Y Combinator’s Brex SME banking success – Can UK and EU Fintechs draw inspiration?

In 2016, two Brazilian entrepreneurs Henrique Dubugras and Pedro Franceschi exited their Fintech start up Pagar.me, got an admission into Stanford and headed to Silicon Valley. But once Y Combinator (YC) accepted their application as an augmented reality startup, into their 2017 programme, they dropped out of Stanford to pursue YC.

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The story has further twists when the two entrepreneurs see a Fintech opportunity during their accelerator programme at YC, and pivot (rather restart completely), from an AR startup to an SME focused Fintech startup.

They found that many of their cohorts at YC – who were also startups, struggled to get a corporate credit card even though they had decent funding. Conventional banks weren’t willing to give them credit cards due to their high risk profile. Brex was born.

If I had the opportunity to do a Fintech business (a well funded one), I would no doubt go down the SME banking route. The space has so many opportunities (and risks), which with some out-of-the-box thinking could be hugely beneficial and impactful to all parties involved.

Henrique and Pedro quickly created a model for Brex. They created a credit card for startups; a credit card that didn’t need proof of cash flows (revenues), as many of these startups were still pre-revenue. They didn’t require a security deposit or a credit score. All they needed to evidence was a $100,000 in the firm’s bank account.

Since launch in September 2017, they have onboarded close to 1000 corporate customers from several startups. So the growth is great, but where is the risk management?

The credit limit of the cards are tied to the firm’s bank balance. When a startup applies for the Brex card, they have to provide details of their bank account, and based on the balance Brex decide a credit limit and offer a virtual credit card. The startup then will decide how the credit balance will be further shared across its corporate card holders.

The credit card limit is a dynamic percentage of the firm’s bank balance. This keeps the risks down. Also, the balance on the card has to be paid off every month, else it is suspended.

Brex also offer startup friendly features such as $5000 worth of AWS and discounts on food delivery services for loyalty point holders. They provide a more intuitive and customer friendly expense management process as well.

Thanks to all the basic yet, highly startup centric approach, they have had some serious investor backing. This month they raised $59 Million from top VCs in the valley. Paypal founders Peter Thiel and Max Levchin have taken part in the Series A round.

Brex plan to build their team and increase their marketing budgets to grow their card spending to $300 Million this year and $1.5 Billion by end of next year. An aggressive target indeed, but with the kind of capital thrown at them, they should perhaps be able to do a good job.

So, what inspiration can Fintech’s in EU and UK draw from this story? Its that, they have a bigger opportunity (not in terms of market size), thanks to their supportive ecosystem. Open banking regulations should allow for SME’s to share their bank account details with Fintech firms. This should provide better and more granular data for Fintech’s to provide SME banking services.

I believe, firms in the UK and EU are better placed to exploit banking data that they will now have access to and provide better SME banking services. With the FCA providing sandbox support, they should be able to test their underwriting models to ensure they have all risk management processes and procedures thought through to avoid a bubble.

Despite the efforts of the British Business Bank, there is still a £4.3 Billion funding gap for SMEs that are looking for debt funding in the UK alone. Also, day to day banking features are limited for SMEs due to poor credit scores, lack of sustainable revenues and cash flow track record. These are all barriers a clever credit model could address, and open banking could allow for the data analytics to back it up.


Arunkumar Krishnakumar is a Fintech thought leader and an investor.

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