A Fintech Reckoning Pt II: Demystifying the expense management monolith

As part II of our series on "A Reckoning in Fintech" (see part I here), I want to look at the last 2 of our 4 groupings of providers in the expense management market, based on the strategic decisions made by major expense management platforms about where to play and how to win in those market segments.

As a refresher, our four groupings are:

1. The maintain enough of a lead crowd (i.e., SAP Concur)
2. The take ground in the legacy T&E space hard chargers (i.e., Navan, Mesh Payments)
3. The not just the expense but the spend management provider of choice expanders (i.e., Ramp)
4. The provide (but stealthily) full banking services for businesses players?(i.e., Brex)

In the first post, I looked at how legacy market leaders like SAP Concur can be minimally innovative enough to maintain a lead on the hard chargers coming for their enterprise install base, like Navan and a less mature Mesh Payments.

In this post, I want to examine the rest of the often lumped together expense management space, by seeing what choices Ramp and Brex (as illustrative examples of Segment Three and Segment Four businesses) are making and how that will drive each into new market segments (and revenue streams).

Segment Three: The not just the expense but the spend management provider of choice expanders

I wrote about in a prior post how all expense management providers are becoming spend management providers. I highlight Brex’s launch of its bill pay offering and Ramp’s launch of its procurement platform. Both launches help the companies expand their addressable market by adding services and capabilities of an accounts payable platform, while also still using their corporate cards to power these payments.?

In the short term, these product launches from Brex and Ramp (also Rho and other providers) appear aimed at the same strategic market. However, I believe if you dig a bit deeper into both Brex and Ramp, you can find a strategic divergence occurring as each company looks to carve out its own where to play and how to win choices.

Off the back of a $300M fundraising announcement, the question becomes what was Ramp’s fundraising story and where does it plan to invest that cash. I believe that Ramp specifically is doubling down to become a holistic spend management provider, evolving from an expense management provider today into a spend management and accounts payable player.

Ramp’s primary install base customers today are start-ups, small businesses, and medium-sized companies - 15,000 businesses, as highlighted in their own fundraising announcement. This large install base indicates to me Ramp benefits today from a fast, transactional sale with small user count businesses as its ideal customer profile today. However, that is changing, and Ramp is aggressively pushing into territory with its acquisitions, launches, and go-to-market (very much by design). As the Fintech Blueprint highlighted in its September 4th Substack, when looking at Ramp’s direction:

“[Ramp] acquired AI customer success tool Cohere.io (its first acquisition), it brought on Shopify as a client, and it launched Ramp Plus, a procurement solution for large enterprises”

Judging by its strategic decisions, the Ramp team has decided it can win in the spend management and AP market by being an encompassing financial suite and solution for businesses. Early results from the Shopify partnership announcement and the co-creation of a new product it did with Shopify show that Ramp can have success in this market. The R&D, product, and sales resources required to attack that market is the $300M bet Ramp and its investors are placing right now, and Ramp hopes this path can help it continue its growth story.

Segment four: The provide full banking services for businesses players (but stealthily)

Across the sector, self-issued corporate cards were the strategic avenue for growth, control, and data visibility needed to fix the gaps in the market where customers had demand for control, visibility, and a better spend management experience. Brex, like Ramp, built their core product on the back of their corporate card, using this as the primary means to acquire customers, monetize those customers, and provide their core product experience.

For the record, those self-issued cards are still core to both Brex and Ramp's platforms. These businesses, unlike Navan, show no indication of focusing on a bring-your-own card solution - perhaps a future Achilles heel and blind spot for both organizations as they try to move into an enterprise space. Perhaps though, the where-to-play and how-to-win?choices though mean these businesses won't decide to diversify away from their own cards.

While many pundits focus on Brex’s card product (and lump Brex and Ramp together, as I highlighted above), one of the unlocks that the Brex team figured out early that fueled its growth was its underwriting of small businesses and entrepreneurs that traditional financial institutions would not underwrite. Let’s look at the core thesis Henrique Dubugras and Pedro Franceschi laid out in their Series B pitch (summary from Business Insider):

“Technology startups often had trouble securing corporate credit cards — even if they had millions in the bank — because legacy banks and card issuers wanted to see company credit histories, which young institutions simply couldn't produce.”

If you think about a core underwriting decision, leading to issuing, at first, there are a series of ancillary, related services, traditionally provided by an underwriting financial institution (or should be). These services, not being provided by traditional banks, are directly adjacent to Brex’s core spend management product, where it started with many start-ups. Brex clearly, however much it may deny it, is moving down a path to provide a series of not just spend, but treasury and banking solutions for its customers, one adjacency at a time.?

Why though? In an August report from Bain focusing on the challenges banks have providing the services small businesses really want, the Bain team highlights the opportunity (bold emphasis mine):?

“Fintechs and digital financial platforms understand that a small firm looking for a loan considers more than just a low APR. Just as important is a loan delivered quickly and with repayment terms tailored to the company’s revenue flows. SMEs want to simplify their financial management through automated yet personalized digital experiences, an area where banks have been struggling.”

Brex is targeting this problem and doing it methodically. While an open secret for a while, the Brex team confirmed that it looked at SVB’s card portfolio when SVB collapsed this spring. Brex has also flirted with a banking charter and withdrew the application. While Brex denies it wants the “regulatory overhang” of becoming a bank at this moment (quote from its COO), its path shows that Brex believes it can compete and win by providing not just spend management, but also treasury services to start-ups and tech-first enterprises - the exact type of simplified financial services small businesses want and expect, yet traditional banks are not able to provide.

A quick look at Brex’s core products today show a steady creep into core banking services, starting with accounts payable solutions, debt solutions, and business account services (you know the kind that banks used to try to provide small businesses…)

There are intriguing long-term opportunities for Brex in providing banking and treasury services, where I believe it is inevitably going). The primary monetization model for many self-issuing spend management platforms is that credit card. As Navan’s Michael Sindicich highlighted in TechCrunch, monetization models that work in low to no interest rate environments suddenly look far more tenuous in high interest rate environments. Brex had this problem and created a a PR nightmare in 2022 after it reportedly fired a number of its small (and likely unprofitable) customers) (see “Brex drops tens of thousands of small business customers as Silicon Valley adjusts to new reality” from CNBC in June 2022), Building a business solely on interchange is hard; Brex is adjusting to that and making long-term bets. Treasury solutions present an opportunity to monetize customers in new ways, creating an annuity line not dependent on cards.?

Traditional banks have many diverse revenue streams, a reality that fintechs across sectors are now contending with because they have not set those up over the last decade (low interest rates meant they didn’t have to). Long-term, if Brex can build these solutions – a big if, since they are costly and time consuming to build – treasury and banking solutions coupled with existing spend solutions enable Brex to steal market share from traditional banks and eventually get that banking license required to become a neo-bank.

The opportunity: megabanks and regional banks hold nearly 90% market share of SMB checking accounts in the U.S. A small slice of that would be meaningful quickly.?

While this path may take Brex a while to cover fully, the strategic choices are apparent, as Brex and Ramp seek to carve out unique places in the market for themselves. Brex is aiming to be the future spend and banking services provider of choice for entrepreneurs (and hopefully larger businesses as well).