The Many Parts of a Credit Card

I frequently hear something to the effect of “Wow, building a credit card is hard.”

Yes. Yes, it is.

One thing that often surprises people is all of the required ancillary services and capabilities that make a complete credit card. The minimum viable product of a credit card doesn’t feel very minimum. In addition to being a very complex consumer financial product, cards are highly regulated, and as a result, many features must be built on day one.

Even in contrast to a debit card (deposit account), a credit card is an order of magnitude more complex. In honor of publishing our second edition of our Credit Card Program Management Platform Market Analysis, I’d like to take today’s edition of CardsFTW to dig in a bit more on this topic.

The Basics

If you simplify the product for a credit card down, the user story probably takes one of two forms, depending on the user.

Form A: As a consumer with limited access to capital or cash flow constraints, I want a payment product that allows me to take out short-term loans so that I can acquire a good or service today and pay for it later.

Form B: As a consumer who doesn’t want to carry large amounts of cash or wishes to shop online, I would like a payment card that aggregates my purchases into a single monthly bill and provides additional convenience and protection.

As we break these requirements down, we see a few key items:

1. A payment card operating on a known network that can be authorized and settled for transactions
2. A ledger for storing cleared transactions that can be billed monthly
3. A repayment method, allowing for the user to repay the current balance in whole or in part
4. An interest calculation system to determine the payments due should the user revolve their balance
5. An underwriting system to determine how much credit (access to capital) to provide the user
6. A set of policies and procedures to ensure the program operates compliantly across jurisdictions, covering areas like disclosures, servicing, and disputes

The Next Level

The basics didn’t include a lot of features we would all now think of as basic requirements, such as:

1. A web application for logging in and managing the account
2. A mobile application (iPhone and Android) for managing the account
3. A rewards system
4. An anti-fraud system to protect users from unwanted transactions
5. Cardholder support
6. Payment dispute management 
7. Credit furnishing (reporting payment behavior back to the credit bureau)
8. Integrated offers and discounts (e.g., Amex Offers, BankAmerideals)
9. Mobile wallet cards (e.g., ApplePay)

One could argue that some of these requirements aren’t required for a minimum viable product “MVP” (I might go for #2, a mobile application), but much of the rest is considered table stakes and required by market forces or regulators. You cannot operate a card without fraud protection or dispute management. (OK, you can, but you would get into trouble.)

The Role of Credit Card Program Managers

I had a funny conversation the other day with someone who is not in payments. He asked what I did. I explained, "I help people build payment experiences, like bill pay, debit, and credit cards. " To which he replied, “Doesn’t Visa make cards?”

No, Visa doesn’t. Although Visa's processing network is critical to the global payments ecosystem, it does not issue or operate cards!

In traditional products, a bank issues a card and engages a number of vendors to provide the services we’ve outlined above. If you’re Chase, you might own many of your own systems (such as login or even core processing), while if you’re a small community bank, you might outsource the entire operation to an agent bank, such as Elan Financial Services.

For most modern technology companies providing cards, the credit card program management stack is the alternative construct. A new brand has to decide whether to build the stack from scratch, essentially putting the entire puzzle together themselves, or if they want to work with a program manager, which provides parts of the stack as a service.

We examine several providers in our report, but I will compare two examples today because they represent more extreme ends of the spectrum. (Note: Due to the nature of our work in building cards, we have direct or client-based financial relationships with the parties mentioned below.)

Full-Service Example: Cardless

Cardless, founded in 2019, bills itself as a next-generation answer to a legacy co-brand card provider, such as Synchrony. Cardless’s customers include airlines (e.g., Latam), retail brands (e.g., Alibaba, Simon Malls), and others. These brands tend not to want to operate a card program themselves; they want the card program operated for them, with their brand and loyalty programs.

As a result, Cardless provides almost everything for these programs: a white-label set of applications, capital for lending, underwriting, customer care, fraud management, and more. Cardless has application programming interfaces (APIs), but its primary integration is a white-label hosted experience or software development kit (SDK) that embeds the experience within the client’s brand. 

Cardless itself isn’t a core processor and has built a comprehensive layer on top of other providers to provide a one-stop shop for issuing a card program.

Build Your Own Example: Highnote

Highnote, founded in 2020, is a core processing platform directly connected to major networks like Visa and Mastercard. In addition to core processing, Highnote offers program management services, allowing customers to integrate primarily via API to launch a range of card products, including revolving credit cards.

Highnote can integrate with third-party solutions brought by the customer to round out the full product experience. For example, Highnote doesn’t offer tier-one cardholder support (e.g., the first call); customers must do so. Highnote does offer a dashboard for accessing data and managing program operations. Customers must also define their own underwriting, provide capital, and build cardholder interfaces.

At first glance, you might wonder why anyone would choose a do-it-yourself provider. The answer comes down to strategy and flexibility. A fintech brand choosing to build on Highnote (or a similar platform) can fully customize its interfaces, define unique underwriting, and deeply embed the card experience into the rest of its application.

Bare Metal: Core Processor and More

Outside of program managers, a fintech can choose to build the entire stack themselves. This requires a direct bank deal, a direct processor deal, and integrating each of these services. In the long term, owning your entire stack may provide enhanced margins and flexibility, but it comes at the cost of having to spend more money at each step to build each feature and capability.

Considerations

Deciding which path to pursue is a matter of capital available, timeline to launch goals, and provider availability (you may want to work with Cardless, but they may not have capacity or interest to launch your program).

I am optimistic about the future of credit cards because there is a wide variety in the way to build cards today. Twenty years ago, the only choice was to try to work with a traditional bank, within the constraints of their systems. Today, a fintech or modern brand can select from a number of options.

United Cards Get More Expensive

The big U.S. co-brand news this week is that United Airlines co-brand credit cards, which are issued by Chase, are all getting a big bump in annual fees:

1. The United Explorer card will now cost $150 each year, up from $95 (58%)
2. The United Quest card fee will climb to $350 a year from $250  (40%)
3. The United Club Card will cost $695 a year, up from $525 (28%)

These are huge increases, with the least expensive card seeing the largest bump. In the past few years, I have seen very few successful cards with fees between $99 and $250; it’s been sort of a no-one’s land of too expensive for cheap annual fee cards and not enough to have high-end benefits.

Do you inherently know that Quest is better than Gateway? Why?

Annual fees for cards have been going up a lot over the past few years. I understand inflation affects everything, but it’s not like you get a dozen eggs with these cards.

Some incremental benefits partly justify the new fees. The low-end Explorer card includes $400 in credits, but you’re unlikely to use them. Do a lot of people buy prepaid hotel stays through United Hotels? I think not. Do a lot of people with the low-end card spend $10,000 per year, so they can get another $100 credit at United? Also, probably not.

I did notice an interesting one, a credit of $100 at MileagePlan Partner JSX, which is not part of United. (This credit goes up to $200 on the $695 United Club Card.)

I think the trade-off between the total value vs. total cost of high-end cards is becoming overwhelming for users. I would love to know what the actual engagement is here because it’s clear that it doesn’t cost Chase $675 to provide $675 in benefits. I think people get $695 cards because they want lounge access and don’t want to pay directly. Where will it end? I’m guessing that by the end of the decade, $999 annual fee cards will be surprisingly common.

CardsFTW

CardsFTW, released weekly on Wednesdays, offers insights and analysis on new credit and debit card industry products for consumers and providers. CardsFTW is authored and published by Matthew Goldman and the team at Totavi, a boutique consulting firm specializing in fintech product management & marketing. We bring real operational experience that varies from the earliest days of a startup to high-growth phases and public company leadership. Visit www.totavi.com to learn more.

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*Indicates a company with which Totavi has a financial relationship.