The 2013 hack of its customer service database was an $18 million debacle for Target and a major nuisance to the 41 million customers affected. For the founders of credit card startup Final, the Target data breach was something more than that: the inspiration for a new business.
The young men were on vacation in Europe, bouncing from hostel to hostel. When their credit cards stopped working, they had to move money around, as well as borrow from friends to make ends meet.
The bank was going to ship them new cards -- but to their addresses in the states. Trying to deal with phone-only customer service across wildly different time zones was a headache. Now-COO Andrew Dietrich found out that he was about to lose a chunk of his possessions at auction, because his recurring payment to the storage facility didn't go through.
The frustrating experience made the Final founders realize that inaccessible payments impact consumers as much as merchants. They wanted to bridge the gap and do it safely. "You're really giving the key to your account away with every purchase," Dietrich said, since all that's required to initiate a credit card transaction are the number and the expiration date.
The company born of that experience came out of beta on Tuesday. Now anyone can apply for an account at Final. However, users won't be accepted unless they have sufficiently good credit. If you do, Final acts like a typical credit card system -- it protects you from fraud. But not in the same way that any old credit card does. Final's security features far exceed the status quo.
The company's core value proposition is that it can act as a password manager for your credit card. Along with receiving a physical card for IRL payments, users can generate credit card numbers on demand. You're able to create a new one for each purchase, or assign unique credit card numbers to every retailer. Users can specify how much money is allowed to flow through a given credit card.
Final's system means that after a data breach you can simply switch off the credit card number associated with the hacked retailer. You needn't worry about having to change the rest of your accounts.
As privacy breaches are becoming more and more common, consumers aren't protected by standard credit cards. Of course, Final isn't the only option for security-minded consumers who want to protect their financial information. Existing startup Privacy.com performs a similar function. But it's not exactly the same.
Dietrich explained in an email, "At a conceptual level, [Final and Privacy.com] both provide a similar benefit -- the ability to generate new card numbers for payment and restrict how they are used." He added, "In terms of a financial product and company level, we are very different" from various precursors. He continued to compare the two companies' business models:
Interestingly enough, we looked at starting our business with Privacy's concept -- a prepaid card layer. We were even in the process of building and launching it as a beta in [Y Combinator]. We kept coming back to figuring out how that product converted into the credit card product we wanted to build, and how we could build a large and successful business from a prepaid payment layer. We couldn't figure it out. There are very few large successful prepaid card companies out there; there are many large successful credit card companies.
Prepaid generally makes money on interchange + fees, and oftentimes mostly fees. Privacy charges $0 in fees, so they may have a tough road ahead, particularly when their customers only use them sometimes for certain purchases -- the lifetime value of any single customer is pretty low.
Credit cards make money on interchange + fees + interest. The interchange rates are higher, they provide rewards per purchase because they can fund them, and are the primary spending vehicle for prime and super prime consumers.
We have also built a credit card product + operations + processing system that can offer white label platform services to banks and brands for any type of credit card product they wish to launch. [Think of Costco's arrangement with Amex.]
Privacy uses another prepaid processor provider, and there are many options and it is very difficult to command any type of premium as a prepaid card processor (this is what Marqeta is trying to do, and Privacy does not have the technology, team, product to move into B2B).
Of course, Final's primary competition will be traditional credit card companies and the banks they partner with. Dietrich thinks that Final has another advantage because it was built from the ground up to serve digital natives. The majority of the company's customer service interactions go through email, for example, and the mobile app is one of the service's primary interfaces.
Final is also focused on affluent consumers with good credit. It's not open to everyone -- although Final did just drop its yearly membership fee -- and the service is akin to a higher-end credit card like Chase Sapphire. It remains to be seen whether convenience will be enough of perk to entice wealthy Millennials.