Executive Summary:
Brex is a financial technology company that primarily offers a corporate credit card to early-stage companies. Furthermore, business owners can also create a bank account (called Brex Cash) and utilize the company’s various expense management tools for their business.
Brex makes money through a monthly account subscription, interchange fees, referral fees from cashback rewards, interest on loans, as well as interest on cash held in its customer accounts.
Founded by two Brazilian entrepreneurs in 2017, the company has been an extreme success, even for Silicon Valley standards. Brex has raised over $1.5 billion in venture capital funding to date.
How Does Brex Work?
Brex is a financial technology company offering a corporate credit card, cash account, as well as various software tools to manage expenses, taxes and so forth.
According to the FED’s Small Business Credit Survey, receiving credit was the second biggest challenges for small businesses in America. Hence, Brex specifically targets early stage technology startups that need quick and reliable access to capital.
Apart from startups, Brex also offers cards to life science, e-commerce or late-stage and enterprise companies. In recent times, the firm moved away from its focus on small businesses and towards larger enterprises.
Credit limits are issued based on a company’s cash flows and not (as typical with many other credit cards) on an individual’s credit history and score.
Brex looks at a firm’s financial backing, sales volume, spending patterns, and many other data points. Additionally, there is no personal liability for the holder of the card.
The Brex Card is a charge card, therefore it must be paid off in full every 30 days. Payments are automatically deducted from a firm’s bank account. Hence, Brex will have to gain access to your corporate bank account, which had been criticized by some of its customers in the past.
Brex comes with a set of additional features that can be accessed through the company’s website or mobile apps (Android or iOS). Examples include:
- Cash management solutions that allows to send and receive money instantly
- Expense management giving an overview about the firm’s spending habits, instant receipt matching and integrations with other accounting tools (e.g. NetSuite, QuickBooks, or Expensify)
- Fraud and theft protection as well as customer support to settle any problems arising
- A financial planning tool called Ply with which users can track KPIs or create different scenarios
Lastly, users can earn bonus rewards for spending money with their card. Reward partners include the likes of Uber, Lyft, American Airlines, Starbucks and many others. The points earned can then be redeemed in exchange for goods and services, such as AWS or Slack discounts.
Brex partners with some of the world’s biggest tech companies including Airbnb, ClassPass, DoorDash, and many others.
A Short History Of Brex
Brex was founded in 2017 by Brazilian entrepreneurs Henrique Dubugras and Pedro Franceschi.
When Dubugras was 12, he became a big fan of the Korean multi-player game Ragnarok. Since his parents did not agree to pay for the game’s premium features, he started programming them himself. He then sold those features as a premium feature to other players. Unfortunately, he was forced to shut the business down due to copyright infringements.
Dubugras then went on to use the cash from the game venture to start an online education company aimed at getting Brazilian students into US colleges. And while he amassed a user base of over 800,000, he was not able to monetize them well enough to sustain the business.
Shortly after calling it quits on the EdTech business, he met his future partner in crime Franceschi. A year prior, Franceschi managed to program Apple’s Siri voice assistant to understand commands in Portuguese (at the time, Siri was only able to handle English).
Eventually, aged 16 and 17, the pair met on Twitter (Dubugras is from São Paulo while Franceschi lived in Rio de Janeiro). Being teenage boys, they were going through what a lot of underaged men do at this delicate time: how to get to know girls.
Dubugras took this idea to a local hackathon and won the first price worth $10,000. Born was AskMeOut, a Tinder-like app where people could match with Facebook friends. Unfortunately, the pair couldn’t figure out how to process payments effectively and again, had to shut the whole thing down.
Nevertheless, failing at these two ventures became a blessing in disguise. Both Dubugras and Franceschi realized how ineffective and inconvenient payments over the internet were and decided to build Pagar.me, Brazil’s answer to US based Stripe.com.
The company became a huge success and within a matter of two years grew to over 150 employees and over $1 billion in processed transactions. They sold the company in September 2016 and moved out to the US to begin their Computer Science studies at Stanford.
Fortunately for the two, their studies didn’t last too long. Six months into the program, they started a virtual reality gaming company called Beyond that got them into prestigious startup accelerator Y Combinator.
Three weeks into the program they realized that virtual reality was not their forte and quickly pivoted to what ended up becoming Brex. With their prior FinTech experience as well as the network of entrepreneurs that they’ve built over the years, they decided to tackle to problem of access to debt and corporate expenses for early stage technology companies.
On the strength of that network, including former PayPal founders Peter Thiel and Max Levchin as well as former Visa CEO Carl Pascarella, the pair was able to raise a $50 million Series B one year after the company’s inception.
Within that year, Brex was able to amass over 1,000 paying users as well reaching $300 million in transaction volume. By 2019, the company grew to a valuation of $2.6 billion, raising hundreds of millions in the process.
Nevertheless, growth halted at the start of 2020. Some of its startup partners, in particular those in the travel space, had been severely hit by the coronavirus pandemic, leading Brex to minimize spending limits on certain accounts.
The company, furthermore, had to let go off 62 people due to restructuring plans. Nevertheless, the company also continued to raise money. In an interview with TechCrunch, Dubugras stated: “The capital is so we can play offensive while everyone else plays defensive.”
And playing offense they did. In June 2020, the company was able to secure FDIC insurance on all of its cash accounts, giving customers the necessary security to store their monetary assets.
Integrations with software providers like SAP or Xero highlighted some greater ambitions. These expense management solutions, which are normally used by larger institutions, became a clear indicator that Brex is slowly planning to expand from its startup clientele towards bigger customers. The company would effectively compete against Amex and Chase who have traditionally dominated the enterprise space.
In February 2021, Brex announced it issued an application with the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions (UDFI) to establish Brex Bank.
Being a bank would allow Brex to create their own loan products in the future. Since the company has a front-row seat into its customer’s spending habits, it can offer those loans tailored specifically to their business needs (and allowing startups to not give up valuable equity in the process).
Bruce Wallace, a former executive at Silicon Valley Bank, would have spearheaded the bank, which is a wholly owned subsidiary of Brex and based in Draper, Utah. In August, though, Brex voluntarily withdrew its application.
In the meantime, the startup also continued to add additional capital to its balance sheet. In April, it raised $425 million in funding. It used portions of that money to purchase Israel-based Weav for $50 million in August.
Throughout 2021, Brex also expanded its focus from startups to now targeting small businesses across all of North America. Its efforts paid off when, in January 2022, Brex managed to raise another $300 million in Series D funding (after having raised $300 million back in October 2021).
The firm used portions of that cash to unveil a new software platform dubbed Empower, which combines products such as expense tracking, spend management, and more.
Just a week after the announcement, Brex disclosed that it just acquired Y Combinator-backed Pry Financials for $90 million. They then integrated the tool to now offer financial planning to its clients.
However, the founder’s youth also became evident from time to time. In June 2022, Henrique Dubugras announced that Brex would stop working together with small-and-medium-sized businesses (SMBs) by mid-August.
Not only were customers angry about the suddenness of the announcement but also its poor communication. For example, Brex would still work together with venture-backed startups, which, in some instances, constitute as SMBs as well.
Franceschi, in a blog post, expressed his disappointment more vividly:
Last week’s announcement was an incredibly disappointing moment for Brex. I signed off on the email that went out, which lacked the transparency our customers deserved. As someone whose dad was a small business owner, the way we communicated this decision weighed heavily on me.
Today, over 1,000 people are employed by Brex which operates multiple offices in the United States and Canada.
How Does Brex Make Money?
Brex makes money through a monthly account subscription, interchange fees, referral fees from cashback rewards, interest on loans, as well as interest on cash held in its customer accounts.
The business model of Brex is predicated on bringing in customers via its corporate credit card and then cross-sell into ancillary services.
In order to make its offering more attractive, Brex provides startups with various tools such as spend tracking, instant revenue payouts, or integrations with other software products.
It can then additionally monetize those customers by not only offering them a corporate credit card but cashback rewards, loans, and more.
Without further ado, let’s take a closer look at each of Brex’s revenue streams in the section below.
Monthly Subscription
In order to be able to use the corporate card, employers will have to pay a monthly subscription fee to access Brex Empower, which combines all of the firm’s products in one platform.
The pricing is only available by contacting sales. Products include Brex’s spend management and bill pay software tools, the ability to set up custom spend policies, and more.
Brex initially started out by charging $5 per month per user. One year after launching (2018), the company already had 1,000 paying users. In April 2021, the company pivoted to the Premium product, which a year later it revamped into Empower.
It can probably be expected that the churn rate on its all-encompassing software solution is fairly low.
After all, many of the companies grow alongside Brex, which means that they base their financial stack around the firm’s products. Uprooting that would, in all likeliness, be extremely costly.
As a result, Brex is also incentivized to continue expanding Empower’s functionality. Brex’s acquisition of Pry, which provides financial planning tools, underlines that strategy.
Interchange Fees
As with every other FinTech, including the likes of Revolut, Monzo, or N26, Brex partners up with a payment processor (in this case Mastercard) to offer a credit card to its customers.
Traditionally, when a customer makes a payment with a credit card, the issuer of that card keeps a percentage of the sales price (called interchange fee). In the case of Brex and Mastercard, this commission is shared between the two parties.
Mastercard’s interchange fees in the United States are normally around 3.15 percent, on top of a fixed fee of $0.10.
Brex is thus incentivized to make spending cash as simple as possible. The generous cashback rewards, which we’ll cover in the next section, further promotes that exact spending behavior.
Cashback
Whenever a customer spends money at one of the company’s Brex partners with, he or she can earn points that can be redeemed later on. Customers can earn up to 7x the amount, depending on where they spend the money.
Since Brex is aimed at startups, the points can consequently be redeemed at companies that create products for these companies. Examples include credits on AWS, Slack, HubSpot, Zoom, Indeed, and many others.
As with any cashback program, Brex will presumably make money on every transaction it facilitates through its partners (via so-called referral fees). This helps them to grow their business and, in return, direct that money back into Brex’ business.
In some instances, companies also make money for promoting rewards. Whether that’s the case with Brex and its partners is not publicly disclosed.
Interest On Loans
In 2021, Brex launched Brex Venture Debt, a financing program for startups and other high-growth ventures.
To kick off the service, Brex has issued a $150 million fund. Through the service it looks to compete with the likes of Bank of American, Silicon Valley Bank, and other financiers.
Brex generates income from this program through interest paid on the loans. Rates are not being publicly disclosed.
Brex possesses one clear advantage, that is it has detailed data on its customer’s spending habits as well as financial wellbeing at large.
As such, it can make more accurate assessments about how likely it is a borrower defaults on a given loan.
Brex Cash
Brex Cash is a business cash management account integrated with the Brex Card. It works just like a traditional bank account in that it allows users to store money and earn interest on the cash in balance. Brex Cash is built in partnership with Boston’s Radius Bank (many other FinTech’s undergo similar procedures to have well-established banks as underwriters, which helps to hedge against any potential risk).
As opposed to traditional banks, Brex won’t serve its clients through physical branches since everything is handled digitally. The cash account directly links to the credit card, replacing the need for users to link to their home bank.
Cash holders will be able to earn interest on the money they store in the account. As of the time of writing, the yield is at 0.1 percent. The money is stored in a low-risk government money market fund and can be accessed whenever needed.
With Brex Cash, any startup, regardless of funding, can create a Brex account to store cash. This removes the previous need to at least have $100,000 stored in the business account.
Brex, just like any normal bank, uses the cash residing on user accounts to lend it out to other institutions, such as said banks.
They then collect interest from these institutions (also called Net Interest Margin). For 2019, according to Statista, net interest margin for all U.S. banks was equal to 3.35 percent.
Brex Funding, Valuation & Revenue
Brex, according to Crunchbase, has raised a total of $1.5 billion across 11 rounds of venture capital funding.
Notable investors include the likes of Y Combinator, DST Global, Kleiner Perkins, Peter Thiel and Max Levchin (co-founders of PayPal), Ribbit Capital, and Barclays Bank (who led another $100 million debt round in April of 2019).
Brex is currently valued at $12.3 billion after it raised $300 million in Series D-2 funding in January 2022.
Being a company in private ownership, Brex is currently not obligated to disclose revenue figures to the public. Co-founder Dubugras, in January 2022, had stated that the company managed to double revenues during the year prior, though.
