Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Today we’re getting two items out of my notebook while sticking to our recent fintech theme (Q1 fintech VC results here and more on investing patterns into the category here). Let’s chat about fintech customer acquisition costs and the rise of card-focused plays inside of the category.
For a little context: I’ve been hunting down a story on rising fintech customer acquisition costs (CAC) for what feels like a year. After a host of calls and chats on the topic, I’m admitting defeat. Details below, but I’m excited to cross the topic off my to-do list.
Regarding cards, I’ve spoken to both the CEOs of Brex and Ramp in recent weeks and corresponded a bit with Coinbase. So let’s chat interchange a little bit as well. Today is a fintech grab-bag, and we’re all going to be better for it. Onward!
CAC
Last year saw a host of huge fintech rounds, often into companies with consumer-facing products. The year was capped off by a $500 million investment into Chime, a fitting way to wrap up the calendar period. A result of fintech’s well-chronicled funding boom (and nigh-record 2019 investment totals) was rising customer acquisition costs, or so we were told.
In June of 2019, Bond Capital’s Mary Meeker’s yearly slideshow included a neat chart showing that “Cost Per User Activation – Mobile Finance Apps, Global per Liftoff” was rising. Indeed, the chart she shared showed the dollar amount associated with that metric from around $30 in early 2017 to $45 when the chart ran out of room in mid-2019, a record high.
And then in August of 2019, GreenDot, a public bank that “provides banking services with a focus on pre-paid cards,” as I wrote at the time, bemoaned rising competition from “so-called neobanks flush with new rounds of venture capital spending a record amount of marketing dollars to convert customers to their largely free bank account.”
As far as shade went, that was pretty good. Then investors sold the hell out of its stock, giving its value more than a haircut. The theme of the two news items, however, felt pretty clear: Rising venture totals into fintech startups were driving CAC in the space up.
You can math out the logic pretty easily: A set of companies competing for similar customers are suddenly richer, but the channel space open to them is static. They spend more. What happens to the price of reaching potential customers? It rises. And that drives up CAC.
Or so I thought. It felt like a pretty slam-dunk case, so I started asking everyone I spoke to about it. A call yesterday with M1 Finance’s CEO Brian Barnes is illustrative. Here’s his response to my question about if he’s seeing CAC rise at his firm, a consumer-focused financial services platform that reached a new AUM threshold today (more later today on TechCrunch.com, quote condensed slightly):
Yeah, it really hasn’t. If anything, our customer numbers are massively accelerating, despite cutting back on marketing spend. And I do think that gets into how we positioned ourselves [as] a firm and what drives at the capital efficiency of how we’ve gotten to where we’ve gotten. A lot of our FinTech peers created an innovation [saying] that this is the be-all, end-all solution, went [out] and raised enormous sums of money and spent that on billboards and taxicabs and TV commercials — talking about how how great their product was.
The CEO went on to stress that some fintech CAC levels could be high if a startup was trying to move someone off an existing platform, for example, to a roboadvisor. But Barnes’ notes match what I keep hearing from fintech players: CAC levels are either down a little, mostly flat, or up a smidge, but remain healthy. Meanwhile, other folks are spending way too much money.
So, out-of-control fintech CAC is a bit of a white whale. It may be somewhere, even if you aren’t sure where.
My best guess after trying to nail down whatever this story is that fintech players — both B2B and B2C — are paying more on average to acquire customers, but that they’re mostly ok with the cost as they work to grow their per-customer revenue opportunities. That brings us to our second topic.1
Cards
Everyone knows Brex. Recently, the fintech unicorn picked up a competitor by the name of Ramp. Both companies are playing in the corporate charge-card space, a lucrative market. Naturally, given the prominence of Brex in the startup scene (famously rapid capital accretion, pervasive advertising, quick valuation ascent), Ramp’s launch was widely covered. You can read TechCrunch’s story on the company’s debut here.
Flush with $25 million, what did the company have on offer that Brex lacked? A different focus, I’d hazard. The company claims to want to help its customers spend less, providing them with reports on their spend to help identify costs to reduce or eliminate. The card also comes with a host of perks (expected) and 1.5% cash back on all purchases. That last figure caught my eye.
How the heck was the payout financially feasible? My understanding of interchange fees (the slice of transactions that card-issuers like Brex and Ramp) could charge were about that price level.
So how does Ramp afford to give its customers 1.5% back on all purchases? I wound up on the phone with Ramp CEO Eric Glyman to chat about the matter And it’s interchange, of course.
It turns out that the rates for corporate credit cards are higher than for consumer cards, meaning that Ramp (and, presumably Brex) have more revenue (gross revenue?) to play with than I had anticipated. Or, more simply, that corporate cards are better business than I expected them to be, given the current dynamics of the interchange setup we have in the United States.
Ramp is an interesting company because unlike most card companies, it’s somewhat anti-points. “Cash back is great,” Glyman told TechCrunch, “because people understand it.” He went on to say that points programs are, in his view, built more for the issuing company than the consumer (customer), a stance that I somewhat agree with given the steady degradation of the value of both credit card points and airline miles (nearly fungible today) over the last few years.
Let’s get back to CAC for a second. I said that I asked a lot of fintech folks about CAC. Ramp was no exception. Especially given Brex’s huge ad presence, I wanted to know how Ramp was going to stand out. Per its CEO, early reaction to the company’s product has been better than it anticipated. Glyman called early traction “overwhelming.” On the CAC point, a question that is really a narrowed go-to-market-motion query, Ramp said your credit card shouldn’t pay for other company’s billboard bills which was medium-space shade. Ultimately Glyman stressed customer value creation as an effective marketing tool. So, chalk Ramp up on the ‘not too worried about CAC’ side of things.
Brex isn’t too worried about competition, at least public. In a call with Brex CEO Henrique Dubugras discussing a recent offering from Amex that may challenge his own product, the executive told TechCrunch that Brex’s space won’t see one winner with 80% share. There’s room for a few. As Brex launches in more verticals (more coming this year, per the executive), the company hopes to replicate its early success in more markets. Indeed, Brex now sees 35% to 40% of its platform spend in the ecommerce sector, an add-on to its earlier startup focus.
Even with the launch of Brex Cash, which Dubugras told TechCrunch is showing “fantastic” early signals, Brex and Ramp are still mostly interchange-derived plays today. But it’s not only B2B companies that are working hard to derive revenue from cards. Consumer companies are hot about the game as well.
I’ve written before about the rise of every damn company trying to put a card in your hands, a trend underscored by rising fintech CAC (maybe) making fintech players hungry to drive more revenue per landed-user (probably). Consumer debit cards are one such way. And Coinbase, a crypto trading firm, recently took steps to double-down on its consumer card function:
So I reached out to Coinbase on the matter, curious if the news would allow the company to “earn more interchange revenue from debit card transactions?” As it turns out, per Coinbase’s comms director Elliott Suthers the answer is no, but. While it doesn’t generate more interchange revenue for the company, we presume on a per-transaction basis, the new status will “allow [the company] to offer value added features on top that will ultimately deliver more value for our customers.”
I wonder what’s up with Coinbase’s CAC now that we’re here.
Anyhoo, it turns out that most players in the crowded, well-funded, and highly-valued fintech world aren’t too worried about how much they are paying today to acquire customers. And, that interchange revenue is becoming only more embedded, and critical to many fintech plays, even if the revenue stream is better for B2B players than B2C.
More later, but I’m very glad to have all of that out of my notebook.
- This story is a good example of why background and off-the-record chats between reporters and executives suck. I could tell you a lot more but everyone who was willing to talk hard numbers wanted no one else to know them. So, I know more than I am allowed to tell you and that is annoying. But the details I cannot share match up with what I wrote above. Just, you know, with more specificity. Make Executives Brave Again.