A mind-blowing business model

Posted on February 11, 2021. Filed under: Uncategorized |

I’ve been thinking recently about the interchange business model. It’s pretty insane to me, that if you originate a new checking account / debit card, Visa or Mastercard will pay you 1-2% of every dollar your consumer spends on said card. Originate a credit card…the numbers get even larger. That is a sick business model IF you are able to retain that consumer for a long period of time. Something that’s become apparent to me is that it is easier than ever to spin up a new card and start taking spend away from a consumer’s previous bank/card. Banking infrastructure is highly rentable, as is payment processing and ATM infrastructure. The competition at the top of the funnel for this type of origination is fierce…and just as easily as you can pull a consumer to “your” debit card, the next new bank / personal finance app / whatever can pull that consumer from you. There is a lot of innovation happening at the top of the funnel…people building better mousetraps to acquire new users…and the lowest CAC seems to win in the near term. The more interesting question is how do you keep participating in that consumer’s spend 12, 24, 36 months later?

In my mind, you have to provide perpetual value, beyond a nice brand and interface, in order to justify that spend staying with you. Credit products are an obvious answer, to the extent that you can underwrite a loan that the next service can’t. Rewards and cash back is an age old approach…but to me that is a race to the bottom. Ideally, you would justify your existence by providing a value that is deeply integrated into the spend itself, and that does not contemplate erosion of your margin over time.

I find myself asking, beyond credit or rewards, what experiences can you deliver to a consumer that would keep them spending with your card despite the onslought of new top of funnel competition trying to poach that spend away. One interesting lens, is to think about the delta in data fidelity between what an application can deduce from Plaid, and what an application can deduce from owning the card on which you’re spending. Can you deliver ongoing insights at that position that you couldn’t without the spend. Can you get more granular on budgeting, anomaly detection, etc? I find myself asking, what type of experience could you deliver to a consumer if rather than merchant level spending data, you had SKU level data on which to build your experience. One potential architecture that’s interesting is pairing a debit card with a chrome extension that grabs SKU level data on every transaction you make across the web. Interestingly…if you could achieve penetration with that architecture, in addition to interchange fees form the card, you could also capture affiliate revenues from those transactions.

I’m sure there are a ton of other ideas that innovate less on customer acquisition, and more on unique retention mechanics, and to the designers of those experiences I believe goes the long term prize. If you are one of those designers, I’d be interested in leading your Series A. jordan@pacecapital.com

P.S. I’m equally interested in more horizontal layers that index the interchange business model and the rise of online top of funnel points of origination. Who is building tooling between the consumer’s transaction and the point of origination’s monetization that indexes this entire class of businesses? I think payment processing and white label banking infrastructure are obvious answers, but I wonder if there isn’t more stratification inbetween those two points…what can be abstracted away? How can you ease the pain of the next incremental point of origination to participate in this model?

P.P.S. I’m still learning about this stuff, so if I have anything wrong here, please reach out and let me know.