Debit cards issued by fintechs are just one piece of a larger debit ecosystem that has seen growing interest, especially during the pandemic. The humble debit card is having a renaissance as a host of fintech players turn to the decades-old technology to power new areas of financial services. It’s easier than ever for companies outside the traditional banking sector to issue cards to their customers, which has fueled a spate of creative offerings featuring perks like spending rewards that have largely eluded the category for more than a decade.
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Article credits: the article was taken from MarketWatch.
Fintechs and debit cards
Fintech companies are using the debit cards to let customers access their money more quickly, making it so workers can tap their wages ahead of payday and small-business owners can immediately spend the funds they made from their sales. The cards promise better access to quality financial services for people who’ve been excluded from the credit industry or who have been overlooked by the traditional financial system. Charles Schnell, a worker at an Ohio facility that makes plastic wrap, used to try to borrow money from friends when his bills didn’t align with the two-week pay cycle, but about a year ago he signed up for Payactiv, a service that allows workers to access some of their earned wages ahead of payday. Schnell gets the funds on a debit card issued by Payactiv and has used the money to pay bills and deal with expenses related to a family medical emergency. Companies offering earned-wage access through debit cards say that they’re giving workers more financial flexibility, such that they will be less reliant on costly options like payday loans to handle bills and other expenses.
Debit cards issued by fintechs are just one piece of a larger debit ecosystem that has seen growing interest, especially during the pandemic. As is typical during periods of financial uncertainty, debit spending grew last year while credit spending contracted, partly because consumers were gravitating toward a less risky payment method. Debit cards also became a bigger part of the overall card market, as the number of U.S. debit cards in circulation increased 1.7% while the number of credit cards dropped 4.8%, per Euromonitor data. Consumers typically focus on paying down debt and building savings during economic downturns, and higher unemployment can lead to higher default rates. Money ordinarily moves slowly through the financial system, which can also pose logistical challenges for small businesses facing tight cash-flow situations. It may take five days for Harlem Biscuit Company, a New York City food establishment, to actually receive the revenues it makes by selling on delivery platforms like Grubhub or DoorDash, and even the company’s traditional payment processor, Square Inc., can take a day or two to deliver payments to its customers’ bank accounts. But Square also offers a small-business debit card that gives owners instant access to the money they make from sales. “It helps us really function in a day-to-day capacity,” explained Warren Satchell, Harlem Biscuit Company’s chief operating officer.
A few years ago, fintech companies mostly used debit cards to target people making under $75,000 a year, but now the market has “exploded” to include more segmented offerings, such as debit products aimed at immigrants or the LGBTQ+ community, according to Alvarez-Evangelista. Even retailers like Walgreens Boots Alliance Inc. are getting in on the action.
Regulatory arbitrage game
Branch and others are able to provide free services like earned-wage access to customers by taking advantage of the way the card industry is structured. Merchant banks pay card-issuing banks interchange fees when consumers swipe their cards at a store, providing an avenue for fintech companies to monetize their debit products indirectly. Instead of charging a fee for customers to access services, fintechs can attach those services to a debit product and collect interchange on the merchant end.
Return of rewards
While credit cards offer lucrative rewards that are partly funded by higher levels of interchange, the U.S. debit industry largely abandoned rewards following the Durbin amendment, thus limiting rewards opportunities for lower-income customers.
That’s starting to change as fintech companies look for more innovative ways to reward consumers, presenting the chance for customers outside the credit system to earn perks for their spending.
Working with Durbin-exempt banks is one strategy, because then fintechs are able to collect elevated interchange fees that can fund rewards, at least in part. Oxygen, a financial-technology company aimed at freelancers, recently launched a debit rewards program that offers free perks like 2% cashback, lost-luggage protection, and hotel-theft protection—all elements of typical credit rewards programs. The company says that Durbin-exempt interchange and one-time fees for optional higher rewards tiers help fund the program.
So easy to launch
New technology is also helping to fuel the debit explosion thanks to more “turnkey” solutions that ease the process of issuance for those outside the traditional banking space.
Five years ago, it might have required months of negotiations and integrations for a company to launch a debit offering, said Alvarez-Evangelista, but now the process can take just weeks. Instead of building custom solutions and pricing for every debit product, tech players and issuers have designed more straightforward offerings with a rich set of digital-banking features, like the ability for users to deposit checks remotely or turn on a virtual debit card from within an app.
Still, there remains interest in more customizable offerings, and that area has also gotten a high-tech spin. Marqeta Inc., a $14 billion fintech company that recently went public, works with businesses seeking more unique debit applications for specialized business functions.
One customer, Coinbase Global Inc., built a card that lets users monetize their cryptocurrency holdings so they can convert them to dollars for in-store spending. Another client, DoorDash, relies on the company’s technology to dynamically populate information about deliveries and tips so that workers can request on-demand access to their wages and receive an accurate amount.
While credit cards are often viewed as more secure than debit cards because they don’t offer fraudsters a direct line to someone’s bank account, there’s been progress in making the debit experience safer. “The reality is that credit-card companies have, in fairness, been really good to consumers if you get defrauded,” Klarna’s Sykes said. “We want to make sure the same experience is something debit-card customers can enjoy.” The buy-now pay-later company offers various security features like the ability for users to generate one-time virtual cards that they can use when shopping at unfamiliar retailers.
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The Banq team