The Transformation of Credit Card Issuance

Legend has it that in 1950, Frank McNamara, a businessman from New York, forgot his wallet when he went to a restaurant for dinner. This embarrassing episode sparked in him the idea of creating a card which he could use to pay for meals anywhere. A year later, he would return to the same restaurant and pay with his newly-created cardboard Diners Club card, the first multi-purpose charge card.

The evolution of credit card issuance

Soon, American Express and others started issuing cards, adding the concept of credit to it, and allowing customers to retain a payable balance on their accounts. Banks clearly found this debt-like-feature attractive and so Bank of America launched what came to be known as Visa in the late 50’s, while Citibank and others coalesced their efforts to create Mastercard in the 60’s. With the support of the banks, Visa and Mastercard would go on to expand their merchant network so that their cards could be accepted at millions of locations around the globe and eventually online.  

The fact that Visa and Mastercard established themselves as two dominant and independent service providers to various issuing banks had some interesting implications.

• First, it meant that they had to set up their systems such that any third-party could issue a credit card. As a result, in the past years we have seen not just banks, but also supermarket chains, airlines and even universities issue cards as part of their marketing strategies.

• Second, because multiple issuers had to participate in this payment network, each with its own methods for authorising payments and checking for fraud, Visa and Mastercard had to build relatively open transaction authorisation processes (compared to the monolithic proprietary systems banks typically developed for their internal purposes.) As a result, today, each payment is checked for both fraud and for the payer’s credit, in real-time, before any transaction is authorised. Multiple third-party service providers are able to inject themselves in the card authorization flow to provide services in this complex network – companies like Adyen (AMS: ADYEN) or Plaid are examples of such companies.

Yet, despite the technological advances of the past decades, and the enormous growth of the Visa/Mastercard networks, credit cards have largely been used in much the same way for the past 60 years. When COOP in Switzerland or Apple in California issues a credit card, it is still a general-purpose card, as envisioned by Franck McNamara in the 1950’s - the card can be used for any purchase, anywhere Visa and Mastercard are accepted.

However, today, largely thanks to the relatively open infrastructure noted above, this is starting to change. Rather than issuing general purpose cards, more and more companies are now issuing cards that can only be used in specific stores to purchase specific items. This is possible because third party authorizers can inject themselves in the digital authorization flow and decide to only authorise a specific purchase. These cards can also be issued on the fly, in real time, as virtual cards which are authorized to make only one specific purchase. Traditionally, general-purpose cards would be issued in weeks or perhaps days.

Now it takes seconds or milliseconds to issue a card which has infinite degrees of control and flexibility in its usage. This quantum change has allowed entrepreneurs and innovators to re-imagine how cards can be used, and it has allowed them to build whole new businesses based on this newly found speed and flexibility.

advantages of modern issuance

1. Granular control

Flexibility has been enormously useful in the on-demand delivery sector has been enormously useful in the on-demand delivery sector. Companies like Instacart, DoorDash and Postmates equip their couriers with special cards, which are authorized to make purchases in real-time only after confirming that the transaction matches the appropriate store, location, and amount of the original end-customer order. In other words, when a DoorDash delivery person visits a restaurant to pick up a meal for an end-customer, his or her DoorDash credit card is only authorised to purchase the items that the end-customer ordered and nothing more. Having this level of control and fraud-prevention is critical for the on-demand delivery sector. What’s more, the granular data provided by the systems can be analysed to generate insights, like detailed customer or product profitability analysis, which in turn can be used to better meet the end-customers’ needs. These systems have also proven to be enormously scalable.  Over the past months, during the COVID-19 lockdowns, payment volumes for such companies tripled, and delivery companies had to massively scale to support the spike in on-demand food delivery.

2. on demand lending

Lending is also being transformed by the flexibility offered by modern card issuance. Alternative lending companies can issue cards to borrowers giving them access to funding when and where they want, and only charge interest when the borrowers actually draw financing and spend the funds. For example, a company called Kabbage enables its business customers to receive funds instantly and automatically from their credit lines at the time of purchase, so they can pay for office equipment, or inventory. Another lending company, Affirm, issues single use virtual cards, at the point of sale, enabling buy-now-pay-later per each individual purchase. By fully automating merchant payments so that there are few/no human interactions, and by continuously analysing the fine-grained data they collect in the process, both companies can dramatically reduce transaction risk and improve their value proposition.

3. expense management

Employee expense management, which is typically difficult to control and to track in a timely manner. A company called Teampay is now issuing physical and virtual cards on-demand for specific events, employees, or purchases and configures controls to limit spending by individuals, teams or at certain merchants. Rather than banks or companies issuing cards to third party individuals, Teampay allows companies to issue specific cards to their own employees for making company-related purchases.

4. Decreasing time to market for new products

The Banking sector is also being transformed radically, and speed to market with new products can be a critical differentiator. Today, fintech companies are using new technologies to configure unique solutions quickly by seamlessly integrating payments APIs with existing systems. When Square decided to issue a virtual debit card, paired with its fast-growing money-transfer app – the Square Cash App – it was able to build the product within six weeks, rather than the months a traditional issuer-processor would have taken. Similarly, because of the card issuing and processing technology underpinning its Cash App, when the US government needed to disburse PPP stimulus checks to qualified recipients, the Square Cash App was able to distribute the funds with greater ease, speed, and accuracy than traditional banks.

the case of Marqeta

All the above companies - from Square to Kabbage, and from Postmates and Instacart to DoorDash – are Marqeta customers. They are using Marqeta’s card issuing platform to execute on their business plans and to bring their own innovation to the marketplace.

These B2C companies dazzled their customers with their flexible payment cards, while Marqeta quietly established itself as their de-facto issuer and processor.

This explains why Marqeta has been able to double its revenue for the past four consecutive years, to $300M last year. In 2019, it also tripled the payments volume passing through its platform and issued its 140 millionth card. If Marqeta was to be considered a single card issuer, it would rank as one of the largest 25 issuers of payment cards in the U.S. (the others being some of the largest banks that issue cards to their customer base.) In 2020, as more and more activities moved online due to the COVID-19 lockdowns, Marqeta saw record volumes.

Beyond the short-term boost, Marqeta’s success is fuelled by some fundamental trends that should only accelerate in the coming years:

• The amazing growth of its addressable market - More and more sectors of the economy are opening up to the digitization of payments. As a result, the total number of non-cash transactions worldwide is expected to reach 1 Trillion in 2022, up from 605B in 2018, and the modern card issuing market is expected to grow by $30T in the next decade to ~$80T. Last year, VC funding for payments and processing grew to a total of $4.4B - a 46% increase YoY, and a good indication of the size of the opportunity as seen by entrepreneurs and investors.

• Transformation of fintech - Fintech usage in general has also broadened. Financial services are being unbundled and repackaged into intuitive new services every day, enticing millions of consumers away from traditional banking. Digital-first banks, payments companies, lenders, wealth managers, expense managers and personal finance providers, are all rapidly expanding across these sectors with new value propositions. This change is being felt specially strongly in Europe, where 64% of digitally active consumers were already fintech adopters in 2019.

• Implementation of open banking - A key driver behind the rapid penetration of fintech is the implementation of open banking, as mandated by the European Union’s Revised Payment Service Directive, known as PSD2. Under this rule, customers have gained full rights to their bank data and can therefore share them with whomever they wish, including third-party providers such as aggregator apps and fintech start-ups offering more user friendly, informative and cheaper services. To abide by the new regulations, money-center banks are now required to establish open application programming interfaces (APIs) for their computer systems so that third party applications can access customer data. PSD2 has spurred innovation across the financial landscape in Europe, fuelling the rise of the so-called super app, which combines insurance, asset management and traditional banking on one platform. This trend was only strengthened by the COVID-19 lockdown, which triggered a massive surge in the use of fintech apps.  In March alone, usage of fintech apps increased 72% in Europe. This explains why Marqeta will be using its recent funding to expand aggressively internationally.

Originally Marqeta set out to build a technology to facilitate payment card issuing while bringing a new level of customization and control to the process. Its technology was built from the ground up with no legacy infrastructure, and so it was able to provide the first, fully-documented, open API platform for payment cards. This was a niche market when Marqeta was founded in 2010, and one that had historically seen little innovation.

Like other API-based infrastructure companies we have discussed in the past (such as Adyen or Twilio and Stripe), Marqeta built an open software platform that third-party/external company engineers could easily plug into and achieve their goals. The rapid changes and innovations in the fintech market among others meant that more and more such companies could use Marqeta’s technology to innovate and get to market quickly. Independent and tremendously scalable, Marqeta has thus become the go-to card issuer for the world’s fastest growing tech companies, from on-demand delivery to neo-banking innovators and disruptors.

Disclaimer

The content of this article has been approved and issued by TOP Fund Advisors SA for background, information and discussion purposes only and does not purport to be full or complete. No information in this document should be construed as providing financial, investment or other professional advice.



Authors: Salman Farmanfarmaian and Richard Rimer