Will Brex disrupt your companies corporate cards?
The two-year-old unknown payments start-up valued at $2bn.
Brex, a two-year-old payments start-up, is making waves in the venture capital and finance worlds. For an unknown start-up, Brex already has quite a story to tell.
Founded by Henrique Dubugras and Pedros Franceschi; The 22 year olds started to explore entrepreneurial ventures early in life. Dubugras started his first company at 14 where he developed an online game and, then went onto to develop an ed-tech company.
Dubugras and Franceschi relocated from Brazil to the States to commence their studies at Stanford. Around the same time, they joined a Y-Combinator batch planning to further develop their virtual reality start-up. However, the crew at Y-Combinator re-focussed Dubugras and Franceschi on payments — Recognising the pairs passion, experience and skillset for disruptive payments technologies would likely lead to a strong concept.
The nudge pushed them to develop Brex — a solution to help start-ups overcome significant barriers in acquiring credit for company purchases. The team soon dropped out of Stanford to focus on Brex full-time. Over the course of two years Brex have been the talk of Silicon Valley; Especially after recently closing a series D fundraising round that leaves Brex valued at $2bn. Does this unicorn really have the potential to shape the corporate card industry?
The Business Model
Brex’s core goal is to provide start-ups with easy access to corporate cards. Start-ups face a number of barriers when trying to acquire corporate cards for their businesses. One of the biggest barriers is a personal guarantee, where the company founder must agree that a bank can acquire his or hers personal assets if the company defaults and there is no longer any company assets to acquire.
Brex promises a painless process: no fee’s, no interest and no personal guarantee required.
It almost sounds too good to be true.
Brex’s marketing game is strong. Brex is advertised as the solution that every founder has been looking for. The website insinuates that incumbent banks have been deliberately awkward and risk averse in providing start-ups access to credit. Brex are often seen suggesting that banks have lacked innovative and disruptive thinking to provide out of the box payment solutions. Whilst that might be true, Brex’s website doesn’t exactly outline why it easier for them to provide credit to start-ups over an established bank?
My initial thoughts regarding the question were cynical. Of course endless VC funding and limited scrutiny from regulators makes it a lot easier for Brex to provide credit in comparison to an established firm.
Brex, leverages a charge card concept; A charge card works more like a debit card than a credit card. A founder can put as much cash on the card as the limit allows. At the end of every month the company must clear the amount on the card enabling Brex to minimise the amount of risk on their books. However, at scale will this strategy still be minimal risk? For example, if another financial crisis was to hit and Brex has 500 start-ups on its books. All with around $50k-$100k of debt on the card for the month and the companies suddenly start to default, Brex could be in a compromised position.
Brex forsees this issue and requires that it is linked to the start-up’s bank account. This means Brex can monitor the ebb’s and flow’s of a start up’s financial situation — automatically adjusting the cards credit limits based on the companies finances, helping to minimise Brex’s risk exposure. An innovative feature though easy to replicate; This replicable feature provides an explanation to why growth is so essential for Brex’s business model and their aggressive pursuit of VC funding.
Fintech start-ups typically face less scrutiny than a global financial services company. Brex is no exception to this rule. Banks need to adhere to regulations like KYC (Know-Your-Customer) and credit checks. These processes can be time-consuming and documentation heavy for global banking institutions especially when considering providing credit to a high risk category such as start-ups. Whereas Brex can promise start-ups a seamless sign up process with minimal checks.
However, this doesn’t mean that any start-up can sign up to Brex. In the FAQ section of their website, it does state that they will analyse a start-up’s bank account before providing them with corporate cards. The rumour online is that start-ups must have at least $50,000 in their account. Although as Brex grows we could see the company offering a range of corporate card packages to the various stages of start up growth. For example, a low credit limit option for a company just starting out.
I suspect Brex will not be free from regulation for long. I believe as the company grows especially into new markets, Brex will need to scrutinise the sources of funds in the bank accounts. There is already concerns about Saudi money in the VC market and the wider impact in Western society. The company will need to monitor whether companies are leveraging high-risk loans to prop up their bank balance. Thus Brex will not be able to maintain a basic bank account check for long. The question is whether Brex’s technology team will be able to implement innovative regulatory solutions that will continue to make the sign up process as seamless as possible.
Revenue Streams
The biggest question I have surrounding Brex is how the company will make a profit ? Brex is not currently taking transaction or sign up fees from customers nor is Brex providing loans and making a profit from the interest. Therefore if Brex is not leveraging typical revenue routes that most card companies use how are they making money?
Considering the number of high profile VCs willing to invest in Brex there must be a clear path to profitability. Though some may argue that Brex is caught in a wider VC funding bubble ( see my other article here ).
Brex seems to be following the Uber/Lyft model hoping to achieve wide-spread growth and dominance before profitability. Once Brex is a dominant player, they will likely to switch to charging fees or offering loans.
Looking at Brex’s careers page, they are incredibly focused on expanding their customer experience team. This is key in analysing Brex potential revenue streams. Brex currently charges $5 per month per additional card on top of the first five free cards. If Brex can successfully provide optimum customer experience to each customer then they will be able to minimise their churn rate. As Brex grows, so will the start-ups. The larger the start-up, the larger the income for Brex. Successfully creating customer loyalty is key to Brex’s business model.
Of course incumbents could potentially challenge Brex. A company like Amex could replicate Brex’s business model offering corporate cards for free then transferring start-ups to a standard corporate card plan after achieving growth. However, I think we are more likely to see a “Brex-It” in the form of an acquisition from an incumbent like Capital One or American Express over incumbents implementing copycat solutions. Brex offers incumbents access to customer loyalty and their greenfield tech solutions. Incumbents offer Brex access to capital and strong regulatory experience. An acquisition could be a match made in heaven.
The Weird & Wonderful
Brex has recently branched into e-commerce cards and reward schemes. I suspect branching into e-commerce is so Brex can continue to secure dominance in the payments space — recognising another gap in the market. The rewards scheme on the other hand seems to be an additional revenue stream for Brex as well as a form of rewarding customer loyalty. If Brex can guarantee companies enough business through preferred partners then I suspect companies will pay for this privilege. A preferred partnership offers Brex another diversification option in revenue streams. Both concepts provide Brex with great opportunities. However, one wonders how much this 2 year old start-up is able to manage.
The most peculiar addition to Brex’s business model is the acquisition of a meeting space in San Francisco for exclusive use of their card owners. The space is supposed feel cosier than a WeWork but offers more privacy than a coffee shop. The founders reassure the press that the space is not a private members club. However, it does sound a bit Billy MacFarland-esque. I suspect Brex is actually trying to solve a problem that they themselves have faced and I suppose you could call it again another form of diversification. Though, one has to wonder if the company is raising too much money when they can afford real estate developments that aren’t directly essential to their core business model?
The Future of Brex
Brex is no doubt disrupting the payments industry with a fresh perspective to corporate cards — innovatively tackling a problem that many banking institutions have disregarded for far too long.
Brex will face barriers in the pursuit of growth — regulation, competition and capital to a name a few. Information on the companies profits, customers and churn rates are all held tightly under lock and key, accessible to only a few insiders. It will be interesting to observe Brex as more details come to light.
One thing is for certain we may be hearing about “brex-iting” in a more positive sense.