Brex’s decision to largely exit the SMB market has caught its customers, market observers and even its competitors by surprise. And while the affected customers scramble to move their assets off Brex’s platform, its rivals are taking aim at the fintech and the market it’s leaving behind.
The decacorn’s decision puts a potentially material customer cohort into play, meaning that Brex’s rivals are likely gearing up to try and attract the accounts left adrift.
TechCrunch heard from a number of Brex rivals on the matter, providing us a feel for how the market views the company’s decision. Naturally, as we’re discussing competitors, they had quite a lot to say about their own products.
So to avoid being overly generous to the competing entities, we have bucketed their observations into two areas: notes on the business model and customer-related points. We’ve tried to only share observations that describe the corporate spend market more generally and not why one particular company is better than any other.
Given how competitive the corporate spend world has proved (more here, here and here from TechCrunch), Brex has kicked off an interesting strategic conversation in this well-funded fintech startup niche. Let’s talk about it.
Kicking the beehive
Interchange incomes usually mean low margins, so their ability to power corporate spend companies has been a point of debate for some time. Brex and Ramp started off by offering free services, while Airbase focused more on selling software. Divvy managed a huge exit on the back of just its cut of card spend fees.
Later, Brex rolled out paid software products and Airbase worked to attack the interchange model by remitting its own interchange incomes back to users as cash, more or less.
Following Brex’s decision to change its target customer, Airbase is feeling vindicated in its choice of business model. Its founder and CEO, Thejo Kote, told TechCrunch that Brex’s move “is hopefully the beginning of the end of the crazy VC-fueled delusional business models which assumed you could build a profitable software business on the back of low-margin interchange revenue.”
Those are fighting words, but given how long Airbase has approached the market, we don’t mind sharing the quote.
Kote has two more notes worth our time. First, the Airbase founder said that it is “impossible” to serve small, medium and large businesses as their “needs are so different.”
“Brex has been behaving like a bank and not a fintech company, without investing in the software that companies need from their corporate spend solution.” Oded Zehavi, CEO of Mesh Payments
This echoes TechCrunch’s long-held view that we’ll see more segmentation in corporate spend services with time. You can read this as a Brex-positive comment to a degree, as in Kote’s view, it had to choose a narrower market, and it now has.
(Brex’s CEO feels much the same, telling TechCrunch that his company’s criterion for culling customers was perhaps less than perfect, but that Brex had to “have one.”)
Second, Kote provided a bit more context around the economics of interchange revenue. In a riff, the CEO said that “VCs were happy [in recent years] to pour billions into companies at 100x multiples with their 20% gross margin interchange revenues.”
That’s quite some shade, as 20% gross margin revenue is decidedly lackluster when compared to traditional software incomes. That gross margin number is a useful metric for us to have in mind when we consider the variety of fintech revenue that has found a place inside a host of financial technology startups.
Customers, please
There’s a good amount of schadenfreude evident in the commentary from Brex’s rivals.
Ramp CEO and co-founder Eric Glyman told TechCrunch that Brex’s “ungracious off-boarding” of myriad smaller customers “does not reflect a company that is living up to a commitment to be fully aligned with its customers.”
You know it’s gloves off when you get accused of a lack of alignment with customers. (This is a venture capital joke.)
Oded Zehavi, the co-founder and CEO of Mesh Payments, feels Brex “has been behaving like a bank and not a fintech company, without investing in the software that companies need from their corporate spend solution.”
Kote also chimed in on the idea that Brex doesn’t yet have the tech needed to fully tackle the upper end of the market; though, of course, we are taking all these comments with more than a tablespoon of salt.
Extend CEO Andrew Jamison made the case that “SMBs are not just small retail stores; [they are] a huge segment that includes many startups and other tech or servicing companies,” meaning that Brex is leaving a huge chunk of potential business behind. A market that, clearly, other companies are courting.
So what?
Brex has a history of rapid-fire fundraising and ending up with a resulting valuation it has to tend to. It has also been ahead of the market at times: It grew initially by going after a customer segment that other corporate card solutions mostly overlooked — startups.
Could the company’s latest move simply be it yet again carving a path for itself ahead of its rivals? (As TechCrunch noted earlier today, the company said that it has become “less suited to meet the needs of smaller customers.”)
Maybe. But the conclusion is a bit of a stretch at this juncture. Other corporate spend startups have focused on larger customers and software incomes rather than smaller companies and interchange fees for some time. Don’t forget that Ramp is sticking to its guns, which is evidence that at least some well-funded companies are content to stay put and serve SMBs.
The move by Brex was not made without careful thought, we’d imagine, given that the company would have been able to guess what the market’s reaction would be. So it was made to fit a certain business need.
You can supply your own guess as to why Brex thought now was the right time to shut down such a broad customer base. But in a changing market where capital is suddenly more expensive and fintech valuations are falling sharply, we doubt that this will be the last time a decacorn financial technology company makes a sharp product, or customer, turn.