Has the tide turned on commercial cards?
Recently I read an insightful article by Patrick Diemer, a highly respected industry colleague, entitled ‘2019 will not come back’. He was referring to business travel generally, but it prompted me to think whether that year represented the high water mark for commercial cards.
On the surface, things seemed to be going swimmingly – a strong economy drove increasing revenues for issuers as business customers grew (and spent), plus new payment flows created new revenues from areas like accounts payable and travel intermediaries.
At the same time, operating costs were benefiting from automation and digitisation, and with historically low interest rates, cost of funds for banks were negligible. Risk costs were also mostly under control – the increase in eCommerce fraud being mostly attributable to consumer cards, as virtual cards in our space added greater protection.
Below the surface however things were a little different, as banks struggled to push on and invest in the future of their commercial card businesses. Legacy tech and increased costs from regulation and compliance issues are sucking up development budgets. Digital transformation ambitions were scaled back, meaning that the customer experience lags behind as commercial card tools are being judged against consumers’ best mobile experiences. In addition the spectre of further interchange regulation continues to hang over the industry in many countries, although EU based issuers dodged a bullet here in 2020.
But regulation can be a double edged sword, as around the world regulators are keen to unleash the potential of Open Banking. This is creating a much more competitive market, and the numbers of fintechs investing and growing in commercial payments is now huge.
The problem for banks is that most fintechs aren’t just kids in a garage playing with the latest tech; indeed many are much better funded than those traditional commercial card issuers with large installed bases of customers.
Just look at a couple of the bigger fintechs in the commercial card space. Take Divvy, a Utah based spend management platform founded in 2016. It raised $165 million in January this year, and recently announced it is being bought by Bill.com for $2.5 billion. Or Brex, another US based commercial card start up in 2017. It is now valued at $7.4 billion, and recently raised $425 million in Series D funding, stating that this will fuel the company’s growth and help to further expand its platform.
Leave aside the valuations, the issue is how many banks can afford anything remotely like this scale of investment in their commercial card business? Probably none.
The reality is that fintechs have done a better job at explaining their strategy and their business models to private equity and venture capitalists than banks have done with their own management teams and shareholders.
Of course many banks have been investing in fintech and until recently focused primarily on game changing initiatives, especially those leveraging new technology and preferably with protected intellectual property. It followed the old Jack Welch strategy of ‘destroy your business model before it destroys you’.
Although positioned somewhat differently, banks’ investment in fintechs may be viewed as being at the expense of their own in-house business units. What does it say when the bank would rather invest in a small business with no customers than the family business that has been serving its customers for years? Actually it probably says that the family business needs help to reinvent itself to have a viable future.
A recent McKinsey article observed that bank investment in payments requires the same ambitions and boldness that a start-up challenger would have. For traditional banks, payments can take up a significant portion of their budget – sometimes up to 40% of operating costs – and incumbents can fall into the trap of viewing it as a cost centre, rather than an opportunity to leverage the relationship with their customer.
To go back to my original analogy, after the high tide in 2019 the water drained out of the commercial cards bay in the last 18 months. 2019 will not come back, and the tsunami of change is fast approaching and increasingly this change can be best managed through collaboration between fintechs and traditional banks. Based on a bold vision, and willingness to invest, I believe it is still possible for incumbent issuers to continue to innovate and add value to their card programmes, thereby protecting their most important asset – their customers.
Nicki Bull Bisgaard is Group Head, PayTech Group & CEO, EedenBull