifiers have improved security significantly. Things like thumbprints have become standard practice. We’re looking at biometrics like facial recognition and retinal IDs. As sci-fi as these sound, at the end, it’s all about reducing risk and adding value for the customer.

Payments, personalization, and social tools
When I look at the world today, much of the innovation we’re seeing in the industry is coming from the rise of mobile payments in the context of social tools. The most famous examples come from China. Statistics on wireless payments there are staggering. WeChat Pay, the mobile wallet function of the WeChat app, is actively used by 600 million consumers each month. 44.5 percent of people use the app to avoid carrying cash. Alipay has 520 million worldwide consumers. Both are Wirecard consumers and the one thing we’re looking to do is how to introduce these and similar platforms to the U.S. market in order to serve that global consumer base in North America.

Slow mobile wallet adoption in the U.S.
These things always take time. Historically, consumers take a while to come around to new payment methods. It’s generally been the banks, merchants, and payment facilitators helping consumers adopt new payment methods. If you think about it, checks were first used in the 1680s to help farmers and businessmen, but they weren’t widely adopted until centuries later. The earliest credit cards were introduced in the 1950s and now they’re a central part of our lives. But that was a decades long process and what got them there was banks and merchants offering perks to drive adoption. The same applies to mobile wallets. They’ll mature as retailers roll out better reward and loyalty frameworks for them and make them easy to use. So, when we reflect back on how Wirecard can help, it’s up to us to drive adoption, both in how we go to market and in the technology we develop.

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WorldRemit’s Catherine Wines: ‘We’re trying to make money transfer as easy as sending texts’

Catherine Wines has seen how technology has impacted the remittance business. When she co-founded WorldRemit in 2010, she envisioned doing to remittance what the online travel agencies had done to their industry. Fast forward a few years and her firm, WorldRemit is one of the fastest growing tech companies in the U.K. and from a valuation perspective, is progressing toward unicorn status.

On the podcast this week, we talk about what prompted her to take on such a large, stodgy industry and why it’s been so hard to move money internationally. We discuss her view on the role of cash in our economy and WorldRemit’s international growth plans.

Catherine Wines is our guest today on the Tearsheet Podcast.

Subscribe: iTunes I SoundCloud

Below are highlights from the episode, edited for clarity.

Why get into remittance?
I used to work in another company doing remittance, but the old fashioned way. People would need to go to a shop to send money. When I left my previous company, I met Ismail Ahmed through a common friend. He had this idea of bringing remittance into the 21st century by bringing the industry online.

We’ve often made the comparison to travel agents. Years ago, when you wanted to book a flight, you used to go to a travel agent in a physical location. It was the same with money remittance. Now, you wouldn’t think of booking a flight by going to a shop. You do it online. That’s what we wanted to do with moving money: make it a lot more convenient and a lot cheaper. By doing this, we knew we would compete with the large incumbents like Western Union and Moneygram.

Why has it been so hard to move money internationally?
You have to establish quite a large network. In order for us to be able to send money and have a customer receive it almost instantaneously, you need to have a lot of partners in the recipient’s country like in Africa, the Philippines, or Africa. Building that network takes a long time and is quite costly.On the send side, in order to be able to send money, you need to get a license, and that can be quite expensive and time consuming. For example, in the U.S., you have to apply for a license in each and every state. We started in 2014 and now, we have licenses in 48 of 50 states.

Where are the banks in the remittance business?
Banks have never really gone into remittance because of the need to build these partnerships. Banks couldn’t provide the service that their customers wanted. Our products is very much for economic migrants, working overseas and sending money home. They need to send smaller sums of money pretty quickly. Banks just couldn’t compete because they work on Swift, which is quite slow and expensive.

Where do you see growth in the business coming from?
Sending money is about a $500 billion market. A large amount is still sent informally, like people carrying cash with them. There’s a big push to move that to more formal channels, like us, making it more convenient and cheaper. We started seven years ago in Europe, and now we’ve expanded to 50 send countries going to about 140 destinations.

We’re still a relatively small competitor compared to Western Union, so we’re trying to grow our business in existing markets while we expand to new ones.

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‘In my world, it’s called theft’: How Ajay Banga wants to change inclusion

Count the CEO of Mastercard among those who think in-kind donations and financial aid systems are corrupt.

“We are in the business of killing cash. And so, who is the single biggest generator of cash in an economy? It’s the government paying its citizens and giving social benefits,” he said. “During the distribution of those social benefits globally, 30 to 40 percent of what’s distributed does not reach the citizen. In the NGO world that’s called leakage, in my words it’s called theft.”

Banga wants business leaders to take economic development more seriously; to stop looking at financial inclusion through their short-term returns lens, rethink how they see capital and open up to the “enormous” money-making potential of bringing people out of poverty, he said Wednesday on the main stage at the Bloomberg Global Business Forum in New York.

“I’m through with ticking the boxes in the corporate sphere,” Banga said. “That’s not what brings change… the more we talk about the long-term and we say ‘Ajay, I’m not making more money at this and I’m doing for the long-term,’ nothing is going to change.”

Mastercard is currently working with Western Union to create a digital infrastructure model for refugee camps focused on mobile money, digital vouchers and cards, with Kenya as their test bed. The point is to remove the intermediaries and losses associated with in-kind donations, brings funds directly to beneficiaries and give people some control over their financial health.

The work is still in an exploratory phase, but the plan is to use Mastercard’s digital voucher program to provide chip cards to refugees and host community members. The cards would be loaded with points they can spend on everyday purchases and are designed to work on or offline so participating agencies such as the International Rescue Committee can monitor different programs.

“We’re using technology and getting them to record their payments on an electronic mail, so that they can go to a bank and say, ‘You can see I have this much revenue everyday,’ and the bank can make a better decision on lending,” he said of the company’s efforts in Kenya. “By their using it, I make money from their transaction. The bank makes money. The [small businesses] are happy. That, to me, is a business opportunity that is connected to our core competencies.”

First step for business leaders: know the difference between “so-called poverty alleviation” and taking people from poverty to prosperity. The former is only the first step toward prosperity and legitimizes the idea that there isn’t enough of a business incentive in this work, he said.

But there isn’t any trust on this topic between governments and private companies, and that’s a huge problem, he added.

Banga said his company spends a lot of time in developing countries trying to convince governments and other groups about the importance of applying technology to drive inclusive growth or give people identities (because if someone doesn’t have a formal identity it’s “kind of like being in prison”), he said. Mastercard has committed to pulling 500 million financially excluded people onto the financial grid; he said it’s currently at 330 million.

“The first reaction from government and multilateral institutions is: why is this guy doing it and what’s in it for him?” he said.

A spokeswoman for the International Rescue Committee said the it “welcomes the investment and innovation from the private sector to build up the digital infrastructure that would make the delivery method faster, more versatile and transparent and lead to the delivery of better aid.” “Cash relief” is one of the most efficient and effective forms of aid, she said, specifying that cash can be digital cash as well as hard cash.

But the reality, to Banga, is that when business people see money in it, change tends to actually take place.

“My only anthem is, ‘Look, there’s money in this.’ At the risk of sounding mercenary: when you want change, you want return.”

Image via Bloomberg

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‘A story the world needs to invest in’: Inside SBI’s inclusion efforts

A fully inclusive financial ecosystem is arguably the Holy Grail of fintech. While there is much that fintech solutions can and should improve across all aspects of legacy financial services in the developed world, they largely work just fine if you have access to them.

Being inclusive doesn’t just mean that basic banking services like checking and savings accounts are available to all citizens, it also means extending offerings beyond those services to investment opportunities and insurance and pension products. India, with its population of 1.3 billion, stands to gain the most from this; 19 percent of its citizens have no ID card, no financial access and the country “doesn’t really have any social welfare,” according to Arundhati Bhattacharya, chairwoman of the State Bank of India.

The 212-year-old SBI is the country’s largest bank. It handles about 440 million accounts and 23 percent of the country’s banking transactions. Bhattacharya spoke about her organization’s efforts to advance financial inclusion at the Bloomberg Global Business Forum in New York Wednesday.

“It is not the have nots that have any fear because they really have nothing to lose,” she said. “It is the haves that need to understand: unless the kind of difference that we have seen growing amongst the top 5 percent and the bottom 10 percent… is bridged, we are not looking at any kind of sustainable society.”

Other banking leaders have a lot to learn from SBI, which is probably why Bhattacharya was invited to the event; U.S. banking and finance leaders came to speak on prospects for expanding trade and the future of energy in the Middle East.

“Most big business understand this and therefore, they too are eager to participate in this [inclusion] experiment,” she said. “But having seen it working in India… it’s a story that can be replicated in very many places and it’s a story that the world really needs to invest in.”

Between India’s Aadhaar authentication system and its efforts to digitize financial services and commerce as much as possible, the country has made great strides in financial inclusion. SBI, according to Bhattacharya, has concluded that to achieve financial inclusion, initiatives need to be accessible, affordable, high-quality and easy to use. That’s a challenge for privately owned banks — a huge factor in why SBI has found so much success compared to banks in the developed world.

“In the initial stages, such accounts are really not commercially viable,” she said. “Privately-owned banks, even though they may feel that this is the right way to go, don’t have the ability to do so because quarter and quarter, they have to report results.”

The Indian government owns 57 percent of SBI.

And in the initial phases of programs motivated by inclusion, banks aren’t going to see positive results show up in their quarterly earnings reports, Bhattacharya said. That’s why on Wednesday she called on the business and political leaders and investors in the room to rethink “what they are going to give a premium on and what they’re going to discount.”

“We are told very frequently that there is a discount, on account of the fact they know we have to carry out certain government mandates, such as these programs,” Bhattacharya said. “It’s high time that society at large realized that if you’re going to have a stable society, if you are going to have a sustainable growth… organizations that are part of such things should actually be given a premium, and not a discount.”

India’s Unified Payment Interface is a system that enables seamless payments between various organizations. An individual can connect a checking account at one bank to the mobile banking app of another bank, transfer money to someone whose account is held at a different bank and is connected to his own various accounts at various insititutions — for example.

In addition to this system, banks’ existing branch presence and no-frills savings accounts called Jan Dhan accounts, India also has Aadhaar, the digital identifier that requires only people’s scanned fingerprint to perform a financial transaction. Thanks to these individual initiatives, Bhattacharya said SBI has issued more than 70 million debit cards, sold 20 million simple life and accident insurance policies and a million pension products — all at very affordable rates.

“The fact of the matter is, we have realized that the business model has to be volumes and not high margins,” she said.

Image via Bloomberg

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How digital payments became politicized

Visa, Discover, Apple Pay and PayPal have all cut off or limited their payments services to so-called hate groups in the wake of violence that erupted when white supremacist and neo-Nazi groups protested the removal of a Confederate statue in Charlottesville, Virginia.

After learning that PayPal played a key role in raising money for the white supremacist rally, PayPal said it would bar users from accepting donations to promote hate, violence and intolerance. Apple disabled payments via Apple Pay on websites that sell white supremacist and Nazi-themed merchandise. Discover said it would end merchant agreements with “hate groups, given the violence incited by their extremist views” while Visa and Mastercard said they were cutting ties with a number of sites they “believe incite violence,” don’t comply with their acceptable-use policies or engage in illegal activities.

It’s fair to say that in the fraught political atmosphere of 2017, even payments have become politicized.

Some say it’s a private company right to take that kind of stand, others say it infringes on First Amendment rights. While it’s arguably not the place of payments companies to be making moral determinations, it’s also not illegal for them to do so. And whether or not they “should,” companies in payments and beyond have made the decision to respond. The question is what the repercussions are for the payments system if they keep acting as de facto watchdogs who will inevitably experience pressure from customers who threaten to take their business to another payments firm.

“Payments are necessarily neutral,” said Jason Oxman, director of the Electronic Transactions Association. “They don’t take a political position, they don’t prefer any company or any consumer over any other. They’re a tool and they’re a very helpful tool in driving commerce but also ensuring consumers have the necessary ability to save for the future, make investments, retire comfortably and protect their resources.”

Commerce in the U.S. takes place over electronic payments systems, which processed $6 trillion worth of payments last year, according to Oxman.

“Electronic payments drive commerce and make commerce possible,” he said. “Sometimes those tools are used by people whose behavior is illegal or unliked. It’s important not to blame the tool of the activity of the people who have used the tool.”

Is it PayPal’s job to play watchdog?
The whole idea of payments and electronic transactions is built around two concepts: identity and risk. Payments companies need to know who has access to their services, who their customers are, and if the account holder’s digital identity matches his or her physical activity. And when it comes to money movement, merchant acquirers and processors are there to mitigate some of the risk involved.

But just by nature of payments being digital transactions, payments companies have found themselves in a position to track payments and to be able to understand things like how people are using their money and what kinds of things merchants are selling.

“A lot of these companies are responsible for connecting with these previously unseen people are being put in a position of being the de facto watchdog. They can’t be in the position to allow certain things to happen,” because of Know Your Customer and anti-money laundering regulatory requirements, said James Wester, research director for IDC Financial Insights’ global payments practice. “There are a lot of these companies now being asked to do. Because they’re at heart about mitigating and limiting risk, their default position might be that they’re not going to allow certain types of consumers, merchants, transactions to take place because it’s not in their best interest.”

Many of these decisions can be traced back to Operation Choke Point, a 2013 Department of Justice initiative that requires U.S. merchant acquirers to submit the types of merchants they provide electronic payments for. Many acquirers won’t work with certain types of businesses that are perfectly legal but risky from a regulatory perspective — pronography, firearm sales, even “racist materials” for example.

Many acquirers choose not to do business with these types of companies for a big reason — and it’s not because of their moral compass. It’s because the chargeback rate — the rate at which a merchant returns funds to a customer — on those transactions tends to be really high; if someone receives a bill for a pornography order, people often say they didn’t buy that and ask for their money back. That high chargeback rate makes it particularly difficult from a risk perspective to underwrite these transactions, Wester said.

“They just say ‘we’re not going to do that, it’s too much of a risk, it’s hard for us to model it, it’’s hard for us to make money on it.’ It’s not out of any moral or ethical decisions, it’s a business decision,” he said.

For those companies who do choose to underwrite risky businesses, Operation Choke Point set intentionally higher regulatory requirements for them to be able to accept those payments — effectively intimidating those merchant acquirers from doing business with them. The point was to make it troublesome to the point that it was hard for companies to find partners that would want to process the payments.

Earlier this month the Department of Justice shut down Operation Choke Point, but it’s not clear all other agencies have too. If companies keep taking political stands they run the risk of the regulators stepping in to “choke” them again — not by forcing them who and who not to do business with, but by “pressuring them to curate it in a certain way,” said Brian Knight, a senior research fellow at the Mercatus Center at George Mason University.

Oxman said he’s hopeful that kind of “intimidation” happens less from now on.

“Payments companies shouldn’t be held responsible for criminal behaviors,” Oxman said. “It’s bad for business.”

Payments companies could cut off the underserved
Perhaps the biggest impact digital payments has had on the world is their ability to bring financial access to previously unbanked individuals and new businesses and consumers into the economy.

Governments want financial inclusion for all too: they want to be able to recognize tax revenue and protect people, which is easier for them to do when everyone’s financial transactions have a digital footprint.

But as companies like PayPal and Visa take political stands and declare where they stand on different issues, they risk shutting people out of the financial system when they exist to bring them in.

“As we build out financial inclusion, we start adding more people, more merchants into the financial system, so there’s more oversight,” Wester said. “What does that mean when it comes to how much oversight organizations can do and in terms of shutting that off?”

Wester said it’s a trend that’s only going to grow the more we bring individuals and merchants into the financial system and that while it’s not necessarily good or bad, it’s an inevitable truth that needs to be understood. “For a company like a bank or a PayPal or Square, is their job to be in a position where they have to be making moral decisions?”

A perilous path
Even without Choke Point, companies acting as the de facto watchdog will always run the risk of regulatory intervention, Knight says.

“If you see firms being pressured to take a political side… those firms may be getting regulatory pressure because they’re seen as being too powerful,” he said.

And while firms have a lot of choice in who they’d decide to do business with, or not, and many criteria they can use to make that determination, political world view is not one of those classes.

“Big players have a disproportionate share of the market,” Knight added. “If they all get together or independently decide they aren’t going to do business with group X, Y or Z, that runs the risk of effectively cutting those groups out of the payments system.”

The most visible and most global brands will continue to be pressured by their constituencies and special interest groups to show their value by, in some cases, choosing not to service entire markets, says Dorothy Crenshaw, founder and CEO of crisis communications firm Crenshaw Communications.

“The public is looking to business leaders [for moral leadership] because they respond,” she said. “They have a board of directors and all kinds of red tape but they can act and they have acted. Its up to brands to decide which side they’ll choose.”

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Inside KeyBank’s partnership strategy

KeyBank in Cleveland, Ohio on Thursday signed off on its latest partnership and equity investment in a fintech startup, the third for the bank’s enterprise commercial payments.

The deal with Billtrust, a company that automates invoice delivery and payment and cash application, comes after two other agreements with Avid Exchange, which automates companies’ accounts payable, and Instanet, an online security brokerage. Terms of the deal were not disclosed. For Billtrust CEO and Founder Flint Lane, KeyBank’s attitude toward vendor relationships and sales was a big indicator of future success.

“What most banks do is partner with software companies — and they love having partnerships, but then they put it in the bag of their sales team and say, here’s another thing to sell. That’s not what KeyBank does, it takes each partnership as its own discreet unit,” he said. “Without focus, these kind of things don’t work so well.”

Key is also a sponsor of Ohio’s Fintech71 accelerator for startups operating in banking, payments, insurance, health care, investing and regtech. The bank wouldn’t disclose how much spending allocates to fintech vendors and other talent partnerships and sponsorships.

“Budget isn’t our real restriction,” according to Matt Miller, head of product and innovation. “Time is the bigger resource constraint for us rather than budget,” he said.

Tearsheet caught up with Miller on how Key’s relationship-first approach to clients and how that plays into its partnership strategy. The following has been edited for length and clarity.

What percentage of your invoices are done in paper?
I think with those clients [using the Billtrust offering] we see at least 50 percent on paper, but it depends client to client. We deal with some really large clients in the Fortune 500 that still have a very high percentage of paper invoices.

What’s the biggest or most consistent pain point for your clients?
Cash application. Once you receive the money how do you direct it to the appropriate place in your system to reconcile the payments? The value of having all that invoice data in one place is the first leg of value. Then by nature, we know when a payment comes back in, where to apply the payment on the back end. BillTrust has built a really nice process involving machine learning and AI to learn as you go so the system gets smarter as more invoices are being sent out and cash reapplied on the backend. To a client it provides tremendous efficiency and cost saving opportunities.

How does your latest agreement fit into your payments strategy?
Banks historically have been focused on payments execution — how you help clients move money from point A to point B across different channels. We continue to be focused in that space but as the industry has evolved we believe we also need to add value before and after the payments. A lot of fintechs figured that out ahead of the banks.

Tell us about your vendor strategy.
Our model is two-pronged: It’s finding a great partner who fits client needs and with whom we can structure a commercial arrangement to offer a service to our client; and having some sort of equity ownership in that partner so we can be seen in a greater strategic light and have a deeper integration with the partner — a lot of times at the board level in an “observer” role.

How do you determine what clients need?
We take a relationship-first approach with our clients. We have specifically organized our sales force around how our clients see themselves; around industry and vertical rather than product and services. Client-wise our book has a lot of industrial companies, from a vertical perspective, and that’s a sweet spot. We want to understand all the details of clients’ financial operations deeply enough that we can go in and consult — we don’t want to show up with a product pitch. If we do have one it’s rooted in a deep understanding of that client.

How do you get feedback from clients?
Our product team needs to capture that info from our sales force. We need to be out on the ground with clients as much as we are in the ivory tower. That’s probably how we get the most of our information but we also use market research and intelligence methods — surveys, interactive communication with clients, focus groups, client events. We try to be pretty robust in how we gather feedback. We’re happy to co-create when and where it makes sense — both with clients and fintechs.

So when do you develop something yourself and when do you look to a startup to do it?
We have to take an honest look at whether we can do this ourselves or if a partner will help us get to market more quickly with a better offering or more meaning to the customer in the highest quality way relative to competition. With a partner you’re dealing with a company focus 24/7/365 on one particular offering. Here, we might not have the ability to focus like that and that’s when it makes sense to partner.

Who is the competition?
Everyone is raising the bar, we can’t just look at the usual suspects within our industry. We have to look at fintechs, we have to look at technology companies like Amazon and Google who are serving in other ways that are making customer think about how they experience technology. All of these things go into our calculus.