Startups that are just a few months old have to deal with a host of challenges, but losing a key selling point of their product shouldn’t be one of them.
London-based Curve, which offers customers a single pre-paid card that combines their debit and credit cards, has had no such luck. The company, which is backed by high-profile names from the London fintech scene, told users yesterday that it would no longer be able to integrate American Express into its service as advertised, and has offered a full refund to all of its customers to-date.
The troubles of one small startup might not usually be worth looking at in detail, but Curve offers useful lessons about the use of regulatory arbitrage in fintech and the risk of relying on the goodwill of established financial players.
Curve is one of a handful of fintech startups trying to do away with the perceived hassle of carrying multiple cards at once. It says it is targeted at “solopreneurs”, a buzzword that refers to business owners, freelancers and other self-employed people, and offers them an app that helps them track their spending and expenses. A Curve card costs £30, or £75 for a black, upgraded version.
But perhaps its most popular feature — no longer viable, for now at least — is that users were once able to make purchases using their American Express, gaining valuable air miles in the process, with merchants who wouldn’t otherwise accept payments from the US credit card company. For example, one trick enabled by the Curve card is using it to withdraw money from a cash machine via their American Express credit card — normally this wouldn’t earn air miles, but with Curve, it did.
The business launched in February after reportedly raising £2m last year, although chief executive Shachar Bialick, who co-founded the company along with Tom Foster-Carter and Anna Mostyn Williams, says the amount was “a bit” higher.
Its backers include Taavet Hinrikus, who founded Transferwise, the bank bashing remittances company, and Ricky Knox, founder of mobile-only bank Tandem, whose crowdfunding round we covered earlier this week. The Boris Johnson-backed London Co-Investment Fund is also a shareholder, and the company’s chairman is Adrian Kamellard, who formerly ran the UK’s Payments Council.
But while the roster of backers seems impressive, the product itself appears to be an innovation in arbitrage rather than a leap forward in financial technology.
The first arbitrage relates to one of the ways Curve makes money and to European Union rules on card transaction or interchange fees.
Last year, the EU introduced caps on the transaction fees VISA and MasterCard could charge merchants. Just 0.2 per cent could be added to consumer debit card transactions, while a marginally higher 0.3 per cent is the cap for consumer credit card transactions. Commercial cards, used for corporate expenses, were exempt. Why? Well, here’s the argument made by MasterCard [emphasis ours]:
We are supportive of the exclusion of commercial cards from the interchange cap as they are very important to the UK. Commercial Cards are a very different product compared to consumer cards, offering merchants, cardholders, and companies / governments providing them to their employees / civil servants specific and sophisticated services, which come at a higher cost to issuers. Unlike consumer cards, which compete with cash, commercial cards do not replace cash but traditional invoicing, which is a less efficient, less transparent, and more costly form means of payments. Commercial cards are also important in supporting small businesses as a vehicle for flexible short term financing. Capping interchange fees for Commercial cards would make issuers reconsider their issuance.
Curve is a commercial card, not a consumer card, meaning that it is exempt from the cap. So when Curve customers use the card, the company takes a payment from a debit or credit card they have pre-loaded into the app. Those pre-loaded cards may be commercial or consumer cards — if it’s a consumer Visa debit card, for example, Curve is only charged 0.2 per cent. Curve then pays the merchant, but charges them a higher 1 per cent fee, according to Bialick, the company’s chief executive, and pockets the spread, minus any other costs.
The way the startup maintains the credibility of this situation is by claiming to only issue the card to business owners or other people using it for legitimate corporate expenses, rather than personal spending. But it’s not clear that it has watertight checks on this.
For example, anyone buying a Curve card from its website is asked to identify their employment status. If you lie and say you’re a business owner, the transaction completes without any fuss and you receive a confirmation email telling you the card’s on its way. “Congratulations – you’re all signed up to Curve,” the email reads. This happens even if you have previously said you’re an employee and been rejected using the same name, email address and date of birth.
Bialick says the company does checks after this point and monitors spending to ensure that customers are using it for corporate rather than personal spending. But a look at the Curve customers on Twitter talking about the removal of American Express compatibility suggests people are slipping through the net.
One Curve customer, who is not self-employed, told FT Alphaville they regularly used their card for personal spending and had never had any trouble with the company. Another, who asked only to be identified by his first name, Aurelio, told us, “I said I was self employed to get the card (no checks) and [I use it] solely for personal use.”
The second arbitrage is to do with a key reason people like Curve: getting to use their American Express in places where American Express is not accepted. The company touts this benefit in its press releases [emphasis ours]:
Curve combines a person’s credit and debit cards into one single payment card which is accepted everywhere MasterCard® works, with Chip and Pin, magstripe and Contactless technology. By uniting existing cards in a single place, users can access foreign currency rates of the MasterCard wholesale rate plus 1% with no transaction fees, see and label transactions from all accounts in one screen in real-time and pay with American Express in places it isn’t accepted - all whilst continuing to collect their existing reward points. Curve puts users back at the centre of their financial world, without changing their behaviour or bank.
It was able to offer this functionality not because of a direct agreement with American Express, but because of the relationship its banking partner, Germany’s Wirecard, has with the US credit card company, according to Curve co-founder Anna Mostyn Williams.
But it’s not cheap letting your customers use American Express, as many merchants know well. While Visa and Mastercard are covered by the European Union’s cap on transaction fees, it doesn’t apply to American Express cards issued directly by the credit card company. [A couple of readers have since pointed out that in March the Payment Systems Regulator said the cap did also apply to American Express.]
So while Curve charges merchants 1 per cent, Bialick says it was charged almost 3 per cent by American Express. “We lost money every time our users used it,” he says.
The official line from American Express is that it asked Curve to stop processing transactions with its cards because it did not “feel confident” in the customer support services in place, according to a tweet from the company’s customer service account on Twitter.
Bialick says the credit card company had questions about how Curve handles chargebacks, refunds and dispute resolutions. He says Curve had hoped to solve the issues while continuing to process American Express transactions, but “they said let’s stop, figure it out and we’ll come back.”
A spokesperson for American Express said the company is “open to discussions with Curve and working with them in the future, however, we will not authorise American Express transactions on Curve from 31 May 2016.”
When, or if, American Express will authorise Curve transactions again is unclear. In the meantime, Curve has offered all of its customers a refund, which could strain its working capital if too many take up the offer.
Bialick says that “not so many, surprisingly” have asked for their money back so far. He adds that the ultimate purpose of the company is “connecting everyone to one focal point of access” for all things money, including credit and foreign exchange.
“There’s more to the Curve than just the Amex,” he says.