Cardless – The fintech startup behind Celtics, Cleveland Cavaliers and Manchester United credit cards

If you support Celtics, Cleveland Cavaliers, Manchester United or Miami Marlins, you can show your love to the teams with the branded credit cards powered by Cardless. Even if these teams aren’t usually on your TV or device every week but you still want to take advantage of great benefits, check out their cards.

Take the Manchester United card for example (Figure 1). The card offers 10% off Manchester United merchandise on select channels, 5x points on dining every time the club has an official match, 5x on ride sharing and streaming services and 1x on everything else. During the first year, the points are doubled to a mouth-watering rate of 10x on dining, ride sharing & streaming services and 2x on everything else. Said another way, if you use Netflix, Spotify, if you eat out a lot and if you shop at Walmart, this card will give you almost unbeatable rewards during the first year. Reward points can be redeemed for statement credits or Manchester United gift cards at a slightly higher rate.

The card also reimburses users up to $5/month for a Peacock subscription provided that users have at least $500 in spend the month before. To sweeten the deal, Cardless waives all the fees, including annual fee, late fee, foreign transaction fee and overlimit fee. However, the APR is quite high at 29.99%. So, you do not want to revolve your balance with this card.

As mentioned above, these cards offer great benefits that are popular to consumers in all walks of life. If you are looking for a new credit card, you may as well give it a try. From a perspective of somebody who works in the card industry, here are my thoughts.

Cardless is a San-Francisco-based fintech startup that helps brands launch a credit card in “a matter of weeks, instead of months or a year”. Costco credit card is issued by Citi Bank. Cardless offers the same function essentially as Citi in this card-issuing process. Started in 2019, the startup has raised $50 million so far to date.

The partnership with sports teams is a great idea to increase the stickiness. It’s likely that a lot of these clubs’ loyal fans will want to sign up for card to use on match days or whenever they go to a stadium. Some will get a card for the sake of supporting their club or as a memento. Plus, these brands can help Cardless push the marketing side of the equation. One press release or one email may lead to many sign-ups. Hence, Cardless likely won’t need to spend much on acquisition. Traditional issuers spend a lot of money on direct mails. An issuer like Capital One easily sends out 60 million mail pieces a month to prospects. If a mail piece costs only $0.5, we are still talking about $30 million/month in direct mail expense that Cardless doesn’t have to worry about. That’s a significant advantage.

It’s intriguing to me how Cardless will make money. To attract prospects, they decide not to charge fees, leaving their revenue and profit dependent on interests on revolving balance and interchange. The problem is that any reward scheme that is higher than 3x is almost a loss-maker as interchange rates for consumer credit cards are less than 3%. In Cardless’ case, losing out on interchange is almost a given. Therefore, Cardless’ hope of profitability for a card program hinges on customers paying interests. If their portfolio consists of only transactors – the term we use in the industry to describe folks that pay balance dutifully – Cardless will keep subsidizing users with their own money.

For good measure, in addition to operational expenses, Cardless has others to worry about. Partnering with prestigious sport brands means that the startup has to pay these brands a finder’s fee whenever a new card is issued. Plus, the company has to pay their technology partners as well, including the card networks (Visa, Mastercard), their issuer – First Electronic Bank and their card management system provider CoreCard. That’s quite a lot to handle for a company that relies almost entirely on one source of revenue.

Cardless was started in 2019, only two years ago. The challenge for a young credit-card issuing startup like Cardless is that it doesn’t have the historical data to strengthen underwriting and minimize losses. Even the firm admitted it itself: “The incumbent issuers have a major advantage in this area: they can use their mountains of data and gigantic teams of analysts, engineers and scientists to make very educated and precise credit decisions”. Cardless has to find the perfect group of customers who use the card regularly (in order for them to acquire new partners), don’t charge off but don’t pay full balance so that Cardless can have interest income which, as I articulated above, is likely their only revenue source. Unfortunately, those who usually revolve have a low credit score and are more likely to charge off, making this a delicate & difficult challenge to solve. The startup can be better at underwriting by signing up more partners quickly and using the incremental data to feed their algorithms. But if their early model doesn’t predict losses well, they will lose a lot of money in the beginning. I, for one, really love to know how they are handling this issue.

My best guess is that Cardless keeps the lights on with VC money. That’s totally fine. Nonetheless, I don’t think they can keep introducing card programs with rich benefits that are limited in their capability to make money forever. Venture capitalists will push the company to improve profitability or won’t invest further if this model persists long in the future. It’s possible that Cardless may have a plan to pivot to other adjacent products or services in the future.