June 19, 2022
Reading time: 4 mins
On June 17, Brex announced it would no longer serve small businesses. Instead, it will focus on “technology startups and larger companies.” For small businesses using Brex, that means they must reroute “all the funds in [their] Brex Cash account to an external bank account” or another provider of cash account services. Oh, and they have to do it by August 15th.
This situation is massively inconvenient and disruptive for the tens of thousands of small businesses that trusted Brex to be their financial home. Now, these businesses must find new financial partners.
Furthermore, for Brex, the pullback is a humbling admission that the company could not serve its small business customers - on whose trust and early adoption it attained unicorn status - effectively or sustainably.
Why then is Brex, as TechCrunch puts it, “abandoning the very segment it started out to serve?” At Hansa, we believe that Brex’s decision is a symptom of structural problems in the small business market that hurts small businesses. Namely, basic firmographic and credit information on small businesses in the United States is shockingly bad, expensive, and difficult for companies to leverage effectively. As a result, companies like Brex can’t provide small businesses with the service and innovative products that they deserve.
Consider the consumer market. Companies know a lot about individuals, which allows them to serve targeted ads and flood mailboxes with personalized offers. With loan applications, individuals can trust that financing providers have a relatively holistic and accurate look at their financial history and needs through personal credit reports. In turn, financing providers reward individuals for being trustworthy and honest customers, who, through increasing credit scores, earn better offers over time. While this system has numerous problems, it works well enough that consumers can access the latest innovations on sustainable terms.
For small business owners, none of the above is true. Companies that offer business products and services do not know enough about small businesses to find and market to them. They often don’t know where they are or if they even exist - and a small business' credit history (if it has any at all) is highly unlikely to paint an accurate picture. As a result, companies serving small businesses have inflated marketing costs and are much more susceptible to fraud. All of these factors hurt honest business owners, who are being excluded from access to offerings that may help them run their businesses better.
Products made for small businesses cost more than they should since companies have to recoup the outsized expense to find their customers. Moreover, since companies can’t differentiate reliably between real and fake or trustworthy and untrustworthy businesses, they have to treat all businesses with suspicion and degrade the customer experience to protect themselves from inevitable bad apples.
Some companies deal with this fraud risk by charging more - Brex dealt with it by shutting the whole business down. They could not efficiently determine their customers’ risk levels, and as a result, had to sever relationships with all customers who did not meet the bar of “professional funding.”1 For evidence on the difficulty they had in even applying this single criterion, look no further than this statement from co-CEO Henrique Dubargas: “Did we misclassify any company? Probably.” Could they have taken more precise action by only stopping serving businesses in legal jeopardy or businesses that had recently laid off a high percentage of their staff (more precise risk indicators)? Almost certainly not, which hurts the vast majority of honest, thriving businesses.
Furthermore, Brex was having difficulty finding small business customers at a price where they could turn a profit. Their marketing costs likely outweighed revenues from small business accounts, and rather than start charging more, they made the difficult decision to leave the market. Understandably, Brex did not want to compromise the value of their product (its very premise is its industry leading rewards and lack of fees). Nonetheless, at Hansa, we believe small businesses shouldn’t be punished for how hard it is to find them and think that this compromise is ultimately unnecessary. If businesses could signal to companies like Brex where they are, and what they need, we wouldn’t be here.
At Hansa, we want to tackle this structural problem head-on so that businesses don't have to compromise on the quality of the tools they use, and their partners can serve them better without leaving them in the lurch.
How does it work? If you are a business owner, tell us about your business and let us match you with the right partners. We’ll save your partners on marketing costs and vouch for your existence and trustworthiness to ensure you get the best deal and the best experience.
If you want to help us build our network of businesses and innovative providers, give feedback, or ask any questions please reach out to us at firstname.lastname@example.org. If you’re looking for suggestions on how to replace Brex, we put together a guide here.
1 Why can Brex continue to serve businesses with professional funding? Brex probably thinks professional funding is a sign that a business is real and trustworthy (although examples like these call that thesis into question). Furthermore, these businesses likely spend enough to recoup the marketing dollars Brex spends on them (not to mention they are easier to find and market to as information on them is easier to access and cheaper), and are likely to grow indefinitely.