I’ve said it before, and I’ll say it again – I never would have expected that spend management would become the hottest space in fintech.
In less than a decade, it has attracted (and kept) some of the most talented and ambitious operators in technology and finance. It has pulled in, by my rough count, north of $4 billion in venture capital funding in the U.S. alone. And it has instilled a genuine sense of fear in the hearts of legacy spend management and corporate card providers.
I never would have expected it.
And yet, if I had more carefully considered what motivates tech startup founders (and their investors), perhaps I would have been less surprised.
Spend management is a massive market. In the U.S., companies spend roughly $12 trillion a year on operational expenses (OpEx). The majority of that is payroll, but a decent chunk is non-payroll, which includes everything from travel and entertainment (T&E) to marketing and software subscriptions.
It’s also a fragmented market, rife with terrible user experiences. The legacy providers in the market are, generally, either providing front-end interfaces to the payment rails that businesses use to pay their vendors (corporate cards, ACH, checks, etc.) or workflow management software to address specific spend management use cases (expense reimbursement, accounts payable, etc.) These systems and products are not easy to integrate, which makes them difficult for employees to navigate (anyone who has ever used Concur is nodding their head right now) and difficult for corporate finance and accounting teams to effectively leverage in pursuit of their mandate (to control spend).
Hence the existence of Ramp, Brex, Airbase, and many many others.
The story of these fintech companies’ appearance over the last 5-10 years and how the market is responding to them (and will respond to them in the future) can be told in a simple three-act structure.
And because I’m a nerd, I’m going to borrow my framing for this story from my favorite trilogy of all time.
A New Hope
The big unlock for modern spend management, as a category, in the late 2010s and early 2020s was the development of modern card issuing infrastructure in the early 2010s.
Early movers like Marqeta and those that came after, like Lithic, Stripe, and Highnote, made it much easier for non-banks to issue credit, debit, and charge cards and to issue those cards in more flexible and configurable ways (virtual cards, single-use cards, etc.).
This was important for spend management providers for two reasons.
The first reason is that, in the context of workflow automation and accounting, cards are data.
Let’s say you’re building software to manage T&E spend. You want to enable finance teams to eliminate out-of-policy spend while, at the same time, creating a seamless and non-combative experience for the employees who are traveling.
Ideally, you’d want your software to be able to dynamically approve or deny transactions based on the transaction type (restaurant vs. retail) and location (is the transaction happening in the same geographic location that the employee is approved to be for their work travel?). You’d also want it to automatically generate an expense report for the employee based on all of the relevant spend for the approved trip, rather than requiring the employee to assemble the details that the system should already know.
That’s what you’d want to build.
The challenge is that the data that you need to power those features (transaction type, time, location, etc.) is locked in the corporate card, issued by some big bank, that the employee is using to make their purchases. That data is only acceptable to you via a downloadable bank statement at the end of the month, or, if you’re lucky, a batch data file at the end of the day.
Neither option is workable for the types of intelligent, automated, real-time experiences that you are trying to enable for your clients’ finance teams and employees.
However, if you have access to a modern card issuing platform, one that makes it easy to issue cards (physical and virtual) and access all of the data that you need to feed your T&E spend management system in real-time via APIs, then you have a viable path forward.
You also have the beginnings of a business model, which brings us to our second reason – cards are revenue.
Obviously, if you work in financial services, you know this. Debit cards generate some transactional revenue. Charge cards and credit cards (which are most common in the spend management space) generate more.
What’s important for our story is that the ability to generate interchange revenue by issuing their own cards gave spend management platforms a lot of flexibility in terms of how they acquired clients and built out their businesses.
You want to give your software away for free and make money on the card transactions? You can do that! You want to funnel that interchange revenue right back into rewards and rebates and aggressive marketing campaigns? You can do that too!
This is how many modern spend management platforms — Ramp and Brex, most notably — built out their products and business models.
The question I’ve been obsessed with is how will the established corporate card providers – American Express, J.P. Morgan, Citi, etc. – respond to the incursions made by these rebels?
This brings us to the second installment in our story.
The Empire Strikes Back
Let’s start with the obvious point – banks that offer corporate cards aren’t happy about all this new competition (which, from their perspective, was fueled by unsustainable, ZIRP-era VC money).
However, the nature and intensity of their dissatisfaction varies, depending on the strategic importance of corporate cards to their business.
For an issuer like American Express, which has a relatively narrow, payments-focused business model, the emergence of modern spend management platforms that A.) issue their own cards, and B.) deliver a compelling enough software product to entice growth-stage, mid-market, and even enterprise companies to switch cards is a direct and very threatening competitive development.
For issuers like J.P. Morgan and Citi, which have a broader suite of corporate financial services, spanning everything from banking to supply chain finance, corporate cards are less of a critical revenue driver and more of a sticky, highly visible add-on product. For these issuers, the emergence of modern spend management platforms is more of an annoyance than a dire threat.
Still, there isn’t a bank that issues corporate cards that isn’t worried, to some degree, about Ramp, Brex, and their smaller peers.
The question for these banks isn’t “Should we do something about these fintech companies?” It’s “What should we do about these fintech companies?”
What’s the right strategy?
Well, it most certainly isn’t to try to build spend management software that can compete directly with these fintech companies. Banks don’t want to play that game, which is smart because they wouldn’t be likely to win it.
Instead, from what I can tell, banks’ strategy for competing with fintech corporate card providers is to compete with the modern issuer-processors that they are built on (or, in the case of Brex, that they’ve built themselves).
These banks are wrapping new API-accessible services around their existing corporate card products in order to enable spend management fintech companies with the same level of configurability, control, and intelligence that Ramp and Brex get by issuing their own cards.
Last year, American Express took a big step in this direction with the release of its Sync platform for virtual card issuing:
American Express has rolled out its Sync Commercial Partner Program to help improve the workflow between technology organizations that serve businesses in the U.S. and American Express.
“American Express Sync will put more B2B capabilities in the hands of FinTechs and ultimately enable their customers to get more value from the platforms they use to run their businesses,” Todd Manning, vice president on the Global Commercial Services team at American Express, said in a press release emailed to PYMNTS.
With Sync, business and corporate customers like SMB-focused platform operator Melio and cloud-based software provider Centime can easily embed virtual cards into their own expense management, procurement, and other business software solutions using American Express APIs, with the added benefit of ongoing support from a dedicated representative.
In a similar vein, J.P. Morgan and Codat announced a partnership last month to unlock companies’ spending and supplier data (which is typically stored in difficult-to-access ERP systems) in order to enable them to convert their suppliers from checks to virtual cards:
By swapping static supplier payment files for secure and persistent API connections, the solution offers more robust data sets and complete analysis to banks, which should ultimately lead to an uptick in spend per connected client through its virtual card offering.
“With the rapidly-growing adoption of virtual cards for B2B payments, we felt the time was right to release a new data product specifically designed to transform supplier enablement and accelerate how the value of payments innovation is realized in the market,” said Codat CEO Peter Lord.
Added Stephen Markwell, head of product strategy and FinTech partnerships for J.P. Morgan’s commercial banking unit: “Thanks to our work with Codat, our clients can easily and digitally deliver critical supplier enablement data to our firm, helping to realize efficiency gains and cost savings sooner as well as across a greater share of their spend.”
These initiatives to make corporate cards more developer-friendly, while relatively new, are already paying dividends. Last year, Citi’s Senior Vice President and Head of Commercial Card APIs shared that the bank had seen an increase in commercial API calls of more than 25,000% year over year:
Of course, none of this happens if there aren’t developers eager to utilize these APIs.
Fortunately for the banks, there are a large number of spend management companies, both legacy providers and new startups, that did not go all in on issuing their own corporate cards. By choosing not to build their business models primarily around interchange revenue, these companies positioned themselves perfectly to ride this wave of new commercial card APIs and developer tools.
Here are four examples:
1.) Clyr – This is the first company I came across in the spend management space that used the lack of its own corporate card as a way to counterposition its service. The pitch to its target clients (small field service businesses) is simple and compelling – use whatever commercial card you want and maximize your rewards.
2.) Airbase – Airbase has, from very early on, been of the opinion that building your product and business around corporate cards is a mistake. From their Series B investment memo:
With the availability of mature card issuing platforms, anybody who can plausibly offer a corporate card will do so. There is a glut of corporate card offerings in the market and this will only continue. We believe that trying to acquire customers on the promise of rewards and size of the line of credit is a race to the bottom. … Our opinion is that corporate cards of the future are primarily workflow-driven software products where the real value is in deeply understanding the entire lifecycle of how businesses spend money on cards and to support that in software workflows.
We issue our own cards today. But, we started with that approach because there was no other way to showcase our view that a corporate card system is a software product. We have no interest in competing in the corporate card wars long term and have built the system to issue either our own cards, or integrate with other card issuers. We think it’s better to focus on the software layer and partner with the incumbent card issuers like the banks with large commercial card portfolios.
3.) Payhawk – A global spend management solution for domestic and international businesses across the U.S., U.K., and Europe, has always issued its own corporate cards, but it recently added the option for clients to link their American Express cards using AmEx’s Sync Platform:
“We are teaming up with American Express to give our customers access to the control, enhanced security, and cash flow management that come with using an American Express virtual Card, alongside the ability to simplify and automate their finance operations with a single global spend management solution for cards, reimbursable expenses and Accounts Payable (AP), natively integrated to their ERP of choice. “ said Hristo Borisov, CEO of Payhawk. “The integration helps us provide an elevated user experience and more value to our customers.”
4.) Navan – As you may know, the travel management giant launched its own corporate card – Liquid – in 2020, which was good timing as the COVID-19 pandemic was just beginning to shut down the global travel industry.
What you may not know is that a year ago, Navan changed tack, building new real-time data integrations with Visa and Mastercard to allow for the compelling travel management + corporate card experience that they originally enabled with Liquid to be replicated with any eligible Visa or Mastercard corporate card:
Navan has launched a card link technology that enables its expense management features on enrolled Mastercard and Visa corporate cards.
The Navan Connect technology lets users of Navan Expense add tools such as smart policy controls and auto-itemization to their current corporate cards. Expenses can be checked against policy, categorized and reconciled as soon as an enrolled corporate card is swiped, according to Navan.
They are now building on this new card-linking infrastructure (which they call Navan Connect) by creating co-branded solutions with banks (Citi) and fintech companies (Rho) while continuing to offer Liquid for companies that are in the market for a new corporate card.
That optionality that Navan is now championing – what it calls Bring Your Own Card or BYOC – will, I think, be the dominant theme of the next era of spend management.
This brings us to the third installment in our story.
The Return of Best-of-Breed
(Editor’s note – sorry I couldn’t stick with the Star Wars titles all the way through the piece. I couldn’t figure out a way to tie the word “Jedi” to the point I wanted to make in my conclusion.)
The key difference between where spend management, as a market, was before the emergence of modern fintech providers, and where it’s going next can be summarized by the difference between the terms “siloed” and “best of breed”.
Back in the dark times, companies were forced to cobble together their own spend management stacks out of the various corporate cards, workflow management tools, expense management systems, and bill payment products that were available. This was a huge pain point for companies’ finance and accounting teams, as Airbase points out in its Series B investment memo:
No finance and accounting team – who are the primary stakeholders in the spend management process – would design a siloed and fragmented system like this. They just don’t think about the lifecycle of spending this way.
The appearance of holistic, corporate card-centric spend management platforms over the last 5-10 years gave companies a compelling alternative, albeit one with some tough tradeoffs (e.g. Is our T&E process bad enough to justify switching over to a new corporate card?)
The promise of banks (and the card networks) investing in APIs and developer tools for corporate cards is that it will empower companies to leverage best-of-breed products in every part of the spend management lifecycle without needing to sacrifice the benefits of a fully integrated solution that they are now becoming accustomed to.
