Neal's Deals (Vol. 68) - Bilt Rewards: The credit card that broke the bank ??
Hey everyone - As some of you may know, I'm a big credit card enthusiast and a fan of maximizing credit card points. Being savvy about collecting and redeeming points across different spending categories can lead to fantastic rewards at no extra cost. That's why I was excited when Bilt Rewards launched their credit card in 2022. This card allows you to earn points on rent payments without facing landlord fees—a category I spend heavily on and now can earn rewards from.
However, with my somewhat basic understanding of credit card economics, something seemed off. Bilt's card, used mainly by higher-earning millennials and Gen Zs, only requires five monthly transactions to be eligible to earn rent points and is completely free. This raised questions about the robustness of their revenue model.
For that reason, it was not a complete surprise when the WSJ reported this week that Bilt's issuing banking partner, Wells Fargo, is losing as much as $10 million every month due to the terms of their partnership. The bank made a significant miscalculation to say the least, leaving them in a precarious situation until their partnership ends in 2029. This storyline is particularly interesting as it highlights not only Wells Fargo's missteps but also offers insights into the unit economics of credit card businesses and how they should be evaluated. Let's delve into these nuances in this special payments edition of Neal’s Deals.
How do credit card programs typically make money?
Interchange fees and interest revenue serve as the primary drivers of profitability in the credit card industry.
At a high level, interchange fees are payments made by merchants (the stores) to the card-issuing bank (Wells Fargo) for processing credit card transactions, and in some cases, this revenue is shared with the credit card company (Bilt).
Interest revenue, on the other hand, is generated when cardholders carry a balance on their credit cards and incur interest charges instead of paying in full each month.
In addition to these key revenue streams, credit card companies may also earn income from various sources such as annual fees, foreign transaction fees, points programs and other charges.
What did Well’s Fargo get wrong?
Everything? Wells Fargo's initial projections for the partnership have not aligned with reality. They had anticipated that approximately 65% of the card's purchase volume would come from non-rent transactions, which would generate significant interchange-fee revenue. However, the actual situation has reversed, with rent-related transactions comprising the largest share.
Similarly, Wells Fargo expected that a over half of the total amount charged to the card would carry over from month to month as a late balance, leading to interest charges. However, the reality is quite different, with only around 15% to 25% of the charges carrying over, impacting their interest revenue projections significantly. Wells Fargo also pays Bilt $200 per new card account as a lead generation fee, a practice usually reserved for established credit-card programs like airlines. Additionally, the bank pays Bilt 0.80% of each rent transaction, despite not collecting interchange fees from landlords….
In summary, cardholders are rapidly signing up for the card, maintaining timely bill payments, and limiting their non-rent spending on the card, leading to these significant losses.
What can we learn from this?
Not all credit card programs prioritize immediate profitability; like Wells Fargo's case, they often serve as lead generation tools to access new demographics, deposits, and loans (such as mortgages). However, if cardholders don't use the card frequently and make timely payments, it can undermine all of this revenue potential.
The news also highlights the difficulty for new credit card companies to succeed if they are not top-of-wallet or do not have an inequitable partnership like Bilt's with Wells Fargo. While Bilt is doing just fine because of Wells Fargo's support, they may need to introduce higher spending thresholds, annual fees, or improve the partnership incentives to ensure the bank sticks around...
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For now, if you're a renter, consider getting a Bilt card to enjoy the free points for the next few years.
Let’s get to it:
AnyCreek, a Memphis startup that provides a platform for booking guided outdoor experiences, such as fishing and hunting trips, with professional guides and outfitters, raised a $1.8 million seed round from Starting Line, Bridge Investments, and LaunchTN.
Why this is interesting: AnyCreek has developed a platform that helps adventurers in 183 markets discover, book, and pay for fishing and hunting experiences with top guides and outfitters, fostering a community of outdoor enthusiasts. For businesses in the industry the company offers vertical SaaS tools for guides, including calendar management, payments, and customer communication, providing a modern booking experience for adventurers. The market is more substantial than I anticipated, considering that the outdoor recreation economy accounted for 2.2% ($563.7 billion) of the U.S. GDP in 2022, with Americans spending $144.8 billion on fishing and hunting. This suggests it can certainly support venture scalable returns. There's also a precedent for significant outcomes among vertical-specific booking providers like Mindbody in wellness and fitness, Toast in food services, and Boulevard in beauty salons. If they become the category-defining player, this one is a winner.
After Hour, a San Francisco based startup building a social stock trading app, raised a $4.5 million seed round co-led by Founders Fund and General Catalyst.
Why this is interesting: AfterHour, founded by CEO Kevin Xu, a former software engineer at Stripe and YouTube, emerged from Xu's own investing journey, where he famously turned $35,000 into $8 million during the meme stock era. Throughout his journey, Xu shared every trade in full dollar amounts with the WallStreetBets community under the pseudonym Sir Jack, inspiring him to create a degen-native financial community. Realizing the gap in the market, Xu created AfterHour, which provides transparent trade data and insights through a verified community managing over $200 million in portfolio AUM. Members connect their brokerage accounts to share portfolios, position sizes, and daily performances publicly, fostering credibility. Real-time alerts on critical trading activities and Twitch-style chat rooms offer timely information and lively discussions, merging market entertainment with opportunities to unlock alpha. Since its launch two years ago, AfterHour has seen the sharing of 6 million signals on the platform, and an impressive 70% of users engage daily. This well positions AfterHour to capitalize on the evolving landscape of personal investing among the younger generations.
IENAI Space, a Madrid, Spain startup that is developing electric propulsion systems for satellites, raised a $4.2 million round led by GED Conexo.
Why this is interesting: Electric propulsion systems offer several advantages over traditional chemical propulsion systems. Electric propulsion uses electrical energy to accelerate propellant particles, providing higher efficiency and specific impulse compared to chemical engines. This increased efficiency allows satellites to carry less propellant, reducing their launch weight and costs significantly. Additionally, electric propulsion enables satellites to perform complex maneuvers, such as station-keeping and orbit adjustments, more efficiently and for longer durations. These capabilities are crucial for satellite missions requiring precise positioning, extended operational lifetimes, and flexibility in orbit management. With projections indicating the launch of over 20,000 new satellites by the decade's end, IENAI Space's electric propulsion technology has the opportunity to expand its footprint alongside the burgeoning industry.
Deals in the Works:?If you want to learn more - feel free to reach out
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Quote of the week:
“When the going gets tough, the tough get going"
— Joseph Kennedy
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Have a great weekend everyone!
Director of Content
5 个月My heart is with Bilt at least till the contract is up.
Chief Operating Officer at BKREA | Ex Uber & Square
5 个月We’ve been talking about this for years! Happy our instincts are right.