Celsius is about to disrupt the credit card business model
Celsius will soon be partnering with VISA to issue a Celsius Network credit card (join the waitlist here
). Based on recent comments by Alex Mashinsky in conversation with InvestAnswers
, I am beginning to formulate a business model that Celsius may employ to deliver rewards to Celsians, whether they use the card or not.
In brief, I believe Celsius will use a portion of a cardholder’s cryptocoin and stablecoin assets as collateral to fix a credit limit on their card. Celsius can then generate yield from the designated collateral offsetting costs, nullifying default risk, charging lower interest rates for a carried balance, and allowing a return of a portion of that yield to the cardholder as a reward.
What Mashinsky Said
“We were astonished that VISA agreed to do this program”
Mashinski likened VISA’s transition from settling fiat payments to settling digital payments, to Netflix’s transition from delivering physical media to streaming digital media.
What Celsius gets is “VISA offering to settle, or transact, or do anything both on the digital side and on the fiat side, and in a way that we wanted, that is in the best interest of our customers.”
Mashinsky reminds us that “Most of VISA’s customers are banks.” In this new model, it is the Celsius Network members who are VISA’s customer allowing delivery of unprecedented benefits. “What we are offering here is half of what banks charge you for yield—to take credit on your credit card. So what we're doing, effectively, is trying to create a vehicle—a financial tool—that will allow you to earn as much as you can while using credit, but basically ending up ahead, meaning still being positive, still making money every month.”
“You get a statement from your bank, and after all fees, after all transactions, after everything, the bank says, ‘Hey, you've earned more money than you paid us.’”
“That has never happened in any bank in history, because that's not their job. But that is the experience you're going to have it Celsius.”
The Current Credit Card Business Model
Credit card companies like VISA and MasterCard have been, until recently, fiat currency payment settlement networks. These Card Networks connect Cardholders, Issuing Banks, Merchants, and Acquiring Banks.
Props to WalletBuddy on medium.com for their explainer and the figure below.
The Issuer provides a credit card to the Cardholder. The Cardholder makes a purchase at a Merchant. The purchase is recorded in a Payment Gateway, transmitted to a Processor, which seeks authorization from the Card Network, which in turn forwards the request to the Issuer. Once a transaction is approved by the Issuer, the Card Network forwards the transaction approval to the Acquirer, the Acquirer notifies the Merchant, and you can complete your purchase. This all happens once you swipe your card and wait for those few, sometimes nerve-wracking, seconds. The Acquirer agrees to pay the Merchant after deducting Merchant Discount Fees. The Issuer pays the Acquirer after deducting Interchange Fees. And the Issuer collects the transaction amount from the Cardholder. The Issuer and Acquirer pays the Card Network an access fee.
Let’s follow the money in this business model by reviewing the experience of each of the participants.
- The Cardholder does not incur a charge at PoS. The transaction is ultimately settled by the Acquirer. The Cardholder is charged by the Issuer on a monthly basis for cumulative charges since the last payment period. If the Cardholder clears the card balance when due, no interest charges accrue. However, if the Cardholder fails to clear the balance, interest charges will accrue for the next pay period.
- The Issuer collects a variety of charges from the Cardholder including Annual Fees; Late Payment Fees and Interest; Foreign Transaction Charges; Cash Advance Fees. The Issuer also collects an Interchange Fee from the Card Network, though this is derived from the Merchant Discount Fee.
- The Acquirer collects a portion of the Merchant Discount Fee. The Acquirer will also sell Point of Sale terminals to Merchants. Settlement of a transaction with the Merchant is not immediate, with accumulated transactions settled at regular intervals. In the interval, the Acquirer can generate income from the funds it received from the Issuer, awaiting transfer to the Merchant.
- The Merchant incurs some costs in order to get access to the payment network and support transactions. They purchase the PoS terminal from the Acquirer initially. On an ongoing basis, they surrender around 2% to 3% as the Merchant Discount Fee. They also incur an operating cost for having disposed of inventory without payment until the Acquirer settles the transaction.
- The Card Network collects the remainder of the Merchant Discount Fee for providing the platform facilitating the authorizations and transfers, including cross-border processing.
In this model, the amount of credit extended to the Cardholder by the Issuer depends on the Cardholder’s credit score and income.
A Possible Celsius Credit Card Business Model
Fintech companies like Square and AntPay seek to connect consumers directly to merchants within closed digital transfer ecosystems. Such an approach is antithetical to the Celsius Network’s approach. The Celsius Network is predicated on community ownership of the platform, supporting dozens of cryptocurrencies and stablecoins, generating yield either in-kind or in CEL token, and offering low interest loans against staked holdings as collateral. For Celsius to participate in the credit card space, I presume it will seek a platform that connects its members (Celsians) with as many vendors as possible, at no cost, and possibly even net positive to Celsians.
Scenario 1. Celsius is Issuer and Acquirer
In partnership with VISA as the Card Network, Celsius could function as both the Issuer and Acquirer. A Cardholder’s credit limit is not based on their credit score, but on their holdings in the Network they commit to collateralize the card. VISA generates revenue from the transaction in the usual fashion, by collecting a portion of the Merchant Discount Fee. Celsius can generate yield from the collateral used to support the credit limit. Since payment by the Cardholder and to the Merchant are settled at periodic intervals, Celsius would therefore have access to the full collateral amount from which to generate yield. This arrangement would require Celsius to function as Acquirer and be able to settle cumulative transactions with a Merchant. For this reason, Scenario 1 may be unlikely, despite its appeal in maximizing yield from collateral funds.
Scenario 2. Celsius is Issuer
The likelier scenario is that Celsius relies on its relationship with Cardholders and VISA alone, and does not also try to include Merchants. In this case, Celsius would be required to transmit funds to the Acquirer on approval of the transaction and would no longer have access to these funds. The Celsius Treasury would be depleted by the transmitted amount, no longer available for yield generation. However, Celsius would continue to be able to generate yield from the Cardholder’s collateral during each payment period. In this way, Celsius can generate revenue from the MDF as an Issuer, and from yield like an Acquirer.
Celsius will be able to generate additional revenues from interest on unpaid balances, though I expect a single-digit annualized rate, perhaps 8%, rather than the typical rate of about 20%.
I expect Celsius will offer a cash rewards system with in kind rewards based on the staked collateral / credit limit amounting to 1.5% a year, enhanced if received in CEL. Cash rewards would similarly be an additional 1.5% a year on each transaction.
To reduce currency exchange risk, Celsius may require that collateral be held by Cardholders as one of several approved stablecoins rather than as a cryptocurrency of the Cardholder’s choosing.
Some credit card Issuers offer no fee cards. Many Issuers offer cash or loyalty point rewards on transactions, subsidizing these rewards through fees collected from merchants and interest charges. No credit card Issuer offers rewards on unused credit room.
The model of collateralized credit limits is familiar in the financial industry in such instruments as a line of credit or loans, but novel in the credit card industry. It affords digital currency HODLers access to low-cost credit that is agnostic of income level or traditional credit scores.
Celsius will be the first in the industry to allow Cardholders to—as it puts it—“Earn when you spend. Earn when you don’t.”