American Express puts Kabbage acquisition to work with card company’s first checking account

American Express, best known for its array of personal and corporate cards, is making a push into territory held by banks and a growing list of fintech players.

The card company is launching its first checking account for small businesses by leaning on technology acquired last year in the acquisition of online lender Kabbage, CNBC has learned.

The product, called Kabbage Checking, is a no-fee digital account that pays 1.1% interest on up to $100,000 in balances. It includes mobile check deposits, a debit card, bill pay and targeted savings features, and access to a network of ATMs and retail locations for cash transactions.

It’s the latest move to shake up the increasingly competitive world of small business banking. For decades, big U.S. lenders were mostly content to offer bare-bones checking accounts and credit cards to small business owners. Entrepreneurs who needed access to more working capital were often out of luck.

That gave rise to online lenders like OnDeck Capital and Kabbage more than a decade ago.  More recently, fintech players like Square, Brex and Intuit have rushed to offer small business checking accounts. And banking giants like JPMorgan Chase have been fighting back by rolling out fintech-inspired services and hardware for merchants.

Regardless of their starting point, many of the competitors are morphing into all-encompassing providers of cash management, transaction and lending services for small businesses. Key to this strategy is the humble checking account, which enables access to deposits, a foothold to offer complementary services and data on money flows.

“The checking account is sort of the financial operating system for a business, it’s one of the first things a business gets” after being created, Kathryn Petralia, co-founder of Kabbage, said last week in an interview. “With the record number of new businesses being created last year, we think it’s important to help them get products that a brand new business wouldn’t be able to get from a traditional institution.”

That’s why AmEx acquired Kabbage in August, reportedly paying as much as $850 million for the start-up. While the New York-based company is the largest issuer of small business cards in the country, it needed a digital storefront for a full suite of products beyond just plastic, executives have acknowledged.

“We have great cards, we’re an industry leader for small business cards,” Anna Marrs, president of global commercial services at AmEx, said last month at a conference. “It’s when you try to go beyond that that we don’t always have the skills in-house, we don’t always have the products on the shelf.”

Competitors, in particular the Silicon Valley firm Brex, have seen surging growth by providing more credit to start-ups than traditional competitors dared and quickly rolling out new products beyond its corporate charge card. Brex, which is ranked No. 6 on the CNBC Disruptor 50 list, more than doubled its valuation this year to $7.4 billion.

Kabbage had been close to completing its checking account around the time the coronavirus pandemic struck in the U.S., according to Petralia. Even though AmEx is itself a bank holding company, the checking account is backed by Green Dot, a partner to technology and fintech firms.

AmEx is betting that its cardholders may be frustrated with the limitations and fees of traditional banks and open to an alternative. But it also has no minimum balance requirement and offers a relatively high interest rate; most small business checking accounts pay virtually no interest, though they often offer cash sign-on bonuses.

Some U.S. business owners may have soured on Kabbage, however. Months before the takeover, Kabbage abruptly halted lending during the pandemic, slashing some customers’ credit lines. The start-up pivoted to administering Paycheck Protection Program loans, but when AmEx bought Kabbage, it excluded the fintech firm’s loan book.

Borrowers who had used Kabbage for the first round of PPP loans had to rely on K Servicing, a new entity, for follow-up loans. That business has garnered less-than-stellar reviews from people desperate for rescue loans.

After AmEx completed the Kabbage acquisition, it began piloting the fintech’s services to its cardholders earlier this year. The card company has begun offering credit lines of $1,000 to $150,000 for small businesses, leaning on Kabbage’s automated underwriting software.

As part of its cash management platform, the company will be able to deliver insights to users including when to pay vendors and borrow money, Petralia said.

“That’s the beauty of having a suite of products that all work together to help customers manage cash flow,” she said. Business owners “are not folks with finance degrees; they’re ordering inventory and making products and dealing with customers. We’re trying to simplify their lives.”