Deserve, a Silicon Valley startup that helps other companies launch and manage credit cards, is the latest private fintech to feel the pressure of slowing business and a dry funding market–in its case, compounded by turmoil in the crypto industry. The 10-year-old Palo Alto company was valued at $500 million in 2021 and is backed by high-profile investors including Goldman Sachs
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“The company is not for sale,” Deserve founder and CEO Kalpesh Kapadia, 52, said in an emailed statement. He added: “As a full stack financial infrastructure provider that powers meaningful card programs for a number of companies and banks, we continually have strategic discussions around commercial partnerships, investment and M&A.”
Since its 2013 founding, Deserve has raised $150 million in equity funding. It is not yet profitable and burned through roughly $15 million to $20 million in 2023, according to people familiar with its finances. Kapadia says he expects “strong growth” this year. “Reduced burn rate along with renewed growth in 2024 and a full sales pipeline of banks, fintechs and brand partners positions us on a solid trajectory to building a self-sustaining, profitable standalone business.”
Industry insiders expect that if Deserve is sold, it will fetch less than half of its peak 2021 valuation. Not only have most fintech valuations come down since then, but Deserve has faced a special challenge—back in 2021, it was looking to grow in part by working with crypto lenders that wanted to issue credit cards. But later its biggest customer, crypto lender BlockFi, went bankrupt.
Kapadia came to the U.S. from India in the mid-1990s for graduate study–he earned a master’s in industrial engineering at the New Jersey Institute of Technology, followed by an MBA at Carnegie Mellon. After working for 15 years in finance as an investment banking analyst and hedge fund manager, he founded Deserve. He originally conceived the startup as a consumer credit card company that would target immigrants and students, making it easier for underserved populations to get credit. Deserve launched its first card in 2016 with backing from venture firms like Accel and Aspect Ventures, according to PitchBook, and it issued loans through its own balance sheet, funding them with a line of credit from Credit Suisse.
But consumer lending is a notoriously difficult and capital-intensive business to break into, especially if you’re taking the financial risk on your own books as Deserve was. In 2018, Deserve was approached by student loan bank Sallie Mae, which was interested in launching its own credit card. Seeing it as an opportunity to switch to a better business model, Kapadia pivoted Deserve to help other companies launch credit cards. Sallie Mae became its first customer.
To make the complex process of launching a credit card easier for customers, Deserve does everything from assessing borrower risk and processing transactions to fielding customer service calls and handling disputes. In 2020, Deserve powered a now defunct credit card for wine enthusiasts for Vertical Finance, a small fintech startup that was acquired a year later. In 2021, it landed customers like the University of Notre Dame. Despite its pivot, Deserve held onto its original consumer card business and continued collecting fees and interest income, though it stopped investing in acquiring new customers.
Back in March 2021, Kapadia told Forbes, “We have more business than we can handle … We have every bitcoin company talking to us for credit cards.” A few months later, Deserve helped crypto lender BlockFi launch a rewards card, and the ill-fated crypto company became Deserve’s largest customer. BlockFi collapsed spectacularly and declared bankruptcy in November 2022 after the fall of FTX, wiping out a big chunk of Deserve’s revenue.
As interest rates continued to rise and the startup funding market froze, Deserve ran into another problem: other fintech customers started struggling to survive. One example: GloriFi, an anti-woke digital bank that hired Deserve to release a credit card, launched in September 2022 and shut down two months later–before the credit card even came out. This dynamic of floundering startups has affected many fintechs serving fintechs, including industry pioneer Plaid. Today Deserve has 15 customers–half are fintech companies like investing app M1, and the other half are banks, including Malvern, Pennsylvania-based Customers Bank.
Over the past year, competition for tech-enabled credit card issuing has gotten stiffer. In January 2023, publicly traded payments company Marqeta announced that it planned to acquire Power Finance–an early-stage credit card issuing startup with no revenue that was poised to compete directly with Deserve–for $275 million. Marqeta had partnered with Deserve in 2021 to help its customers launch credit cards, but Marqeta CEO Simon Khalaf says it didn’t seriously consider buying Deserve because it was a more established business with higher expenses. Khalaf thought it would have been a drag on Marqeta’s profitability and harder to integrate into Marqeta’s technology.
Founded in 2010, Marqeta has historically helped companies issue debit cards and process debit transactions, but with the Power acquisition, it’s now competing head-to-head with Deserve for credit card business. Both companies recently bid to power credit card offerings for travel company ITS and AffiniPay, according to people familiar with the negotiations. Marqeta won both, although Kapadia says he didn’t find the economics of the ITS deal attractive enough to continue pursuing it.
Deserve today focuses solely on credit card issuing and processing for other companies. “We are uniquely positioned in the credit card ecosystem with the industry’s most modern end-to-end stack,” Kapadia says. Last year, it sold its balance sheet of credit card loans (a holdover from its consumer-facing credit card) to a private equity fund. The move improved Deserve’s gross margins from 35% to 75%, though it also resulted in revenue shrinking in 2023 versus 2022, according to a person familiar with its business. The company has enough cash to survive through the end of 2025 and expects to hit break-even by then, that source said.
Kapadia says that Deserve, unlike other fintechs, hasn’t had to slow down its pace of taking on new customers due to regulatory scrutiny of its partner banks. Its primary bank partner is Salt Lake City-based Celtic Bank.
Still, Deserve’s plight seems to highlight the continued challenges fintechs have had in making a meaningful dent in the massive U.S. consumer lending market. Marqeta was founded 14 years ago and now processes $1 billion in daily transactions but has just begun trying to aggressively expand into credit cards. Neobanks ranging from Chime to Varo have yet to develop meaningful lending businesses. (Affirm and Klarna are notable fintech exceptions with their sizable buy-now, pay-later lending operations.) The complexity, fraud risks, capital requirements, stricter regulations and difficulty of lending to lower-income customers continue to make it a tough business for fintechs, whether they’re lending directly or just providing technology to other lenders.
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