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Fintechs across the U.S. and Canada have found a niche for providing small and medium-sized enterprises with virtual and plastic expense cards.

The fintechs use proprietary credit scoring methods and links to customers’ bank accounts and accounting software to lower the risk that has kept many North American banks away from this market. The fintechs also emphasize digital features over financial terms.

Access to corporate cards is challenging for SMEs. Banks typically require personal guarantees from small-business owners and, if they approve the corporate card, it may have a low credit limit. Consequently, company owners often use personal cards for business spending, and can’t import that spending into their accounting software.

“Most U.S. and Canadian banks treat small-business cards as an offshoot of consumer credit cards,” said Gilles Ubaghs, strategic advisor at Aite-Novarica. “Banks have very little differentiation between their small-business and consumer cards, and they haven’t invested in making their SME cards digital-first.”

The U.S. has seen an explosion of fintech activity in small-business cards with a lot of venture capital funding going in, according to Ubaghs. “The Canadian market is at an earlier stage than the U.S., but Canadian startups such as Caary Capital and Float Financial have very strong potential for growth,” he said.

San Francisco-based Brex, the largest U.S. fintech issuer of SME expense cards, currently doesn’t have a Canadian operation, although it issues cards to Canadian firms with U.S. subsidiaries. “I wouldn’t be surprised if Brex launched an operation in Canada,” Ubaghs said.

Other U.S. players include New York-based Jeeves (which entered the Canadian market in March 2021 and currently has 400 Canadian clients), Ramp, Expensify and Divvy (which was acquired by Bill.com in June). Toronto-based Wave Financial has already entered the U.S., and Caary plans to launch in the U.S. in 2022.

Fintech-issued business expense cards are perceived as digital-first payment tools, which is in contrast to the way banks portray their own products, said Ubaghs.

“For fintechs, it’s not so much about the card’s APR but about how it fits into SME expense management systems, payment flows and reconciliations,” he said. “Additionally, many fintechs provide cash back, which many banks don’t do.”

Banks evaluate business credit card applications by looking at traditional credit files, which may be very thin for smaller companies, said John MacKinlay, Caary’s CEO. “Around 40% of Canadian SME applications for bank credit cards get rejected,” he said. “Also, banks process SME card applications very slowly.”

Caary and its fintech competitors obtain customer consent to access their business bank accounts and accounting records to assess creditworthiness. Some fintechs provide charge cards, and others provide debit cards that draw funds from a linked bank account.

Many fintechs offer instant virtual card issuance with multiple digital cards for employees, plus physical cards.

Fintechs aim to build better expense cards for small businesses

Dileep Thazhmon (left), CEO of Jeeves, and John MacKinlay, CEO of Caary. “The banks that partner with us see us as providing access to an asset class they might not be able to finance directly,” Thazhmon said.

Card issuance is just the entry point for fintech services to SMEs, according to Alenka Grealish, senior analyst at Celent.

“The sustainable model is not to be a monoline, providing business expense cards,” she said. “It’s a platform play, so you need to offer a range of products on top of your charge card such as lines of credit, supply chain financing or working capital.”

Because of their potential for growth, fintechs targeting SMEs have attracted significant investment. In October, Brex raised $300 million for a valuation of $12.3 billion.

In November, Float, which offers cards that draw funds from cardholders’ business bank accounts, received $30 million in a funding round led by Tiger Global Management. Five months earlier it raised $2.8 million in seed financing equity.

In September, Jeeves raised $57 million in Series B funding for a $500 million valuation, following $31 million in Series A equity and $100 million in debt funding in June. The company’s customer base is doubling every 60 to 90 days, said CEO Dileep Thazhmon.

The funding for Jeeves’ loan book is provided by banks and hedge funds.

“The banks that partner with us see us as providing access to an asset class they might not be able to finance directly — receivables financing for fast-growing companies,” Thazhmon said. “For example, Silicon Valley Bank, which participated in our Series B round, sees us as providing faster access to financing start-ups and greater range, especially internationally, which they couldn’t access.”

Caary works with several technology providers to deliver SME card services. The Canadian financial data aggregator Flinks provides access to customers’ bank accounts, cash balances and cash flow, while Caary’s credit scoring and monitoring draws on integration with accounting packages such as QuickBooks. Caary provides clients with digital receipt capture and spending insights through a partnership with the Canadian technology provider Sensibill.

According to MacKinlay, Caary plans to roll out its Mastercard-branded charge card and credit card in the first quarter of 2022. The credit card will have an APR of 10-14%, depending on client risk.

“We plan to offer our products in the U.S. and are working with some partners with U.S. operations,” MacKinlay said. “We also plan to offer installment loans, as we see a big opportunity in” buy now/pay later.

Jeeves also provides working capital loans and revenue-based growth capital to its clients. Jeeves assesses its customers’ creditworthiness by working with Plaid to access their business bank accounts.

“If they have some form of cash flow coming into their bank account, we can underwrite them,” Thazhmon said. “We have our own proprietary credit-scoring system, looking at clients’ spending patterns and cash positions and adjusting their credit lines based on how much they pay back to us.” Clients get instant card issuance, unlimited virtual cards for their staff and up to 3% cash back.

Shopify and Square provide their sellers with prepaid cards linked to funds in merchant accounts. Square launched its Square Card in Canada in September, following its U.S. launch in 2019.

“Because funds are held in the merchant’s Square Balance account, they can access customer payments immediately, rather than having to wait for funds to settle at an external bank account,” said Christina Riechers, head of product at Square Banking. “In Canada, we target the Square Card at larger businesses as well as very small businesses.”

Shopify has yet to launch its Shopify Balance card in Canada.

“In the U.S., Shopify Balance provides merchants with access to their funds within one business day from customer orders, which helps them manage their money on the same Shopify platform they use to run their business,” said Tui Allen, a senior product leader at Shopify. “We launched Shopify Balance as many U.S. small businesses are underserved by banks.”

Wave provides U.S. business debit cards linked to Wave Money accounts held at its partner, Community Federal Savings Bank, plus services such as invoicing, instant free deposits from customers to Wave accounts, payments processing, spend management and payroll services. All its products are offered in Canada except Wave Money accounts and cards.

Wave, which was acquired by H&R Block in 2019, has 300,000 monthly active users in North America, and the U.S. is Wave’s largest market.

“Instead of providing them with a line of credit, we help small businesses speed up their cash flow by getting paid faster through our invoicing and online payments platform and accessing those funds instantly through Wave Money,” Wave CEO Kirk Simpson said.

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