Credit Cards as a Service

Hi y’all, Cokie here. Today I’m fortunate enough to be joined by Matthew Goldman from Vertical Finance. He also has a newsletter called CardsFTW, which I strongly recommend. Matthew and I started this project out of a shared interest in December of 2020. With his almost daunting knowledge and experience in the credit card space and my love of all things financial infrastructure, we figured we were the right duo to take on this report.

This report will be published in three parts: 

Part I is meant to serve as an introduction to credit cards, including terminology and history.

Part II will talk about co-branded cards from traditional institutions and touch on modernized credit-card-as-a-service offerings.

Part III will completely dive into credit-card-as-a-service offerings and conclude the report.

We hope you’ll enjoy it and thanks for reading! 

Part I

Introduction and Terminology

Credit cards today are a ubiquitous every day payment tool, with more than 1.12B cards in the United States in 2018, according to consumer personal finance site WalletHub. Since their introduction in 1958, cards have expanded rapidly with the average American having four open revolving credit cards as of 2018, according to the Consumer Financial Protection Bureau.

In this report, we examine the rise of modern Credit Cards as a Service Providers (CCaaS). These are financial technology companies that provide the necessary technical infrastructure, business expertise, and banking relationships for another non-bank entity to launch a credit card product. Traditionally, a bank has been the primary issuer of a credit card, both from a legal aspect, and from a marketing and servicing aspect. The bank defines, markets, and manages the card, in turn hiring certain vendors to provision the product. With CCaaS, the setup is flipped with a nonbank defining the marketing program, subject to approval and oversight by a partner bank and CCAAS provider. These service providers differentiate themselves from banks and core processors by providing a more complete service.

Terminology

Credit Card -  an open revolving loan product with a physical and/or virtual card number for spending.

Debit Card - a physical and/or virtual card attached to a demand deposit (checking) or other prepaid account.

Issuer - a chartered bank (depository institution) regulated by the government and a member of one or more payment networks.

Payment Network - a payment processing company that provides merchant acceptance for a card product, such as Visa or Mastercard.

Open Loop - a card that is issued on a payment network and can be used at any merchant that is part of the payment network.

Closed Loop - a card that can only be used at a specific merchant.

Branded Card - a card with a payment network brand (see also “Open Loop”)

Co-Branded Cards - a card with a merchant or non-bank brand as well as a payment network brand.

History of Credit and Co-branded Cards 

Modern open loop credit cards started when Diners Club was formed in 1949 by Alfred Bloomingdale, Frank McNamara, and Ralph Snyder. At the time, some retailers, including gas or oil companies offered credit cards that allowed an individual consumer to charge a purchase at the merchants own stores and to settle the payments at a later date. The Diners Club team set out to create a universal card that a businessman could use at many merchants with a single bill at the end of the month.

American Express, which started out a mail express service in the mid-nineteenth century and evolved into a travelers check giant by the mid-twentieth century, entered the open loop credit card field in 1958. At the same time, The Hilton Hotel Corporation expanded its closed loop Carte Blanche card into an open loop operation. In that same explosive year, Bank of America and Chase Manhattan Bank (predecessor to today’s J.P. Morgan Chase) entered the space. Lots going on!

In 1966, Bank of America expanded its own credit card operation into a system that other banks could join called BankAmericard. A competitive group of banks started another national credit card system called the Interbank Card Association (renamed to MasterCharge in 1968). At a time when laws and regulations severely limited interstate banking, these associations were required to enable merchants connected to one local bank to accept credit cards from another local bank’s cardholders.

In 1976 BankAmericard changed its name to Visa. In 1980, the MasterCharge became Mastercard. By 1978, more than 11,000 banks had joined one or both of these networks and more than 52M Americans had at least two credit cards.

The first co-branded travel rewards cards were introduced in 1986 when Continental Airlines launched the Continental TravelBank Gold Mastercard card with Marine Midland Bank. American Airlines launched its co-branded card with Citibank in 1987. Diners Club launched its own rewards programs in the mid-1980s and American Express launched its Membership Miles program in 1991.

Following the financial crisis of 2008, many US banks consolidated and others ceased their credit card issuing programs. Today the majority of cards are issued by the largest banks such as Bank of America, JP Morgan Chase, Capital One, American Express, Citibank, and Wells Fargo.

It’s starting to feel a bit like the trend of every fintech suddenly offering a debit card and/or a checking account...

For more on co-brands, check out Matthew’s latest edition of CardsFTW on this exact topic. 

See you in Part II where we’ll talk about co-branded cards from traditional institutions and touch on modernized credit-card-as-a-service offerings. Adios! 

Part II

CCAAS and Co-Brand Players

Traditionally, a brand seeking a co-brand card would approach an issuing bank and seeking for them to operate a program with a share of profit coming their way. Many of the major consumer issuers operate co-brands both for travel and retail brands. In addition, there are a number of issuers that have specialized in co-branded and private label cards. In the past year a new wave of fintech companies offering CCAAS have emerged. 

It is important to acknowledge that this ability isn’t new -- banks have been whitelabeling credit cards for the better part of the last half century. Every major airline has a credit card. To do that, American Airlines would go to Citibank and Citibank would offer a white-label card. Citibank would have many customers looking for whitelabeled credit cards and they would fulfill each one of their customers wishes -- by starting from scratch on each customer and customizing the card to the customers specific need. The key to CCAAS is a repeatable and modular offering. The majority of whitelabeled cards have identical backends, which has been under-utilized in favor of “customer service.” Consider the Stripe approach: one can visit their website right now and get payments up and running with their API. It’s repeatable and standardized. However, if you want to customize, you can do that too for a higher fee. This is how CCAAS will ultimately look. 

Traditional Co-Brand Issuers 

Synchrony

Synchrony was spun out of General Electric. GE and GE Money (as it was previously known) were early entrants into private label credit card processing in the second half of the twentieth century. GE Money expanded into co-brand cards with many major retailers such as Walmart (although they have since lost this brand to Capital One).

Synchrony is estimated to run more than 40% of retail co-brand volume and operates dozens of private label cards and co-brands. Recent cobrand entrants from Syncrhony include the Verizone Visa Card and the new Venmo credit card. Synchrony has a very limited direct-to-consumer operation. Brands must have more than one million active customers to be considered a viable partner by Synchrony.

Comenity Bank / Alliance Data Systems

Like Synchrony, Comenity Bank first entered the space processing private label cards through its parent Alliance Data Systems. Comenity offers more than 100 different cards from the American Kennel Club to William Sonoma. While Comenity issues for smaller retailers than Synchrony, require a large consumer base and are tightly integrated with a retail approach.

Approach of Traditional Providers

With traditional providers, whether specialists like Comenity or Synchrony, or larger issuers like Citibank or Chase, the card is a separate experience from the retailer or rewards program. For example, if you have a Citibank American Airlines AAdvantage Card, you will login with one username and password to a Citibank site to manage your card. One per month, your accumulated points will transfer over to your American Airlines account, which you manage separate through American Airlines.

We are starting to see a blurring of some of these lines, with the new Venmo card from Synchrony, which can be managed inside your Venmo app. Additionally, Goldman Sachs, which entered the cobrand space with its Apple Card product provides an integrated approach with Apple. Goldman Sachs will be launching more cards and we will see if this new approach prevails.

See you in Part III where we’ll completely dive into credit-card-as-a-service offerings and conclude the report.

Part III

Fintech CCAAS Providers

Fintech providers of Cards-As-A-Service provide an API-driven experience enabling partners to define their own experience. Additionally, they may provide options for partners to participate in various parts of the service from lending to customer support more than a traditional provider. Fintech providers are not limited to working with a single bank issuer and may provide more flexibility for a program, although the space is nascent.

Unlike pure play processors, such as FIS, Fiserv, Global Payments (TSYS) or newer Banking as a Service companies like Marqeta and Stripe, CAAS platforms are able to issue consumer credit and include capital and underwriting. Most traditional processors are built to expect the issuer to provide underwriting and capital for lending (in contrast to BAAS debit cards, where there is no lending).

Deserve

Deserve is a late-stage startup founded in 2013. The company initially set out to build alternative underwriting to provide credit to recent students or immigrants. The company believes that there are alternative signals to identify creditworthiness from those who have limited credit history used for traditional cards.

In 2019, Deserve shifted its focus from its own branded Deserve card to providing a cards as a service offering. Its first two offerings were more traditional co-brands, one with the New Jersey Institute of Technology and one with Sallie Mae. Both the namesake Deserve Card and NJIT cards are issued by Celtic Bank, a Utah-chartered ILC well-known in the fintech space. The Sallie Mae card is issued by Sallie Mae Bank but managed by Deserve on its platform.

In 2020, Deserve launched its first API-driven partnership with startup Vertical Finance. Vertical’s Grand Reserve World Mastercard is a multi-merchant rewards and loyalty card for wine enthusiasts. Celtic is the issuer. Cardholders manage their loyalty account and credit card in a unified web interface operated by Vertical with APIs to connect to Deserve’s underlying processing and servicing platform. 

In late 2020 Deserve announced its first Visa product, a credit card for crypto, BlockFi. The new card is not year publicly launched, but will be issued by Evolve Bank & Trust, another well-known fintech bank.

Railsbank

Railsbank is a later stage processing and issuing platform starting in Europe. They announced their intention to launch a credit cards as a service program in the United States. Railsbank is actively working with several startups but little detail is public. The first card is anticipated in 2021.

Cardless

Cardless is an early stage startup aimed squarely at taking on Synchrony and Comenity. The Cardless team believes that more brands should be able to launch co-branded cards. Their initial card is a Cleveland Cavaliers card, although public details on the issuer and network are not available. It is less clear if Cardless will operate as a CAAS or more like a traditional co-brand issuer. Cardless won’t be competing with Deserve or Railsbank, opting instead for luxury experiences (such as free courtside tickets or tickets to a concert). 

A landscape view

With the above information regarding traditional co-branding offerings and the new and improved credit-card-as-a-service offerings, it’s hard to understand where they sit in comparison together. We’ve put together this diagram to help roughly visualize the landscape.

Moral Aspects of Credit Cards

Given America’s painful relationship with debt, it is well worth us taking a moment to acknowledge the moral obligation of issuers and providers when talking about credit. In 2019, 37% of Americans had credit card debt -- the worst kind of debt. 70% of Americans have at least one credit card, 34% have three or more. With credit scores controlling our entire financial lives and our ability to buy (or even rent homes) or start a business, it’s no wonder that the American relationship with them is complicated. 

Is building out further credit functionality for the ecosystem morally right? I’m not sure. Here’s what I know -- very few people are going to get into extreme debt just because their favorite brand has issued a credit card. For most, it will be a smarter way to buy what they were going to buy anyway. And the competition will be steep. If Nike, Footlocker, Reebok, and Adidas all have competing offers, their terms are going to have to be extremely compelling.

Conclusion

Credit-card-as-a-service does not currently have many participants in the space. With 3-5 CCAAS offerings, frankly the field is wide open. Almost every brand in America is up for grabs and this space is wide open. 

Traditional players tended to offer white-label service, with all the bells and whistles of customization and, for the most part, rebuilding significant components of the program from stack over and over again. CCAAS offerings will standardize offerings that can be selected in a modular fashion for each brand. 

Let us know what you think about this report! Super huge thank you to Matthew Goldman for joining me in this endeavor, he is a genius on all things credit.