B2B Card Platforms

Recently talking to a founder, he had mentioned the poor experience he and his company had when they began looking for banking products. That made me want to do a quick deep dive. You’ll find hyperlinks sprinkled throughout this quick post – do click on those if you’d like to learn more.

Companies normally start working out of their own bank accounts. It is then likely that they move to SVB for banking, AmEx, or Capital One Credit Card which is personally secured.  This means SSNs are secured against it. SVB offers credit cards, but the limit is often very low of ~$10k (even though they close seed rounds). Across the board and on a comparable basis to the challengers, the UI’s are draconian and so complicated that sometimes integrations (for example, with Quickbooks) don’t work. 

And it’s no secret that borrowing money as a startup is difficult. What did surprise me was the amount of paperwork he had to fill out, that he had to put a personal guarantee down, and their line of credit was paltry. This rigid and antiquated credit issuance limit has been there for some time. Yet over the past 5 years, that difficulty has been lessening. Platforms like Mercury, Ramp, Brex, and Divvy are challenging the old guard of SVB, AmEx, CapOne, and others.

I quickly landed on Brex for this weekend’s review. Brex alone has an interesting origin story that many have written about, or done live before which you can easily find.

Although I need to write how all these VC-backed challengers are equally exciting to watch. For example, Mercury is creating a pipeline for VCs to connect directly with their companies, Brex launched venture debt, Ramp has been on fire with their tooling suite being adopted, and Divvy was acquired somewhat recently. But less on that, more on Brex for now.

  • Target: Brex
  • Stage: Series D
  • Capital Raised to Date: $856M (Per TC)
  • Valuation: $7.4BN (Per TC)
  • Founders: Henrique Dubugras & Pedro Franceschi
  • Date Founded: 2017
  • HQ: San Francisco
  • Employee Count: 797 (per LinkedIn)
  • Investors (Sample): Tiger, Ribbit Capital, DST Global
  • Clients (Sample): Airbnb, Carta, Numi, Classpass

Brex has a vision to build the Financial OS for businesses. They have shown an ability to grow and execute at scale. Additionally, B2B digital payments and card adoption has room for multiple competitors to successfully grow and service clients. This is one exciting aspect of the market, the winner does not take all, and the tailwinds are strong.

Based on a recent Mastercard study of payment type usage during the pandemic, online card payments saw the greatest increase (+60%) while cash (-34%) and checks (-24%) decreased the most. US B2B digital payment penetration is only 36%, while B2B credit card adoption only accounts for 4%. 

Brex is not a bank. To achieve the full Brex Cash experience, they work with a partner bank where they hold an account called the Master Custodial Account (MCA). The MCA is an omnibus account, meaning that although each Brex Cash account has its own unique account number, every single deposit arrives into the MCA, and every withdrawal departs from it. The MCA serves as the source of truth for money movement from their perspective.

Brex’s strategy focuses on faster access to cash flows through an offering of a single-stop Financial OS (i.e., debt funding to bill payment). The acquisition of Weav (API for commerce platforms) also shows their desire to provide access to an even longer tail of merchants, creators, and solopreneurs that Brex’s platform currently doesn’t reach.

Nearly every other business credit card (less the challengers) requires a personal credit check, personal guarantee, multiple days to onboard, and an onerous amount of paperwork. Brex is different. Brex is a card issuer that has built a system to handle the authorization and clearing processes through the support of two networks: Mastercard and Visa. 

Brex neither requires a personal credit check nor a personal guarantee. They review the bank account themselves and score companies accordingly, providing 10-20x normal account limits. Brex has an SEC-registered broker-dealer subsidiary, Brex Treasury, that is a member of FINRA and SIPC. This means they are licensed by FINRA and can buy and sell money market funds per clients’ directions. Brex partners with FDIC-insured banks to store uninvested cash deposits.

Brex has four products:

  • Corporate Charge Cards
    • Brex Daily: Credit card paid daily automatically through Brex Cash account, up to 80% of daily cash account limit.
    • Brex 30: Credit card paid monthly to companies with >$50k in bank if venture funded, $100k if not.  Monthly limit of ~10-20% of linked account balances.
  • Brex Premium
    • Automatic Bill Pay: Forward invoices, schedule ACH, QuickBooks or Xero, control cash.
    • Spend Management: Approval flows, custom expense policy and more.
    • (Coming Soon) Reimbursements: Reimburse employees automatically, keeping payments on time and in policy.
  • Brex Cash
    • Brex Cash is not technically a bank account, but its functions are the same — you can store money, invest in money market funds, and send payments via wire and ACH.
    • Brex Cash requires no minimum deposit.
  • Ancillary
    • Brex Venture Debt: $150M fund.
    • Direct Integrations and Discounts: Quickbooks, Expensify, Concur, Workday, Gusto, and more.
    • Rewards: Three options to choose from for affiliate marketing and card rewards.

The way they make money is different on each product set:

  • Corporate Charge Cards:
    • Brex shares interchange fees with their payment processor, Mastercard, whose fees can at times be up to 2%.  The details of the fee sharing arrangement are not disclosed.
      • Reported to have 20,000 customers (as of April 2021).
      • Every transaction that goes through via a credit card has an average 2 – 3% fee that is split between the Issuing Bank, Merchant Bank, Payment Processor(s) and Card Networks. In this particular case, Brex is partnered with Mastercard for the corporate credit card
  • Brex Premium:
    • Brex charges a monthly reoccurring $49 fee for each company.
    • Unlimited seats. Customers are charged for access to the bill pay, spend management and reimbursement capabilities.
    • Unknown subscriber total.
    • Premium was launched in April 2021.
  • Brex Cash:
    • The money market fund pays Brex distribution fees (12b-1 fees).
    • Brex receives net interest margin (NIM) from the banks it partners with for FDIC coverage (<3%).
    • Cash is a cash management account serviced by Brex Treasury, LLC, a FINRA BD.
  • Ancillary:
    • Brex is compensated through its partner affiliate marketing program (AWS, Slack, Hubspot, Zoom, and more).  The details of the compensation arrangements are not disclosed.
    • Brex’s venture debt is said to capture around 7-12% interest (heard through a podcast), although not officially disclosed, where SVB has been known to issue >20% loans. 

And while Brex has been building in the public, their true metrics are kept tight. In an article with TC, they did come out and mention some impressive numbers. For example, Brex’s TPV grew 100% – March 2020 to 2021 (Brex reached $1BN during its first seven months in the market); their customer growth grew 80% from the final quarter of 2020 to Q1 2021, and Brex’s customer breakdown is roughly SMB clients (45%) and non-SMB clients (55%).

All of this would make someone say, ‘great business, what’s the worry?’ And I am likely not the best person to answer, but Brex and it’s peers are breaking ground. I can only imagine that the incumbents continue to intently watch. The company (and others) still face a large number of risks. In my opinion, some of those risks are the following:

  • Brex Treasury, the arm who services Brex Cash receives compensation from the money market funds.  12b-1 fees are normally associated for sales and marketing efforts for the fund itself. Yet a large number of fund managers are eliminating 12b-1 fees and building ‘No Fee’ funds with zero expense ratios.  This aspect is not going anywhere soon, but 12b-1 fees are a topic in many circles these days.
  • Brex is also among the first fintech companies (and the first in a B2B use case) that has filed for an industrial loan charter (which they’ve since pulled back), that will allow Brex Cash to transform into a full-fledged “business bank.” With the ability to lend using Brex Cash customers’ deposits, Brex will be able to provide loans and credit cards at a lower cost of capital.
  • Brex’s new venture debt business is competing directly with SVB, Fifth Street Finance, Clearco, Hercules and more.  The success of this lending product is key for their future success that can be a large differentiator.  Failure to execute and scale this product could result in delayed IPO timing, a down-round, or allow direct competitors to gain market share. 

This shotgun overview is one that keeps us on a very high level. It does not go into the fact they offer instant revenue for e-commerce (big deal), the fact that they now own the data – following the launch of Brex Cash, and have built up a brand name that holds against all others to date. It’s also important to note that their business model changes rapidly, and this post could be out of date soon after writing. This is an exciting field, one which will continue to be for years to come. Perhaps I’ll do down the route of Mercury next!

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