As fintech Brex drops small-business clients, its competitors are ready to scoop up those customers.

Tens of thousands of Brex’s customers have been informed the company will no longer serve them, a Brex spokesperson confirmed. The corporate spending-management startup has said it will stop catering to traditional small-business clients so it can focus on venture-backed startups, calling it a “difficult decision” in a website post.

Small-business needs “are very different from our core customer base of technology startups and larger companies,” the company said in the post. Brex management doesn’t feel it “can adequately serve [small businesses] moving forward.”

Those small-business customers have until mid-August to shift their money to another platform or bank account, Brex told clients. After a June 17 tweet calling the decision “painful,” Brex co-founder and co-CEO Pedro Franceschi also offered a mea culpa in a Thursday web post. In it, he lamented the way the initial announcement was made, saying the company “did a poor job explaining this decision.”

Franceschi also offered clarity around Brex’s adjusted customer criteria. “We didn’t clearly communicate who qualifies as a Brex customer moving forward, which created confusion about which companies Brex would still serve,” Franceschi wrote.

In that post, the company said it will continue to serve businesses that have received an equity investment, generate more than $1 million in annual revenue, have more than 50 employees, have more than $500,000 in cash or are “tech startups who are on a path to meeting the criteria above, and are referred by an existing customer or partner.”

A Brex spokesperson didn’t respond to requests for comment beyond directing attention to Franceschi’s post.

Gilles Ubaghs, strategic adviser with Aite-Novarica’s commercial banking and payments practice, said he was surprised to see San Francisco-based Brex step back from this segment, where it was the market leader among fintechs and led innovation when it came to expense management and digital card issuance.

To be sure, newer fintech players like Brex, Ramp and Bill.com’s Divvy have a very small share — in the low single digits — of the small business card market, Ubaghs noted. About 85% of the market is served by big banks, including JPMorgan Chase, Bank of America, Wells Fargo, Citi, U.S. Bank and American Express. 

Brex’s move is likely a reflection of the broader environment, which has seen payments companies cut employees and seek funding at lower valuations, Ubaghs said. Brex had been growing “very aggressively,” and this move reflects the startup “putting the brakes on a bit to make sure they’re not spread too thin,” he said.

“I think their financial backers are really just checking the books a bit more,” he said of Brex, which has raised about $1.2 billion in capital. “It seems a bit crazy to cut off a big growth customer base, but at the same time, maybe this an element of honesty.”

It’s also “a milestone” shift for fintechs — some of which are switching from an “expand by any means necessary” mentality to one that’s mindful of the revenue model, economies of scale and how to best serve clients, Ubaghs said.

Opportunity to scale 

Brex’s co-CEO and co-founder Henrique Dubugras told TechCrunch affected small-business clients are mainly bakeries, restaurants and design agencies. Dubugras cited the difficulty of trying to serve both traditional small businesses and startups on a path to scale “because of the sheer volume.”

In last week’s apology post, Franceschi said Brex management “overestimated our ability to serve multiple customers.” 

“Our decision wasn’t driven by financial constraints, but by how many things we can do well at once,” Franceschi wrote.

The twenty-something co-founders of Brex, who grew up in Brazil, aren’t new to the payments sphere. They previously founded the company Pagar.me and sold the business for tens of millions of dollars, according to a CNBC report last year (the business is now part of Stone). Now on their next startup, they’ve attracted investments from big-name venture names like Tiger Global and Y Combinator. 

Brex, founded in 2017, “remains committed to startups” that have received venture capital, angel investments or accelerator funding, Dubugras told TechCrunch. In April, the company announced a focus on enterprise customers with the signing of food delivery company DoorDash. Startups “want and need a super high-touch, white-glove experience and they need a partner that can scale them from there when they’re really small until they’re really big,” Dubugras said.

That strategy, to target startups and scale with them, offers more long-term revenue potential for Brex, Ubaghs said. Small businesses might be “a bit more static” than startups, and navigating legacy infrastructure with established small businesses “can make things a little bit trickier,” he said.

Small businesses rely on commercial cards far more than they used to, making for a huge market, Ubaghs said. During the COVID-19 pandemic, small-business card spending kept growing when other commercial card categories like corporate and fleet declined. 

Small businesses make up about half of the commercial card market in the U.S. That segment’s card spending is projected to hit $423.3 billion this year, according to Aite-Novarica, and $453.4 billion by 2024.

But the segment is “notoriously underserviced” by big banks, because most banks keep their small-business and corporate card divisions separate, which doesn’t offer a great line of sight as their business clients grow, Ubaghs said. 

That might open the door for disruptor fintechs trying to grow their market share in the space. Ubaghs couldn’t say whether he expects one particular competitor to take Brex’s spot as the key fintech in the small-business segment.

Competitors line up

Ramp wouldn’t comment directly on Brex’s move, but Colin Kennedy, the company’s chief business officer, said it doesn’t “see a need to make a choice between servicing one or the other” when it comes to customer segments. Ramp raised $750 million in March at a valuation of $8.1 billion.

New York-based Ramp has “thousands” of small-business clients but wouldn’t share a more specific figure; those businesses must have $75,000 in the bank to become a Ramp customer, a spokesperson said. 

Ramp plans “to continue to invest really heavily in trying to serve that segment,” by giving customers additional tools and deepening relationships with them, Kennedy said. Those plans aren’t in response to Brex’s move, though, he said. 

When asked for comment on Brex’s move, a Divvy spokesperson pointed to Bill.com CEO and founder Rene Lacerte’s Wednesday post on LinkedIn, where he trumpeted the company’s focus on serving small and medium-sized businesses.

“We know you have choices, and that’s a good thing,” Lacerte wrote. “We’ve spent the last 16 years building software to help you succeed and our door is always open for you.”

In an interview, Aliaswire CEO Jed Rice also said Brex’s exit from the space creates an opportunity for his company because it targets such small businesses, too.

Ubaghs said he’s curious to see whether Brex will ever return to the small-business segment, and if they do, how the company would be received. Small businesses “have long memories” when they’ve been dumped previously, he said. 

“A lot of companies are going to be very hesitant, including non-clients who haven’t worked with them before,” he said.