March 13, 2020
Dominated by Visa and Mastercard, the global adoption of credit cards has been nothing short of revolutionary lending credence to the concept of buy-now-pay-later, the hallmark of cash flow management – and it is not slowing down. According to McKinsey’s Global Payments Report 2019, credit card payment will add revenues of $160 billion, a 23% share to the global payments revenue expected to rise by $715 billion in the next five years. This means the sector is still very lucrative and can be classified as a growth market. This growth is only tempered by the challenges of access – especially for startup founders in case of business credit cards.
Credit cards have undeniably succeeded tremendously as a payment option. It is its underlying role as a cash flow management tool that would be most useful to startups because, for many founders, managing cash flow is a top priority. Tools that can help smooth out cash flow irregularities and keep the cost of financing working capital low can be very welcome. One such tool that is not always recognized for its cash flow management properties is a business credit card.
A startup can use the interest-free grace period to make payments in advance of receiving funds; this will help them stay on good terms with suppliers even when they are caught short of cash without incurring a hefty interest charge on the short-term working capital they have borrowed. This revolving credit availability will also help startups build a good credit profile for borrowing funds in the long term.
The challenge for startups is access to these cards because they are more often offered by traditional banks who will require a good, almost-perfect credit score alongside a personal guarantee from business owners. For their first business cards, traditional banks are hardly a choice for startups because, for one, they do not have much in the way of collateral, and secondly, entering personal liability for a startup is hardly sound financial advice since most startups will probably fail.
With all these challenges, the credit card has had to be reimagined, and neobanking service providers, such as Open with its Founder One Card, are providing startup focused business credit cards. Banks and other payment providers like Visa and Mastercard can provide the basic infrastructure upon which these new FinTech firms can build their own customer-focused solutions. This is based on the understanding that the trust equation is changing, and consumers, according to US Digital Payments Survey, have become more comfortable entrusting their financial transactions to non-bank-branded models, including brands that are not household names.
Bento’s card is essentially an expense management tool that helps startups better organize and control their spending. It provides a platform that enables business owners to have a global view of their spending. Owners are able to create, activate, and deactivate and even assign spending limits on the cards at will. Expenses can also be restricted by category, making it easy to compartmentalize spending. It is a powerful tool for cost-saving by mostly eliminating leakages. It is not actually a credit card as one can only spend what is in the account, but it is a mighty powerful solution for expense management.
Brex actually offers credit cards to startups based on how well-funded they are as well as their sales projections. That is as far as they go – zero interest, no fees, and no personal guarantees required. It is also built around a startup lifestyle that offers reward points from various partners, including ride-sharing services, cloud services, airlines, and even Airbnb. With its strategic partners, Brex has built a reputable ecosystem that provides startups with a wide array of products and services essential for their growth.
The Open’s Founder One Card, on the other hand, is a combination of what both Bento and Brex offer. While it is an expense management solution in its own right, it is also built around the lifestyle of a startup offering pretty much everything a new founder could hope for. Better yet, it requires no deposit or a personal guarantee from the entrepreneur. It also allows the issuance of virtual cards for easy management of online subscriptions. The business owner has a global view of expenses and is able to allocate spending limits to members of his team.
These creative solutions have come out of the recognition that startups don’t just need to raise money; what’s even more important is how the money already raised is spent and how startups can remain accountable to themselves and their backers. It is this specific attention to startups that most legacy banks have fallen short, and FinTechs have identified the gap. The need to automate day-to-day tasks, such as bill payments, vendor management, and bookkeeping, is where innovative solutions like the Founder One Card come in so that entrepreneurs can concentrate on what actually generates money.