How Kabbage is helping American Express connect with small merchants – American Banker

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The combination of American Express and its fintech subsidiary Kabbage is starting to bear fruit at an opportune time, as credit card companies increasingly expand their range of products to boost revenue.
Amex recently launched a small business checking account through Kabbage, which also offers lines of credit of between $1,000 and $150,000 for small businesses. Kabbage Checking is the first of what’s expected to be several products from Amex that are designed to help small businesses manage cash flow.
The subsidiary, which Amex bought in August 2020 to make use of Kabbage’s data technology for faster lending, allows Amex to compete with Mastercard and Visa, which are adding nonpayment services to expand merchant relationships; and firms like PayPal and Square, which offer credit to small businesses along with payment processing.
“As you saw with Square’s Afterpay deal and PayPal being a big buy now/pay later firm, all of these fintechs are doing payments, lending, and point of sale tech,” said Ian Benton, a senior analyst at Javelin Strategy & Research. “Banks and traditional financial services firms will struggle if they are only seen as being siloed in one area.”
Most immediately, there is a need in the market for better small business checking, says Kathryn Petralia, president of the Atlanta-based Kabbage, and a co-founder along with Rob Frohwein.
“If you were to ask two and a half years ago I probably wouldn’t have been interested in small business checking,” said Petralia. “But we realized the businesses had checking accounts with their banks but couldn’t get a small business loan, so there was an opportunity there.”
Before its sale to American Express, more than 80% of Kabbage’s customers had relationships with banks, but they had difficulty getting a loan, Petralia said.
She said Kabbage’s platform of cash-flow products has been brought into Amex’s “beyond the card” strategy, which seeks to position the company as a partner to small businesses. “The smallest of small businesses are often overlooked and underserved by traditional financial institutions,” she said.
Kabbage accumulates information on accounting, payments and bank accounts to speed lending decisions for small businesses. Amex hopes that speed will outflank bank loans and compete with fintechs that make small-business loans based on future payment flows. Kabbage also offers automated bill payments, budgeting and free access to more than 19,000 ATMs.
The checking account is not only necessary for small business — it’s the operating system for a small business, Petralia said. “Everything they do is tied into that. So businesses should be able to access their cards, or a loan or their account, and it should all compliment each other.”
As a subsidiary, Kabbage has become part of Amex’s increased focus on small businesses as the pandemic reduces the travel-related payments that are core to Amex revenue. Kabbage’s original business was merchant credit, and it later added payment processing to round out a business model similar to Square and PayPal.
Petralia’s career path includes work with earlier startups, such as the data compression company Alica and the e-commerce platform Specialty Shops. She also fo-founded Worthknowing.com in 1999, a business with a model similar to Credit Karma’s. “When you’re a small startup you’re always in trouble and are working against the odds,” Petralia said. “Small businesses have value to the economy, not just in the U.S. but everywhere. It’s just hard for them to get financial services.”
That’s not for a lack of trying from the financial services industry. Payoneer earlier in 2021 partnered with Mastercard to launch a digital card that allows small businesses to invest earnings back into their business through features such as helping Payoneer’s small businesses pay for advertising. Visa in 2020 started a partnership with 9Spokes, a New Zealand data management company, to provide more data analytics to Visa’s issuer network to speed lending to small businesses.
These launches support efforts at Visa, Mastercard and Amex to find new revenue streams as interchange fees become less reliable as a source of fee income and fintechs offer discount payment and lending services to woo small businesses. For a firm such as Kabbage, Amex offers access to a wide merchant network and a recognizable brand.
“A lot of potential customers will have no idea what Kabbage is. But seeing the Amex name tied to it will give it legitimacy,” said Gilles Ubaghs, a senior analyst at Aite-Novarica. While fintechs often offer a best in class solution in a specific category, many businesses do not want to work directly with fintechs, he said.
The card networks have been pretty explicit in their strategy of partnering with fintechs through incubators, funding rounds, open APIs, through to a growing number of acquisitions, and there is no sign of this stopping anytime soon, Ubaghs said. He said these various partnerships give the networks access to new technologies and a variety of routes to go to market.
“All the networks subsequently also have pretty deep war chests these days,” he said, “so some early-stage investments and partnerships have the potential to pay off in serious ways.”
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