Credit card companies want you to fall behind and start racking up debt, Zero CEO Bryce Galen tells Business Insider.
That’s how they make their money.
That can, however, be brutal for the consumer, and it’s one reason millennials have drifted toward debit cards.
People spend 12% less simply by putting it on a debit card versus a credit card, Galen says. It makes curbing spending easier. And among 18 to 24 year olds, the difference between debit (73%) and credit (27%) is particularly striking. Part of this is a lack of credit history, but part is preference.
“There’s a behavioural shift in credit cards,” Hans Morris, Nyca Partners managing partner and former president of Visa, explains. Younger people prefer debit.
But while debit cards help you manage your spending, they have a big drawback: a lack of good rewards. That’s what Galen set out to fix with his startup, Zero.
Debit + Credit
Galen’s basic goal with Zero is to create a card that feels like a debit card in terms of control, but gives you credit card rewards.
Zero, which launches in 2017, will link a 1% to 3% cash-back credit card to a checking account, providing you with a unified view of your finances similar to what a debit card gives you. (One note: getting to a higher tier than 1% cash back will require significant yearly spending of over $25,000). Zero will also alert you if your checking account in dwindling.
The goal is to stop you from going over, instead of the other way around.
Galen’s solution to the debit/credit problem proved compelling to Morris, who invested in the company as part of a $2.5 million seed round, and also to over 50,000 people who signed up to its waitlist in a month.
Credit card companies make money in two ways: processing fees and charging interest when you get behind on payments. Zero is trying to cut out the latter, but make up the difference on a lean operation and digital marketing.
The fine print
Because Zero’s card is a credit card, there technically might be circumstances where you could charge a small amount more to your card than you have in your checking account balance. The rules governing bank cards are complicated, and Zero has to walk a fine line to stay on the right side of regulations. It can’t completely duplicate debit card functionality.
But Zero has tried to help you control your spending without breaking the rules.
Galen’s knowledge of those rules was actually one big thing that attracted Morris to the investment, Morris says. “It’s like he has a PhD in bank card regulations,” Morris and his Nyca Partners colleagues said to each other.
That’s a big asset for Zero.
Morris is usually sceptical of startup founders that come in and pitch him innovative innovative financial products. “That’s great, but it’s illegal,” Morris laughs when recounting what he usually has to say. But Galen isn’t naive, according to Morris. He found a system that could work within the regulation.
Galen’s next big test will be in marketing the card to customers. His thesis is that using a $100 referral bonus and the power of social media can reduce, significantly, the cost of marketing.
So far, it seems to be going well. Zero has signed up over 56,000 people on its waitlist to date.