Building trust in a recession
Brex is building the financial operating system for growing companies. We know we need to earn customer trust at all times, but especially in a recession. Here’s how we’re doing it.
We planned for it
Brex has been a company that has always planned for the future, and the future we imagined was always one where Brex was the primary financial relationship for its customers. A big part of that planning was raising capital, in the form of equity and debt, in advance of needs. In fact, every equity raise was completed before the proceeds of previous equity raises were exhausted. Brex completed its first debt borrowing in early 2018 and its first Wall Street warehouse line of credit—which offers funding for its credit card receivables—in early 2019. Brex borrows from both Barclays and Credit Suisse.
The Federal Reserve considers financial institutions to be “well capitalized” if they maintain equity of 6.5% of their risk-based assets and total capital. While Brex is not held to capital ratio standards required by the Federal Reserve since it is not a bank, we internally use this guidance to ensure we maintain capital adequacy. As of March 31, 2020, Brex’s equity to risk-based assets ratio was over 100%, meaning Brex maintains more equity than its asset balance. This is a result of the aforementioned capital planning, and the fact that unlike banks, Brex’s assets are very short-term (our credit card receivables are only 30-60 days in duration and many customers pay their bills many times a month to optimize rewards).
Brex has recently gone through exhaustive operational and financial planning as well as capital modeling to ensure we have the ability to withstand a prolonged stressed economic environment and to continue to serve our customers. Brex is currently forecasting in excess of 24 months until it would need to initiate an additional capital raise, and it maintains healthy access to the capital markets including hundreds of millions of dollars of committed debt capital.
The previous business Pedro and I built was regulated by the Brazilian Central Bank, and we learned the importance of strong financial and compliance operations. Our first two hires were our Chief Financial Officer Michael Tannenbaum and our General Counsel and Head of Compliance Vince Cogan. Together, we have been building a team and business that is cognizant of the financial and regulatory nuances to operate successfully in all macroeconomic environments.
Brex has rebuilt the financial infrastructure behind payment systems money management. Within our first year of operations, we were audited by Big Four accounting firm Ernst and Young and earned approval from Mastercard, in connection with our BIN Sponsor Emigrant Bank, to issue cards on their network. In April 2020 we built the financial capability in-house to directly clear our transactions with Mastercard, a major milestone.
The banking partners that we work with, including Emigrant Bank and Radius Bank, maintain sufficient capital adequacy as of March 31, 2020 per the Federal Reserve standards.
Safely storing money
In times of financial market volatility, customers want to know that their money is safe. Just as Brex as a company has done contingency planning, there is also a special contingency plan for our products. In the event that Brex fails or our partner banks have financial issues, Brex has backup processors, custodians and networks for a failover scenario.
While Brex Card is not directly regulated, it is held to compliance, capital and operating risk standards of our partner bank institutions. Brex Cash is regulated by FINRA and the SEC and we maintain a Brex Cash business continuity plan in accordance with their requirements.
We are adjusting our products rapidly to reflect the environment
At the end of March, Brex introduced an alternative to its Brex Exclusive Rewards program—which focuses on travel and dining—to offer one that offers spend multipliers on both a bundle of collaboration software and food delivery. In doing so, we also announced special deals on remote collaboration tools including Dropbox and Slack. We also deepened our partnership with Amazon Web Services to offer up to $100,000 in AWS credits to eligible customers.
Our early and significant investment in unique card processing and infrastructure technology allowed us to so quickly modify Brex’s rewards program for the current environment.
Small Business Administration loans
As a non-bank financial institution, we knew that Brex would likely not receive direct access to the relief efforts offered by the Small Business Administration via the Paycheck Protection Program / CARES Act. It was critical for us to get access to these efforts for our customers, so even before the CARES Act legislation passed, we formed partnerships with Radius Bank, and Womply.
We were fortunate to offer our Brex Cash and Brex Card customers access to the Federal Relief efforts beginning Thursday April 9. We were able to fill all the application demand from our customers and facilitated millions of dollars of successful applications on behalf of our customers.
In a recessionary environment, lenders of all types reduce their risk exposure, and for Brex this has come in the form of limits. Prior to economic disruption caused by COVID-19, Brex’s products prioritized reducing what we refer to internally as creditworthy global limit hits: these are transaction declines that result when a customer hits their Brex credit limit, but where Brex underwriting models suggest that the customer can afford to make the payment. To reduce creditworthy global limit hits, Brex often kept customer limits high, well in excess of monthly utilization.
However, in the current environment, Brex has to protect its balance sheet and ensure that we’re able to serve customers that are still growing and need spend capacity in this environment. Rather than maintaining large unused balances for many customers, Brex reduced exposure across our portfolio and we’re increasing limits for customers that both have an explicit need for additional capacity and the ability to pay.
In the B2B payments space in which Brex operates, digital wallets like Apple Pay and Google Pay are a less critical feature than in the consumer space, as the majority of Brex customer transaction volume is online procurement. That said, in the current public health environment, contactless payments have heightened demand, so Brex accelerated the launch of Apple Pay and Google Pay support and released these features in early April.
As always, we are offering actionable advice
Like the customers we serve, Brex is also a growing company. Since we first launched our blog in December 2018, we have been sharing actionable advice with our customers from the mundane—like our most popular post, whether or not startups should offer 401(k) plans to employees—to the data-driven, like the average startup cash burn rates.
In response to the current economic climate, we launched a series of webinars and online resources on topics including the current state of capital raising, Small Business Administration programs, leadership in a crisis and contingency planning. For each of these topics, we conducted deep research and made sure to have real answers to the questions facing our customers, such as “Do I qualify for government relief efforts?” and “Will I be able to raise capital in this environment?” We published these slides online and worked with media outlets including Bloomberg, Business Insider, and the San Francisco Business Times to ensure they got the broadest reach possible.
What we can promise for the future
The growing companies that use Brex demand that their financial tools are not only safe, secure, and stable but also that they continue to evolve as the environment changes. They want to partner with brands that help their customers make critical decisions and navigate an increasingly complex macroeconomic backdrop. I am proud to say that is 100% the commitment that Brex will continue to offer our customers.