SAN FRANCISCO–A new fintech that had more than 160,000 people on its waiting list has officially launched and now has a new challenge–it has to deliver. But whether it succeeds or not, what the company offers credit unions is fresh insights into what type of offerings appeal to younger consumers.
That company, Zero Financial, has gone live with three primary features:
- A suite of credit cards called “Zerocard” with very attractive cash-back rewards offer of up to 3% (but there’s a catch to earn that amount)
- An attractive app that tells users exactly how much money they have and even keeps them from spending any more
- A checking account called Zero Checking aimed at helping users to seamlessly pay off that credit card with no late fees or interest–ever. You can get a generous cash-back reward — up to 3%, a better overall offer than almost any credit card. All that, in one package.
“Zero is the first modern banking experience to combine the simplicity of a debit card with the rewards of a credit card” and a checking account “with zero of the most annoying fees of typical bank accounts,” the company said in launching the service.
Launch of the service had been delayed for two years, but it is now rolling out the offering to the 160,000 people who were on its waiting list, as well as anyone else interested. Whether it meets the expectations of all those who had been waiting for it will now be up to the market. As the New York Times noted in its analysis, “There are about a thousand reasons both to root for Zero and to be intensely skeptical.”
The company’s target market is the two-thirds of young adults who do not currently have a credit card.
How Solution Works
If the solution works as it’s supposed to, the consumer downloads the Zero app, passes a credit check and is approved for the card. From that point on, Zero is supposed to fix everything “that’s annoying about monitoring” spending.
The issue for many consumers is they carry a number of cards, often due to the various rewards programs that appeal to them. Each of those cards has a different due date for payments even if they are drawn from the same checking account, Zero Financial noted.
Where Zero is seeking to resolve the “friction” so often referenced at credit union meetings is through a partnership with two companies— WebBank, which is responsible for the credit card piece, and Evolve Bank & Trust, which holds the checking account.
Zero then seeks to weave together those two accounts in its app, which presents to the user a “current position” that reflects what the consumer has in his/her Zero checking account minus the purchases made with the Zero credit card.
“It’s a sort of imaginary balance — Zero doesn’t really pay off your credit card until the bill is due, on the normal monthly schedule, and it does that invisibly so as not to mess up the ‘current position’ mirage,” noted the Times in its review of the app.
Zero cuts off the consumer if they attempt to make a purchase that would put that current position below zero. “We do that to encourage fiscal responsibility,” Bryce Galen, the company’s co-founder and chief executive, told the New York Times. “Typical banks want people to hold credit-card balances.”
Why might the consumer find that appealing? Because of the other half of its offering, which is the generous cash rewards, according to the company.
“Zero sounds like a glorified debit card, but debit card purchases go over financial networks that yield lower fees from the merchants,” reported the Times. “By sending purchases over the credit card networks instead, higher fees come to Zero. And it can use those fees to give customers higher rewards — up to 3% cash bank — without an annual fee or counting your spending only in particular categories.”
The Asterisk
But the Zero cash-back offer comes with a big caveat for many consumers: to earn the 3% a consumer must spend more than $100,000 per year on the card (consumers who do so then automatically earn the 3% in a subsequent year), or the consumer must refer four new people each year, but only if they set up direct deposit and auto-deposit their paychecks into a Zero account at least two times and make two purchases with the card.
For those who don’t spend $100,000 in a year, all users earn 1% cash back on the Zerocard Quartz, while those who spend $25,000 or refer one person per year get 1.5% cash back on Zerocard Graphite, while those who spend $50,000 or refer two people earn 2% cash back on Zerocard Magnesium, according to its website.
“Zero’s business model is insulated somewhat by the fact that the vast majority of its users will almost certainly not earn 3% cash back,” noted the New York Times, adding that getting four referrals to move their own financial accounts in any one year is also a huge challenge.
The Zero app also lacks some other features consumers have shown they like: the ability to open a joint account, and the ability to remotely deposit checks using a mobile phone’s camera.
What CUs Will Watch
Will big banks or credit unions respond and mimic Zero’s systems? The New York Times quoted Ron Shevlin, director of research at Cornerstone Advisors as noting those financial institutions would have to start running billions of purchases that used to go over cheaper debit-card networks on the pricier credit-card networks instead. “Merchants would revolt,” said Shevlin.
Still, the cards’ appeal to younger consumers who primarily use debit cards but want the cash-back available on credit cards will be a market offering credit unions will want to watch.
“Debit cards are great because of the balance oversight they provide, but due to a complex set of regulations, banks are typically unable to provide any meaningful rewards associated with debit card spending,” said Zero Financial. “With credit cards, the negatives associated with likeliness to overspend and potential interest charges often outpace the benefits of any potential rewards you may get. Zero solves this by allowing you to earn credit card rewards while also providing the balance oversight and simplicity that is so great with debit cards.”