DEEP DIVE with Brex: FinTech Leader in Cards
DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech company, discussing its history, products / services, and how it has grown to be an industry leader.
BREX’S MISSION:
“… building the next generation of B2B financial services with better tech and without the restriction of legacy technology.”
Brex is a US financial services and technology company based in San Francisco. It has become not only the fastest growing startup in the financial technology (FinTech) industry, but quite possibly among all startups ever. With only 3 years since the company was founded, Brex has become a dominant player in the FinTech ecosystem with its core offering of corporate cards for new startups. As of June 2019, the industry leader in corporate cards is valued as a unicorn at over $2.6B. In this month’s DEEP DIVE, we explore in detail how the company got started, what has made Brex such a leader in the business credit sector of FinTech, why customers have become such loyal fans, and what the company will focus on in 2020.
HISTORY OF BREX
As a young Brazilian teenager from Sao Paulo, Henrique Dubugras was already an entrepreneur. He had built a successful online game but forcibly shut it down due to patent infringement warnings. With his earnings, he launched an education startup to help Brazilian students apply to US schools. He had aspirations of going to Stanford himself and uncovered how little Brazilian students actually understood in applying to American university programs. The company was somewhat successful with over 800K users, but lacked monetization and methods to scale the overall business.
After winding down the edtech, Henrique met Pedro Franceschi, another Brazilian teenager (from Rio de Janeiro) — the two immediately clicked on topics of innovation and entrepreneurial success. They both decided to focus on payments by starting Pagar.me in 2013 — the goal being to become the “Stripe of Brazil.” The payments company raised $30 million, employed a team of 150, and processed up to $1.5 B in transactions at the time of its sale.
With true success under their belt, the pair decided to relocate to Silicon Valley in 2016, so they could attend Stanford. They enrolled in Y Combinator (YC), a well-known startup accelerator program, to start a virtual reality startup named Beyond. Their track record of past startups and learnings from YC would ultimately signal the true direction where they should focus — payments.
Dubugras and Franceschi were vividly aware of a huge problem entrepreneurs and founders faced in getting started: access to working capital credit. The young Brazilians already had a large network of startup colleagues, and the necessary payments expertise to create a business card program designed for founders struggling to get approved for credit by big banks.
So, they decided to close down Beyond and start Brex in April 2017. The small startup picked up momentum quickly, and the two chose to drop out of Stanford and pursue their business full time.
HOW the BREX card WORKS
For a company interested in a Brex corporate card, the automated online application process is extremely fast and convenient. Cards can be approved and issued in five minutes. In the business lending sector, this application processing and fulfillment timeline is unheard of. Banks have standard applications that take over 10 minutes to submit, and up to 2-3 business days to review — additionally, some financial institutions only allow for applications to be submitted in-person at a branch!
Brex has a risk scoring model that uniquely factors who the investors and/or venture capitalists are (funding the startup), and the amount of money raised. The general thought process being that if the investment community is willing to grant over $100K in start-up financing (or the company is generating $100K in sales), then the company applying should be entitled to corporate card access. According to Dubugras, Brex hadn’t seen a single default (as of Nov. 2018).
This new structure deviated from traditional models of business credit in which financial institutions mostly considered companies in business for 2+ years, based credit approval on a guarantor’s personal credit score, and limits on annual revenues and gross income. For emerging startups, the timeline of 2 years is either too long or the ability to generate income has just begun.
For the companies that get approved for a Brex card, there are specific conditions to be followed:
The card must be paid in full every 30 days, making the product more of a “charge card” than a traditional business credit card (which can carry a balance owed as long as minimum payments are being made monthly);
Brex monitors a company’s bank account balance daily (through aggregation tools from companies such as Plaid to ensure that a start-up is not recklessly burning through their available cash, and would be able to pay balances owed for the month. This direct line of sight helps Brex shut off card access for struggling companies, which helps minimize default and collection efforts.
There are established competitors in this niche arena of corporate cards for start-ups, such as Chase and Silicon Valley Bank. However these players rely heavily on the traditional FICO-based credit scoring system that is tied to a start-up founder’s credit history. Many new or tenured founders are often bootstrapping their venture before being able to obtain investment capital, which greatly increases individual debt levels and decreases credit worthiness. For start-up leaders that do get approved in these programs, they must make a personal guarantee on the debt — any default by the company would directly damage their own credit history.
The cards issued by Brex are used daily by clients to make purchases (in-person and online). In each purchase, there are merchant processing transaction fees that deduct from the total of the final authorized purchase. The purchaser isn’t paying anything extra, but the merchant that provided a good or service is paying a percentage of the sale to the parties involved — specifically the card network (e.g. Visa, MasterCard, American Express, Discover) and Brex (as the issuing bank). Depending on the purchase category, interchange rates can pay 0.5% - 2% of daily spend in the US.
Brex being able to scale up the size of their customer base and monthly spend has propelled its stellar growth over the last 3 years. However, interchange revenue should not be seen as reliable source growth for any company — changes in consumer preferences towards competitor offers of additional rewards or better value, can quickly leave the FinTech struggling. Brex would have to focus on expanding its product suite beyond cards.
GOING BEYOND BREX CARD
Similar to many other in-demand fintech companies, Brex looked to move past its initial core offering of a corporate card to other financial services that could deepen existing client relationships. When speaking with customers, the founders uncovered how painful the financial experience was in business banking. Brex focused on building a better overall experience by continuously rolling out card rewards, partner programs, and other products to drive client engagement:
October 2018: tailored a rewards program for startups in which points earned could be used for commonly used products and services; (TechCrunch)
December 2018: new travel portal in partnership with TravelBank to help travelers reserve flights and hotels through an integration on Brex’s platform; (Business Travel News)
February 2019: Mastercard partnership to issue the World Elite Mastercard for Business and a corporate card for ecommerce companies were both launched; (Forbes)
April 2019: Clear Channel partnership unveiled discounts for a company’s initial advertising campaign; (Footwear News)
March 2019: Brex opened Oval Room, an exclusive lounge space and meeting spot for cardholders in San Francisco’s South Park; (Business Insider)
June 2019: Accounting partnership program allowed cardholders to find and access accounting service providers (Business Insider); Brex also launched a card for biotech and life sciences firms (BankInnovation.net);
The biggest and most popular addition to the Brex has definitely been Brex Cash (launched in October 2019) — a business cash management account that helps companies simplify financial operations and grow their business. In response to companies paying too much in costs for banking services, Brex Cash eliminated fees for wires (domestic and international) and ACH. Additionally, business checking accounts earn low interest rates — Brex was able to deliver a high-yield rate om deposits! The positive feedback and demand for Brex Cash has been overwhelming, with many startups still on the waitlist at the start of 2020. The company aims for a wider rollout by end of the 1st Quarter of the year.
WHAT CUSTOMERS LOVE ABOUT BREX
Here’s a quick breakdown of Brex’s value propositions and why startups join and stay within their platform:
Application review takes minutes instead of days or weeks (unlike some of the examples in the graphic above), and is done virtually without the need to go to a branch, or speak to a credit officer over the phone;
A credit limit that’s as much as 10 times higher than what they’d receive elsewhere, based on the evaluation of a company’s investors instead of current levels of gross revenue, net income, or personal credit;
No personal guarantee or security deposit, which is standard practice for traditional banks — by building its software platform from scratch in-house, the company avoids 3rd-party legacy technology;
Corporate expenses are simplified through a holistic spending dashboard. Senior leaders at a startup can quickly see how much is going towards travel, conferences, marketing, and other expense categories monthly throughout their firm;
Partnership programs and rewards for many day-to-day or monthly expenses that startups incur in travel, advertising, and accounting;
Deposit account with no fees and high-yield interest rates.
By being able to solve a complex and challenging pain-point for startups regarding business credit, Brex has been able to capture the loyalty of founders across multiple industries. As small start-ups successfully grow, their monthly spend and needs for credit also increase. By continuously acquiring new customers and having existing customers deepen their activity over time, Brex has experienced “negative churn” in which clients don’t leave the company for a competitor.
WHAT’S NEXT FOR the business credit sector
While business lending and credit heat up as a sector, experts around the world are cautious about companies like Brex, whose business model and performance has yet to be tested in a recession. Prior to the Financial Crisis of 2008, banks had been giving out business credit freely to young companies in the form of business lines of credit and credit cards. Once that recession hit, banks quickly shut off the credit valve and left entrepreneurs with a fixed loan, and no access to credit.
This “wait-and-see approach” is keeping established financial institutions on the sidelines for another year, just in case the bubble does burst. As soon as banks feel comfortable with the newest technology being seasoned and tested, they will either buy companies like Brex, or license the fintech platform with their own branding.
As for FinTech companies that exist in the sector, look for the following trends to continue in 2020:
Payments lead to loans. For companies that have already acquired a customer who does payments on their platform, layering a new credit product for their clients to use is quite easy. Key examples are Stripe and Square, who have launched lending products that sync with core payments services;
Loans lead to secondary banking services. The opposite also holds true for established fintechs in the lending space to layer on deposit products for their existing customers. This helps maintain long-term client engagement especially with short-term credit products such as personal loans. Key examples are student-lender SoFi launching SoFi Money, and small-business lender BlueVine launching a business savings account;
Business-tool providers launching card programs. As payment-infrastructure (e.g. Stripe, Marqeta) companies improve and streamline their operations, card issuance has become easier and faster. Expensify (known for its expense management system) has launched its own card for businesses; another example is ScaleFactor (accounting and tax platform for businesses). Card programs are quickly becoming another way for SaaS platforms to monetize their existing customer base.
Even though Brex has already started to diversify its product offerings, look for the unicorn in 2020 to have a specialty focus on new verticals that would help companies looking to scale. Additionally, the company will look to create distinct B2B programs for startups and ecommerce customers, which will have custom rewards, functionality, and distribution channels.
. . . . . . . . . . . . . . . . . . .
Thanks for reading! We really appreciate the continued support!
Be part of our FinTech community at FinTechtris for more industry content and discussions (including trends, deep dives on unicorns, and sector analysis) — signup for our newsletter and Slack channel access today!
