When Henrique Dubugras and Pedro Franceschi joined the YC W17 batch with an idea for a VR startup, they quickly encountered a problem. They had applied for a business credit card to help fund software and other expenses and were denied. Business credit is traditionally underwritten based on the founders’ FICO scores. As international founders with less than a month of credit history, their chances of getting approved were slim to none, despite having $125K in the bank.

It wasn’t just them. They discovered that, while early startup founders had access to high-fidelity payments products like Stripe (YC S09) right from the get-go, getting access to basic banking and credit products was a terrible experience for everyone. Even with $125K from YC and $1–2M in venture funding, a startup’s credit limit is still likely to tap out at $20K from an incumbent creditor—which is not nearly enough to cover software, marketing, and other expenses. Cards are particularly a must have for young companies because large vendors don’t often accept ACH and other forms of alternative payment from early startups. In practice, this leads to founders resorting to using their personal credit cards for SaaS subscriptions or digital marketing, and filing reimbursements regularly.

Stripe also set a great example in how they transformed the internet’s payment infrastructure. Stripe’s launch in 2009 made it possible for startups to easily collect payments online via developer-friendly APIs. Over time, Stripe has expanded to support more business models (e.g., ecommerce, SaaS, marketplaces) and verticals.

While products like Stripe and Square have dramatically pushed business-to-consumer (B2C) transactions to credit cards, business-to-business (B2B) card penetration has remained stubbornly low. The US B2B payments market is three times the size of the B2C market—yet B2B digital payments penetration is 36%, half as much as B2C (67%). B2B credit card adoption is especially low, accounting for only 4% of the market.1

US Payments Market

The extremely low penetration of credit cards in the B2B space is a historical remnant of the industry. Checks remain the most popular payments channel because, in addition to being simple and virtually free to use, they’ve been around the longest. ACH came next in the 1970s and now makes up half the payments volume as checks (mostly in recurring payments such as payroll and billing).

Meanwhile, card adoption is only 4% not for a lack of demand, but because of the significant friction in the accessibility, onboarding, and utility of the product. Most banks and card providers ask for excessive documentation, take 3–5 days to onboard customers, and require a personal guarantee from business founders and owner-operators. Even then, the credit limits they offer are minimal, since they’re being underwritten on the personal credit history of the founder and not the health of the business. And a further obstacle: the walled garden of most enterprise resource planning (ERP) systems makes it difficult for new payment solutions to readily integrate with a company’s accounting software, adding administrative cost to reconciliations and making the total cost of introducing a new payment system incredibly high for small businesses.

To address this massive underappreciated market opportunity (not to mention a personal pain point), Henrique and Pedro pivoted and built Brex. They had the benefit of having previously founded a Stripe-like payments company as teenagers in Brazil. They had scaled that company to $1B+ in annual payments volume, then sold it. Having already developed an understanding of the initial card infrastructure stack needed to build Brex, they were able to move fast and launched their first product within six months.

The initial Brex product was a simple 30-day charge card for startups with credit limits based on cash balance. The value proposition was clear: Founders didn’t have to personally guarantee, it took less than 24 hours to get approved, and businesses could access 10–20x higher credit limits since underwriting was based on cash balance. They further differentiated the product with several intuitive features. Brex gave startup founders a daily view into the month’s cumulative expenses (vs. incumbent offerings which only offered end-of-month reconciliation). They made it 10x easier to file expenses: whenever an employee used their Brex Card to pay for something, they instantly got a text that let them immediately send in the receipt (vs. having to deal with saving receipts and filing them all at the end of the month). Lastly, they designed a rewards program for startups, offering customers things like rewards on SaaS spend and discounts on AWS and Zoom.

Brex’s product-market fit was instantaneous, and the product has spread like wildfire among venture-backed startups. Within five months of launching, Brex grew from 100 to 1,000 customers. In the less than three years since launching, they’ve scaled to over 20,000 customers (including 60% of all YC companies).

Henrique and Pedro’s vision for Brex isn’t just to issue credit cards to startups—it’s to become the financial operating system for growing businesses. We believe that Brex’s experience represents the next great shift in global B2B financial transactions.

The Beginning: Removing friction to unlock demand

Early on, Brex understood that removing the friction of financial products could meaningfully differentiate them from the status quo. Brex’s initial insight was simple: “You should be able to sign up for a credit card and bank account as easily as you can set up an email address—in minutes, all online.” Once they began to onboard customers, Brex found that the demand for seamless finance was even bigger than they had initially imagined.

To provide the modern and seamless service they envisioned, Brex built a risk assessment system that was fundamentally different from traditional credit card underwriting. They removed the paper-based back-and-forth of traditional KYC2 processes and built systems that could collect and verify critical business information (like beneficial ownership) in seconds. They then built their own ledger that used real-time cash, operating, and transaction data to underwrite customers to credit limits with multiple levels of authorization. Incumbent underwriters rely on point-in-time data and must build confidence in customers over long periods of time. Brex’s digital approach enabled them to instantly onboard customers with 10-20x higher credit limits than incumbents were able to offer. These methods have proven to be highly efficient: Brex’s credit losses have been lower than those of Amex and Silicon Valley Bank, even when including the impact of COVID-19.

Demand for frictionless financial services soon spread far beyond venture-backed startups. Every month, more than 10,000 businesses across the country were signing up. But because their underwriting system was built for tech startups, Brex had been turning away more than 80% of those potential customers. In late 2020, Brex decided to retool their system to serve more customer segments.

With the average business in mind, Brex launched a new risk system that could instantly onboard any legitimate business to a bank account and a same-day charge card (a debit card-like product). This change enabled Brex to grow new monthly customers tenfold, and they were able to maintain instant same-day approvals for 80% of those customers. In the first quarter of 2021, Brex onboarded more customers than it did in the entire history of the company and. Today, more than 70% of new customers are traditional small and medium businesses.

Today: Scaling from cards to banking and financial software tools

The next act for Brex was to launch complementary financial and software products beyond credit cards. Last year, they launched a service that transformed the trajectory of their platform: Brex Cash. Brex Cash was imagined as a bank account replacement product that would let Brex serve companies even before they qualify for credit. It was also a way for customers to send checks, ACH, and wire payments to vendors and third parties that didn’t accept credit cards (remember, 96% of B2B payments in the US are non-card).3

But Brex Cash is not just an add-on product. It is a deeply integrated solution that reimagines and streamlines workflows for various forms of payments.

Brex designed Cash to be the center of a company’s financial operations, rather than a traditional bank account used solely for financial services. This meant that the product had to be intuitive and designed for daily use, unlike your typical bank account. Brex removed all fees on ACH and wires, improved payment speed and user flows (Brex’s payment initiation is 40–50x faster than competitors’), and built in utility beyond financial services. For example, they’ve drastically reduced customers’ accounting workloads by integrating Cash into third-party accounting systems. These integrations have made it possible for SMBs like OP2 to save the 20–30 hours a week they previously spent downloading bank statements and doing manual reconciliation.

Today, Brex has more than 10,000 customers ranging from small venture-backed startups and traditional SMBs to large growth-stage businesses using both Brex Cash and the Brex Card. In our view, Cash is the foundational product that is transitioning Brex from a card-issuing company to an all-in-one finance operations platform.

As Brex has scaled, so have their customers. Many of their early startup customers have grown into large organizations whose needs have evolved past simple credit cards. To keep up with customers, Brex has moved quickly to shift from a team-centric product to an enterprise product. They’ve created department- and category-level tracking tools where leadership and finance teams can better understand organizational spend against budgets. Companies can now also use Brex’s virtual cards infrastructure to issue cards to specific organizations and employees rather than dealing with individual reimbursements. This alone translates to hours of time saved for employees and finance teams. Today, large startups like Scale AI (YC S16), Rippling (YC W17), Rappi (YC W16) and Flexport (YC W14), among many others, use Brex as a central tool for managing finances.

The future: All-in-one finance

With more and more companies using Brex Cash, Brex is on its way to becoming a first of its kind all-in-one finance platform. Historically, financial operations software and financial products have existed separately. The incumbent system involves three key “stacks.” The first stack is the payments infrastructure (checks, ACH, and card networks) that processes transactions. The second is the access providers to the underlying infrastructure—institutions like Amex and Chase that manage the storage and movement of funds. Finally there is the value-added services stack, made up of products that handle administrative back-office tasks (such as Intuit, Bill.com, and Concur).

The 3 Stacks of Financial Services

Because of how this system is designed, the average SMB uses at least six different financial services and software providers to manage its business. A typical ecommerce company may use Chase for storing capital, American Express for travel and software spend, Bill.com to manage payables, Expensify to manage employee spend, Quickbooks for accounting, Shopify or Stripe for accepting payments, and a third-party lender for a longer-term working capital financing product. While all these solutions do have the ability to talk to each other, there is no single entity that has a holistic view of the business’ financial operations.

Today's Financial Operating System

Brex is changing the landscape by combining financial products and software into a single platform. The company has spent the past two years building its card processing and banking infrastructure, which in turn will power its software (e.g., Expense Management, Bill Pay). Enabled by its financial infrastructure, Brex is building the “financial operating system” for growing businesses, enabling them to spend and track payments across all mediums.

Brex's Financial Operating System

We are already seeing how integrating the financial stack is enabling greater access to financial resources and only expect these resources to improve as Brex moves closer to a true all-in-one finance platform.

By owning both software and financial infrastructure, Brex is able to:

(1) Leverage customer data to offer better financial products than competitors: When customers make the free Brex Cash account their primary bank account, Brex gains full visibility of their customers’ financial health. Currently, Brex uses this data to predict estimated runway and dynamically sets credit limits that can be up to 10–20x more than what legacy competitors offer. Datrics (YC W21) uses both Brex Cash and Card for this reason. In the future, Brex could identify startups and SMBs that serve “safer” customers (i.e., large enterprises) and leverage repayment data and relationship history to offer bill discounting/invoice factoring and other credit products.

(2) Drive deep value for customers via software: The payment workflow integrations that come with the Spend Management software effectively deliver a product that is not just a system-of-record but also a system-of-engagement for customers. This drives immense value not just through lower banking fees but cost savings and more efficient operations across the board. Back-office administrative teams spend significant hours in manual processes like standardizing invoices, matching invoices to purchase orders, managing billing information for several vendors, payment approvals, and accounts reconciliation/reporting. By integrating the financial stack, Brex can automate these processes, saving companies time and money.

(3) Build unique financial products: Building on its positioning as both a software and financial services provider, Brex can offer financial services products that are not readily available from incumbents. There is no better example of this than Instant Payouts, which launched in Q4 of 2020. An ecommerce merchant can instantly settle funds through the click of a button in their Brex dashboard, instead of waiting two weeks for the revenue to be distributed to their account. Funds are instantly disbursed in exchange for a fee that can be paid with Brex Card points. This is incredibly valuable because it enables ecommerce sellers to smooth out their cash flow and reinvest it in growth regardless of the selling platform. While the customer-facing product is simple, the backend infrastructure is sophisticated, integrating Brex Card, Cash and underwriting stacks.

(4) Lower the cost for customers: As a financial services provider and a software company, Brex is disrupting existing pricing models of point solutions in both layers. By monetizing customers through card interchange fees, Brex is able to price software far lower than a pure SaaS competitor can charge. An SMB with 20 employees may have to pay ~$4,200 per year for Expensify, Bill.com, and Quickbooks. Brex customers can pay a tenth of that in fees and get all of their spend data in a single place. Brex can choose to give even more value back to customers by making any of its products loss leaders to encourage new transactions on the platform. For example, Brex does not charge fees on any bank or wire transfers today, an unconventional practice among incumbents.

(5) Launch customer-centric products faster: By limiting reliance on third parties, Brex can build and launch products faster. In less than two years, the company has been able to quickly expand from a single-product company to a multiproduct company (Card, Cash, Instant Payouts, Bill Pay, and Expense Management) because they own everything from the general ledger to the credit box and can quickly build on their own infrastructure.

Brex timeline

As Brex scales, its data-driven underwriting algorithm will benefit immensely from an expanding customer base that feeds back into the company’s models. Over time, this should yield a lower-delinquency credit book. On the flip side, the diversification of the credit book and seasoning across economic periods should yield cheaper cost of capital over time, which will translate to higher margins for Brex and/or lower pricing for its customers. Brex is also among the first fintech companies (and the first in a B2B use case) that has filed for an industrial loan charter, which will allow Brex Cash to transform into a full-fledged “business bank.” With the ability to lend using Brex Cash customers’ deposits, Brex will be able to provide loans and credit cards at a lower cost of capital.

The financial upsides of an integrated system are significant. The overall infrastructure and ease of use create more capital for both small and growing businesses. Digitizing B2B finances can entirely change the trajectory of a business. OP2 uses both Brex Cash and Card because the combination enables credit limits three times higher than the next competitor, which has allowed the company to meaningfully grow. We see the future of Brex as existing hand-in-hand with the future of growing businesses.

Conclusion: The inevitability of digital B2B payments

In the past decade, we’ve seen the emergence of large players that have reduced friction and enabled digitization of consumer-to-business (C2B) payments by helping both consumers pay digitally (Cash App and PayPal) and helping merchants accept digital payments (Square and Stripe). Meanwhile, B2B payments account for nearly 3x the volume of C2B and the electronic payment penetration is fractional in comparison. The digitization of B2B payments is inevitable in the decades to come.

There is no one way to address this problem, and the market has a spectrum of use cases that need to be addressed. This is also not a zero-sum game; we believe the $25T B2B payments market is large enough to support several companies. Brex is only one of the companies that has revealed the underlying demand and it has only grown more desperate in COVID. In a recent Mastercard study of payment type usage during the pandemic, online card payments saw the greatest increase (+60%) while cash (-34%) and checks (-24%) decreased the most. Legacy players’ archaic infrastructure and high-fee models have created a natural ceiling for how many businesses they can service. Just like consumer payments adoption, we believe that the majority of digital payment adoption will be led by Brex and other modern fintech companies, such as Modern Treasury (YC S18) and Routable (YC S17). We are excited about the next decade of B2B payments and believe many new multibillion-dollar businesses will emerge.

Thank you to the Brex team, Mia Mabanta, and Chloe Gordon for reading multiple drafts of this essay, and to Zain Ali for designing the graphics.

Notes

1. Mastercard, SunTrust – Electronic B2B Payments: The Next Frontier
2. Know-Your-Customer, a standard customer identity verification process
3. Mastercard, SunTrust – Electronic B2B Payments: The Next Frontier