Financial technology (FinTech) companies expanded access to banking services for over a decade. This effort centered on providing bank accounts to individuals who couldn’t qualify or afford a standard account from a bank (i.e. the underbanked and unbanked). Multiple neobanks and challenger banks quickly addressed this core need and are focusing on how to differentiate themselves from competitors. In this new decade, a shift is taking place towards providing all accountholders an enhanced experience, premium rewards, and other benefits with their bank card. The current FinTech response with debit and credit cards has been influenced by the needs and priorities of millennials and Gen Z, who look to FinTech for something beyond a free account with a card.

current Trends impacting card spend

For millennials (born 1981 - 1996), this is their second experience of recession — the first being the Financial Crisis of 2008 - 2009. Graduating with high student loans and racking up large credit card balances impacted credit worthiness and a negative attitude towards credit. Still struggling with debt and expenses, they now face the impact of COVID-19 on their future plans. Goals of starting a family and purchasing a home continued to be pushed further out. Saving, budgeting, and avoiding more debt are critical priorities. As a result, 67% of millennials prefer debit cards, which they see as secure and less likely to get them into debt.

Gen Z (1997 - 2012) experienced childhood during or after the Financial Crisis. They witnessed the struggle of their parents with monthly payments, and possibly foreclosure of their home. Their attitude towards accumulating debt is of avoidance — taught at a young age to not use credit cards or make purchases with funds that weren’t readily available. Gen Z is still spending as much as other generations as they join the workforce, but they’re doing so without relying on credit cards.

For both millennials and Gen Z, the majority of noncash transactions is coming from debit cards (50% in 2018, according to the Federal Reserve) — spiking further as a result of online spending due to COVID-19. Credit cards still exist for these groups and are used, but less often due to poor qualification and costly interest expenses. The downside of not using credit cards (or having open lines of credit) is that an individual lacks credit history and strong credit profile. Both are needed to pursue large purchase goals that require financing such as buying a car or a first home. Low credit profiles also result in higher interest rates on approved credit due to the increased risk of default from the borrower.

FinTech companies responded to these key issues and trends in consumer behavior, and delivered various offerings that target one or more priorities: providing higher rewards, credit building opportunties, or managing card spend effectively through debit or credit options.

Premium fintech Debit Cards

Evolving from a pure ATM card for cash withdrawals, the debit card we carry in our wallets today has replaced the usage of cash and writing checks. The main benefit is convenience and access to the consumer. With the availability of smartphones, these cards have been digitized into mobile wallets for virtual access. Banks benefit from increasing levels of debit card usage due to interchange revenue from card spend (which they keep for themselves). In the last 5-6 years, large banks have added some small rewards programs for debit card spend at specific retailers who have affiliate partnerships.

As fintechs entered the banking space with neobanks and challenger banks, debit card programs received enhancements. From physical cards being made of metal and laser etched, to rewards based cash back on all spending. In particular, companies like Point (a consumer banking app with a debit card) have created a credit card caliber rewards system through their debit card. Instead of applying for a credit card to earn cash back on purchases or higher tiers of 3% - 5%, Point delivers a rewards-based system — groceries earn 2x and subscriptions earn 5x the points.

FinTech companies with existing clients, can quickly add similar products and features to capture a higher market share of debit card spend for themselves. Customers interested in getting rewarded for purchases they already make would readily switch their spending from a traditional bank (with no rewards) to a fintech with premium cash back and no monthly fee.

CREDIT BUILDING through fintech cARDS

The reliance on debit over credit cards in order to avoid accumulating debt, is having a long-term effect on credit profiles. Without active credit lines or a history of monthly payments, consumers can’t grow their credit profile or qualify for financing on larger purchases. For individuals building credit in their late 20s and 30s, it can take at least 2-3 years of payments and expensive secured card programs to generate a strong credit score.

Secured credit cards have existed in banking for years. For bank customers that apply and get declined for a standard credit card, they may have a counter offer option for a secured card that requires a refundable deposit as security. This amount would represent the monthly credit card limit a consumer would have to spend, and come with an annual fee paid in the first month. After 12 months of card usage and the customer being a good standing, the card could graduate to unsecured and the customer would receive their deposit back. If a customer defaults on a balance owed, the secured deposit would be debited and the card closed on the customer’s behalf. No financial loss to the bank or customer.

FinTech has taken a new spin on credit builder programs (such as Self-Lender) in which customers don’t pay a lump sum upfront, but instead monthly over 6-12 months into a savings account. These monthly payments are reported to the credit bureaus as positive payment history. Neobanks have taken the credit building concept further with a focus back on cards and spending.

Chime, the popular neobank in the US, recently announced its Chime Credit Builder Visa Credit Card. Through this program, users can control how much they spend by transferring funds to their Credit Builder Secured Account, and then transact on this amount wherever Visa is accepted.

Everyday transactions are paid with the credit card (based on the amount available in the builder account). At the end of the month, Chime automatically pays off the balance from the secured account. The credit card payment is reported to the 3 credit bureaus (TransUnion, Experian, and Equifax) — no annual fee, interest rate charges, minimum usage, or deposit requirements with the program. This product acts like a capped credit card (unable to be overspent), but has debit card functionality through its funding and payoff. By working to establish good credit AND preventing users from overspending, Chime’s new card is the best of both worlds for users in need of credit boosts.

Hybrid fintech cards: “debit-style” credit card

As competition heats up in the card space, emerging startups continue to deliver additional innovation and business models that address key customer needs and behaviors. In Chime’s credit builder card, the lines between debit and credit cards have already started to blur. Zerocard launched an alternative, hybrid card to replace traditional models of debit and credit card frameworks in large banks.

Zerocard’s program has an internal deposit account (which is required) and debit-like card with 1% - 3% cashback on purchases. The card has a customer control in the Zero app, in which it becomes a credit card. The limit is based on the amount in the deposit account, and offers the chance to build credit; autopay deducts the credit card purchases from the Zero account at the end of the month. Customers can switch back and forth between debit and credit in the app at anytime. For Zero’s customer, the flexibility of building credit over time through controlled spending is a huge benefit.

There are users who choose to use Zerocard as a traditional credit card instead of “debit-style.” Resembling a charge card, the limit would be based on credit worthiness (reviewed in real-time) and any balances carried over to the next month may have a 24.99% variable APR. Staying in debit-mode, helps customers monitor their spending, gain cashback, and pay no fees (except for returned payments and late fees).

Expect to see more cards like Zero, which allow consumers to build smart spending and budgeting behaviors with credit alternatives. As customers succeed in establishing strong credit profiles in these programs, fintechs can start to build premium credit cards with rich features beyond higher cashback, perks, and credit building benefits.

“buy now pay later” options disrupting card spend

When it comes to online spending, the rising trend of buy now pay later (BNPL) platforms has given millennials and Gen Z a new, non-traditional form of payment instead of using cards. Market share has increased from 3% in 2018 to 8% in 2019 (based on the Worldpay from FIS 2020 Global Payments Report). Over the next 3 years, there is an estimated 17% of online transactions in this new channel (about 1 out of 5 purchases).

Companies, like Affirm and Klarna, offer point-of-sale installment loans (paid back every 2 weeks automatically) to finance retail purchases. For shoppers that choose to avoid credit cards, this interest-free option is convenient and helps avoid costly, long-term debt. Each user tends to spend more over time on these BNPL platforms.

The next step for fintech lending companies in this niche is to offer a card product of their own for customers to purchase with. This card can resemble a credit card in allowing for purchases through installment loan options, and a debit card that allows a customer to pay in full right away, or withdraw cash at an ATM. Consumers would be in control of how they spend, track their next payments in one platform, and avoid paying interest.

what’s next for fintech cards?

As we start the 2nd half of 2020, there’s a common theme of self-reflection and planning from COVID-19, especially when it comes to financial wellness. More people are starting to save on a monthly basis and increasing the amount they put away month over month. Cutting back on discretionary spending and budgeting have been hard lessons to learn during the pandemic, but their long-term value benefits future financial planning.

Some banks and card companies are promoting increased financial education when it comes to credit qualification and management. Apple recently launched the Apple Card “Path” program to address the struggles of young individuals who are unable to quality for credit. The program sends alerts to users on how to improve credit profiles through secured card payments and eliminating past due balances. Financial institutions have also started alerting customers about monthly spend with reporting and insights in their consumer app.

The FinTech industry has gone deeper and responded with ways to help consumers monitor spending, build credit, and avoid paying fees through innovative card products. The expectation is that more fintechs will enter this space with their own card program and unique set of benefits catered to to their target segment. Similar to how neobanks are starting to focus on industry verticals (i.e. small business, freelancers, digital creatives, international students) — cards will follow suit and cater to baby boomers, Gen Z, and travelers.