As more consumers have adopted mobile wallets and point rewards have become easier to earn and spend, it's become more difficult to create a card rewards program that stands out in a crowded market.
But one fintech targeting young consumers interested in microinvesting — or buying small amounts of stock — has come up with a novel approach. A new feature from Stash lets users accumulate free stock in the companies where they spend money using a Stash-branded debit card.
“When designing this product, we asked: How do we reward behavior as you’re banking with us and tie it back to investing?” said Brandon Krieg, Stash's CEO.
The result is that if you eat at Chipotle, or shop at Apple, those companies can end up in your investment portfolio.
This stock-back reward may not appeal to everyone, but it doesn't necessarily need to be broadly appealing to be effective, observers said.
“This isn’t designed to catch most people; it’s designed to catch people who like investing in different stocks,” said Ramon DeGennaro, the Haslam College of Business Professor in Banking and Finance at the University of Tennessee and a visiting scholar with the Mercatus Center at George Mason University. “If 99% of people think this is stupid and 1% of people think it’s a first, they have 1% of the market and that’s sustainable. These companies don’t need a majority of the votes; they need enough customers to make money.”
Given that everyone from retail stores to Apple is primarily focusing on credit cards, the field has become very competitive. Debit cards, however, have not seen as much innovation.
Krieg said he wanted Stash's offer to be easy to understand and automated, in contrast to other debit cards rewards he has seen that require too much effort to activate.
"It became quickly apparent to us that existing debit card programs, in comparison to credit cards, offer very little value to the customer, whether because of monthly fees, high minimums to maintain or a user experience where clients have to activate certain offers prior to actually spending at the respective retailers," Krieg said.
Qualifying purchases on the Stash debit card earn between 0.125% and 5% of the purchase total.
Spending with Netflix and Spotify earns 5% back, and with Starbucks and Dunkin', 2% back. All other swipes will get the user 12.5 basis points back or 25 basis points if the customer has direct deposit turned on.
So for example, with the 5% back for Netflix, if someone charged their subscription on the Stash debit card, that person would get $0.55 in fractional shares for their $10.99 purchase.
Users can choose to take the fractional shares in the publicly traded stock of a company at which that user has made a purchase or, alternatively, in a Stash-approved exchange-traded fund. All of Stash's services are incorporated into a single advisory fee, which is $1 a month for investment accounts below $5,000 and $2 a month for retirement accounts below $5,000.
Stash’s banking products are powered by Green Dot’s banking-as-a-service platform. This includes a debit account with no overdraft or monthly maintenance fees, access to a network of free ATMs nationwide, and a direct deposit feature that allows customers to get paid two days in advance.
Other investing apps also have expanded into banking products lately, including Acorns, which debuted its Spend card last year. Acorns also offers Acorns Found Money, launched in 2016, which offers a similar rewards program where users get free stock from selected companies if they swipe with their Acorns card.
Stash is offering the feature at a time when American households are using debit cards much less than credit cards. Between 2013 and 2019, the number of American households using debit cards decreased by more than 17%, from 88.2 million to 72.5 million, according to Value Penguin. The number of households using credit cards increased by more than 12%, to 96.8 million, during the same period.
The advent of mobile payments and Venmo is partly to blame for the dip, said Chris Moon, senior research analyst at Value Penguin. Another factor is the rapid decline of debit card rewards after the passage of the Durbin amendment, which capped the interchange fees banks could charge on transactions.
Stash’s program stands out as a rare benefit in comparison to the proliferation of credit card rewards. According to a Magnify Money
Unique banking products from fintech apps are generally harmless to banks, said Lex Sokolin, global director of fintech strategy at Autonomous Research. While the stock-back feature benefits Stash users, it’s doubtful that it will be a heavy influence on customer acquisition, which is largely driven through ad dollars, Sokolin said.
Even so, having a debit card with a unique reward gives Stash a tool to pitch itself. While it may not get a bank customer to switch to Stash, it likely would appeal to new customers who are in the market for a microinvesting app and are comparing features at several different apps.
The rewards pitch also will encourage Stash users not only to open a debit account with the app, but also to put money into that debit account.
“For Stash, this reward program helps generate revenue across all three of its revenue streams: interchange from debit transactions, management fee on total assets under management, and interest on deposits,” said Max Abramsky, associate analyst at CB Insights. “By automatically adding accrued rewards to a customer’s investment account, Stash can incrementally grow its total assets under management and therefore the revenue generated from its management fee.”
It’s likely that investment apps — more so than traditional banks or wealth managers — will copy a stock-back reward on a debit card, Sokolin said.
Fintech startups focused on microinvesting have to expand into banking products because they need to be able to attract enough customers and generate enough revenue to stop burning through their venture capital and be sustainable as a business, he said.
“The ones that are venture capital-financed had to be unbundled to get the customer base,” Sokolin said. “Now that they have that, they don’t have enough money, they need to generate more money. Nothing about offering a bank account or rewards or a higher interest rate is innovative. They just happened to be delivered through a mobile-first interface in the language people understand.”
