How Fintech Companies Are Changing Credit and Debit Cards
New startups and fintech mainstays are changing the way we use cards
Chances are you’ve noticed an increase in shiny, well-marketed ads for new credit and debit cards over the past few years. Many of these new cards are actually “fintech” products—i.e., cards that are more tech than bank. The card creators partner with behind-the-scenes banks to offer new features and expanded access to underserved customers, but are they really all they claim to be?
What Are Fintech Cards?
“Fintech” refers to the marriage of traditional financial products like loans, bank accounts, and insurance with new technology—a better cash-back rewards program, or a new way to approve people for credit, for example. In the case of fintech cards, it generally means any new credit or debit card that’s not issued by a traditional bank.
How Fintech Cards Work
It’s important to note that these fintech companies aren’t banks in themselves. Rather, they partner with banks to act as a sort of go-between. So if you use a credit card from Fintech Company A to buy something, for example, that money actually comes from a bank somewhere else, complete with FDIC insurance.
If you have a cash management account with a debit card, it works the same way. When you deposit money with Fintech Company B, it will be deposited into another bank account behind-the-scenes. When you swipe your fintech debit card, the funds come from an FDIC-insured account. The fintech company is just the interface, essentially.
In this way, fintech cards are just dressed-up ways to pay for things from a basic bank account somewhere else.
“In terms of function, there is no material difference from similar cards issued by banks if these are supported by the payment networks (e.g., Visa, Mastercard) that the banks also work with,” said Kausik Rajgopal, senior partner at McKinsey & Company.
Examples of Fintech Cards
Here are some examples of fintech cards you might have seen:
- Aspiration: A debit card that offers up to 10% cash back and plants a tree for every purchase round-up into your savings account.
- Upgrade Card: A hybrid product that combines a credit card and an installment loan.
- Cred.ai: This card (currently in beta) claims that you’ll never owe fees or interest.
- Chime Bank: This cash management account comes with few fees and extra perks like getting your paycheck two days sooner and no overdraft fees up to $100.
- Jasper Card: This cash-back card is available to people who don’t have credit.
Why Tech Companies Are Getting Into the Payments Industry
It’s no secret that the traditional banking industry isn’t exactly working out well for a lot of people. One out of every 10 people in the country don’t have a credit score, for example, and around 7.1 million people in the country don’t have a bank account. Among people who do have a bank account, banks claim about $17 billion in overdraft and NSF fees every year.
“Most smaller fintechs who focus on a card are trying to solve an issue for a particular segment of customers,” said Rajgopal. “For example, helping new-to-banking customers build credit, or providing less expensive financing for purchases."
Since fintech companies act as an extra layer between you and the source of your money for the payment, they can add extra value in that layer. The things they can provide are as endless as the market and the regulations governing them dictate.
How the Fintech Wave Could Change Your Next Payment Card
Here are some of the things that fintech cards are bringing to the table that most traditional credit and debit cards aren’t:
- New ways to assess creditworthiness: By going beyond a credit score when deciding to approve people for a card or not, fintech companies can expand banking products to people who otherwise might not qualify.
- New ways to help build credit: Some companies offer new ways to build credit, so you can still increase your opportunities through these already-established systems.
- Quicker access to paychecks: Some fintech companies can process your paycheck up to two days faster than a traditional bank.
- Better rewards: Credit cards have traditionally been the go-to for good rewards, and now fintech companies are finding ways to beef up the rewards program for these options, too.
Overall, fintech credit cards lag behind the perks and rewards rates of cards from traditional banks. However, fintech banking platforms offer customers fee-free banking no matter how big your balance is or how many transactions you make.
Potential Pitfalls for Consumers
Fintech cards are generally regarded as safe to use, and they are overseen by federal regulatory agencies.
However, it’s important to know that there are some risks with them. Silicon Valley’s “make-it-first, fix-it-later” mentality means that some fintech companies are getting ahead of the regulations designed to protect you. For example, the SEC recently charged fintech Robinhood for deceiving customers about how its business model operates; namely, its revenue sources.
“Some of the new products—often offered by companies that are not actually banks—seem too good to be true and it's hard to figure out what their business model is,” said Lauren Saunders, associate director of the National Consumer Law Center. “The terms may change after they acquire a large customer base.”
Even if the underlying banks are FDIC-insured (and it’s always good to check that there is one backing the tech), slip-ups are possible. This recently happened with the Beam banking app, which promised interest rates as high as 4% APY in an FDIC-insured account. But some customers weren’t able to withdraw their money when they needed it, prompting the FTC to file a lawsuit.
How to Choose a Good Fintech Card
“When shopping for a credit card or bank account, it's important to focus on fundamentals and not to get distracted by flashy come-ons or rewards,” Saunders said.
Make sure any credit or debit cards you’re looking at have these basics, at a bare minimum:
- FDIC insurance
- Low or no fees
- Free access to the ATMs that you use
- Rules that are not too complex to understand
- Good customer ratings, preferably over a longer period of time
If a fintech card checks all those boxes, it might be a good card for you.
- Fintech cards are generally safe.
- There is a potential for risk, especially with newer companies.
- Fintech cards can offer consumer-friendly features that many traditional banks can’t.
- The features offered by fintech cards over time are likely to change and evolve over time.