Who needs banks? Stripe wants merchants to be card issuers

Sensing an opportunity in the small-business credit card market, Stripe is setting out to outflank big banks by offering application programming interfaces to enable its clients to issue their own physical and virtual credit cards.

The more Stripe can keep its clients from going to traditional banks, the more money it’s able to generate from its existing base. It’s also a way for Stripe to diversify its business away from competing with an increasingly aggressive PayPal, which has announced it will be spending upward of $3 billion annually on acquisitions over the next few years to process e-commerce payments.

Stripe does not have banking license, so it technically can’t offer credit cards. Instead, it partners with firms that can underwrite its clients. By avoiding the challenges recent fintechs such as Square and SoFi have faced when they applied for banking charters, Stripe can focus on its main business of processing payments.

"It’s a natural progression for them by integrating the needs of an acquirer and issuer for a small business,” said Kevin Morrison, a senior analyst on the retail banking and payments team from Aite Group.

Stripe did not respond to a request for comment. In its issuing portal, Stripe details how physical cards can be customized, printed and shipped to the client while the virtual cards can be used immediately and loaded directly into digital wallets such as Apple Pay. By adding this new capability, Stripe has virtually created a complete cash flow management ecosystem for digitally focused merchants.

The Stripe dashboard allows instant card monitoring for expense tracking and lodging disputes. It further enables card management with abilities to increase a credit line or deactivate a card. There is no longer a need to call a bank help desk since the merchant can do everything itself through the dashboard.

Stripe is also capitalizing on banks' lack of interest in offering small-business loans.

According to the Federal Reserve, origination of small-business loans has barely increased in the last few years and has not returned to pre-recession levels. An entire industry of fintechs has grown to offer loans to this community.

In Stripe’s current ecosystem of financing partners, it lists several businesses that offer small- business loans including Iwoca, Funding Circle, Clearbanc and Cloud Cart Connect. While these businesses do not currently offer credit cards, it is possible that they may seek to do so in the future.

As the economy continues to grow, so will small-business demand for easy access through the form of credit.

“It makes a lot of sense to extend their core processing platform to support a smooth experience for issuing and managing cards,” stated Zilvinas Bareisis, a London-based senior analyst with Celent.

Stripe has also evolved its payments processing capabilities over the last few years such that it now can handle a variety of payments for merchants across the globe, in multiple currencies and on different networks inclusive a one-time payments, recurring billing and subscriptions.

It then moved into handling debit payouts for Lyft when it launched its Express Pay product with Visa and Mastercard in 2017 to pay its drivers. Ashwin Raj, Lyft’s vice president of payments, said at SourceMedia’s 2017 PayThink conference that Express Pay had "become such a significant part of our services that the majority of our drivers are using it.”