Traditional banks focus on attracting and holding deposits. Novo, the financial solutions platform geared to small businesses and freelancers, recognized this approach doesn't always prioritize the needs of fast-moving entrepreneurial customers.
From the outset, Novo aimed to differentiate itself. It designed its platform with a more intentional, customer-centric approach. For CEO Michael Rangel, this meant focusing on facilitating the flow of funds and data in a way that empowers small businesses.
Rangel explains, "Banks' main focus is not how the money moves in or out of the account; the main focus is the hold. At Novo, we built our entire thesis around creating a solution to make these flows easier. That’s an entirely different game."
Novo's commitment to the seamless movement of money and data has resonated with its audience. Today, Novo supports hundreds of thousands of businesses, which emphasize excellence in customer experience. A testament to their success is the near-perfect score given by the 13,500 of Novo's customers who have reviewed its iOS app.
To support this level of customer satisfaction, Novo needed a card program that met its high standards. The company sought a solution that would slot seamlessly into its customers' payment workflows, enable smooth transactions, and make data readily available for financial tracking, analysis, and reporting.
After considering options for replacing their legacy payment processor, including Banking-as-a-Service (BaaS) platforms, Novo settled on Lithic. In Lithic, Novo found product and support alignment with their goals of providing friction-free experience to SMBs and entrepreneurs. Novo’s team selected Lithic for many reasons, including:
- Lithic's product depth, which meant cards could slot seamlessly into Novo's suite and support their mission to give customers comprehensive visibility into their financial data
- Lithic's reliability, scalability, and track record of processing high transaction volumes
- The hands-on support and robust API documentation Lithic offered during migration and beyond
- Lithic's modular, flexible approach that, among other things, would enable Novo to use Lithic’s issuing gateway along with Lithic’s native core or Novo’s own proprietary ledger
- The shared values and deep understanding of small business challenges demonstrated by Lithic's team
“I’ve had a great experience with the Lithic team,” says Chelsye Toliver, Director of Payments at Novo. “They truly desire Novo’s success.”
The Problem: Outgrowing Legacy Solutions
When Novo first started, it faced a significant challenge: finding partners who could support its vision. "It was not easy back then," Tyler McIntyre, Novo's co-founder and CTO, recalls. “When we got started, fintech really wasn't even a word."
Undeterred, the Novo team began knocking on doors, pitching their idea to potential partners. Eventually, on the banking side, they found a solution. They formed a partnership with Middlesex Federal Savings, a small community bank in Massachusetts.
For card processing, they had to look further afield. They settled on a traditional card processor to power their debit card program.
As Novo began to grow, however, they found that their legacy issuer-processor’s technologies did not fit their growing needs. It made it difficult for Novo to offer the seamless, tech-forward banking they wanted to provide their customers.
Issues with legacy providers
These are common complaints with legacy issuer processors.
Legacy platforms often have inflexible and brittle APIs. They have layers of disjointed tech cobbled together over decades, leading to byzantine products and documentation.
Lack of clear documentation means it takes longer for a card program to understand and build to the platform’s API. And when those fragile APIs inevitably break, the unintuitive documentation means it takes card programs much longer to debug and resolve issues.
Legacy platforms often also have sluggish corporate cultures. They don’t treat card programs as partners, but as nameless support tickets, so it can take a program days to get to the bottom of an urgent issue.
Finally, legacy card issuing providers are usually less flexible and modular. They offer a take-it-or-leave-it, one-size-fits-all product set. That can mean, for example, having to use their outdated ledger when you actually want to create a differentiated credit or savings product. It also means being forced to use their daily batch-reports tools – which often don’t reconcile or take so long they’re no longer useful when compiled.
"They used systems and technologies that limited our ability to provide a superior customer experience," says Toliver, Novo's Director of Payments. "This was the case throughout the debit-card transaction lifecycle — from issuance through to dispute and chargeback processing."
Additionally, Toliver notes, the legacy provider could not provide Novo with access to the data it needed to understand its customers and their product experience.
The limitations of BaaS
Novo knew that to continue growing and serving their customers effectively, they would need to find a more modern, flexible card issuing solution.
As Novo began to look for a new card-issuing partner for its debit cards, it considered several options. One possibility was to build its own infrastructure from scratch, but it quickly realized that this would be a massive undertaking.
Novo also explored working with various Banking-as-a-Service (BaaS) providers but found that these platforms often had constraints and limitations that hindered their ability to innovate and scale.
A BaaS provider is a generalist fintech infrastructure platform that allows companies to embed various banking services in their products.
Novo’s perception of constraints and bottlenecks in a BaaS relationship has been echoed by other fintech customer-facing products that want to work quickly to build world-class products and meet customers’ needs. BaaS providers are layered over other infrastructure providers, creating unnecessary third-party dependencies, slowing implementation, and abstracting away important features and controls. That all leads to a great deal of opacity and dead-ends when it comes to exercising more control over the customer experience.
Moreover, because a BaaS provider is just one more intermediary, reconciliation can become more challenging. Indeed, some BaaS platforms have faced public fallout due to alleged poor reconciliations that led to missing funds.
Novo, as a banking technology pioneer, was looking for a relationship that offered much more control and flexibility. Meanwhile, they also wanted a technically solid infrastructure they could comfortably rely on in the medium- and long-term.
Solving Problems With a New Card-Issuing Processing Partner
This is where Lithic came in. Lithic's platform and API-centric approach allowed Novo to keep their focus on solving the core problems faced by small businesses, without unnecessary complexity.
"Novo's philosophy is all about keeping the focus on the problem," Rangel, the CEO explains. "If embedding financial services, like payroll, banking, insurance, credit cards, debit cards etc., helps solve that problem and adds profitability, then great. But if it doesn't, it's best to revisit embedding their APIs later."
With Lithic’s accessible and clear API, there was an immediate fit.
Nearly instant results, including ARPU growth, with Lithic
After switching over to Lithic, Novo watched the data carefully. As might be expected, any migration of a major business driver was a major undertaking, and Novo was anxious to see how the new partner performed in comparison to the processor it was leaving behind. The results were nearly immediate, and significant, starting with how quickly customers received their cards and activated them:
- Improved Card Delivery and Activation
- Average card delivery time was reduced from 21 days with the previous legacy processor to just 7 days with Lithic.
- Lithic also made faster rush-delivery options available, including overnight deliveries of cards via FedEx and UPS, to increase card activation rates.
- Across all shipping methods, Lithic provided better and more realistic estimated card delivery dates
- A one-click activation process streamlined the user experience, enabling customers to start using their cards immediately.
Performance benefits quickly translated to usage and revenue growth:
- Usage, spend, and ARPU growth
- The proportion of customers using their debit cards in the first month after funding increased by 16.7% compared to the 12-month average with the prior processor.
- Novo has seen “banner debit card spend” each month: Average daily spend consistently increased each month, with a 7.8% increase from when the migration began in April to July, indicating a better user experience with Lithic cards. The hypothesis is that improved transaction-data visibility encouraged higher card usage.
- ARPU in the first month after funding increased by 26.8% since the Lithic migration compared to the 12 months prior.
The results have persisted. Customers continue to transact at record levels immediately after account funding, demonstrating the value of quick and painless card issuance. Novo saw its largest spenders migrate over particularly quickly, a signal that the product’s most committed users responded exceptionally positively to the migration.
Novo is also seeing larger spend amounts on the days around the first of each month– indicating Novo’s cards are increasingly becoming the “top of wallet option,” i.e. the default card for subscriptions and recurring payments.
The Process: Seamless Migration and Collaborative Support
Finally, the migration was smooth and hiccup-free. This wasn’t just a subjective evaluation. This is clear in the lack of a significant slip in dollar volumes that can sometimes happen after a migration if customers face issues. Instead, Novo retained 93% of customer spend in a migration cohort that moved to Lithic in mid-2023.
Lithic's team worked closely with Novo to ensure that the transition was seamless for their customers, with no disruption to their services. Migrating to Lithic's platform was a smooth working process, thanks to Lithic's hands-on support and robust API documentation. It was completed relatively quickly, from beta tests of physical cards in early 2023 to a migration completion that same summer.
Lithic’s team worked closely with Novo to nail down key processes. “Reconciliation is always collaborative and prompt,” says Toliver.
Additionally, Novo was able to quickly make use of Lithic advanced card-issuing capabilities. These included security-enhancing features like 3DS 2.0, the authentication protocol, which gives issuers added control over the authentication decisions in card-not-present transactions. Before it was adopted, Lithic performed backtests on anonymized transaction history, to help Novo understand the net savings it could expect to see in implementing Lithic’s 3DS authentication decisioning.
Using Lithic: Unlocking Growth and Innovation
Since partnering with Lithic in 2022, Novo has been able to focus on what they do best: creating innovative banking solutions for small businesses. With Lithic's flexible platform and reliable infrastructure, Novo has been able to:
- Scale rapidly, growing from zero to thousands of beta testers, to tens of thousands and then hundreds of thousands of debit card users in a short period.
- Offer unique features like instant card issuance and real-time transaction insights. Toliver noted that "access to digestible information has allowed us to improve the customer experience significantly."
- Reduce fraud with affordances like Lithic's support of the 3D Secure 2.0 protocol, which gives issuers more control over cardholder authentication for card-not-present transactions.
- Integrate seamlessly with popular business tools like QuickBooks and Xero, just like the rest of Novo's products.
Referring to the importance of these integrations, McIntyre mused on how outdated bank accounts' integrations (or lack of them) seem in an API-first era.
"It's crazy that I can string together a light switch to a toaster using ... Zapier and all these other tools, but I couldn't connect my business bank account to my payment processor. When it’s just a CSV. So that's kind of where the idea came from to focus on integrations."
When Novo launched its revamped debit card last year, it emphasized continuous transaction monitoring, fraud alerts, and in-app controls. These features are, in part, made possible by Lithic’s emphasis on providing customers with rich data access and fine-grained control over transactions overall, and security-related decisioning in particular.
“When you consider that U.S. businesses lose as much as 5% of their gross revenue to fraud, it’s crucial for small business owners to quickly know when an unauthorized transaction is processed,” Rangel said in the June 2023 product announcement. “Novo’s new debit card allows our more than 200,000 small business customers to effortlessly monitor fraud, and control their card activity directly through the Novo app.”
All this has been possible without high fees that eat away at interchange revenue.
Novo's goal has always been to maintain a lean, efficient operation without sacrificing customer experience. This is the only way Novo is able to fulfill its ethos that small business banking should generate revenue without charging onerous fees for basic checking and account services.
Scaling with flexibility and control
By choosing Lithic as its card issuing partner, Novo has overcome the limitations of legacy payment systems and unlocked new growth opportunities. Lithic's flexible, reliable platform has empowered Novo to innovate and scale while maintaining a laser focus on serving the unique needs of small businesses.
With Lithic's support, Novo is well-positioned to achieve its mission of putting business bank accounts at the center of the financial stack for entrepreneurs and small business owners everywhere.
"We aren't merely focusing on reinventing the wheel and making an incrementally better checking account," Rangel said. "We aim to completely transform how this financial tool has been structured for decades. This means simplifying every aspect of financial management for small and medium-sized businesses by integrating the SMB stack into our platform and optimizing the movement of funds along the rails."
With Lithic propelling its card back-end, Novo is poised to continue disrupting the business banking landscape and empowering small businesses to thrive.