Startup caters to millennials tired of paying in cash 'like a gangster'

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When Kristy Kim came to the U.S. from Seoul, South Korea, to attend the University of California, Berkeley, she paid for everything with a debit card.

“I didn’t know about credit scores,” she said. “My mentality was, my parents are wiring money to my bank account, so I don’t need to borrow. Many international students are like that because their parents fund them, so they just use their debit cards to purchase things.”

But when she graduated and got a job as an M&A analyst at an investment bank, she needed a car because many of her clients were a few towns away. She went to several auto lenders, thinking she would qualify for a car loan because she had a good job.

“I got rejected five different times,” Kim said. “They all told me it didn’t matter how much money I made or what grade I got, I didn’t have credit history. So I gave up and bought my car with cash, like a gangster.”

That experience — and the realization she was not alone in it — drove Kim to establish TomoCredit, which began operation this week. The fintech, whose name is meant to suggest “tomorrow’s credit,” plans to give students credit cards even if they have no credit score and no credit report. It also aims to help them build up a credit history over time.

TomoCredit has a waitlist of 50,000 people; it plans to start advertising next week.

Data released Wednesday by Bankrate highlighted the potential demand. Its survey of 2,500 consumers found that 58% of millennials said they had been denied at least one financial product such as credit cards or loans because of their credit score. That was higher than rejection rates for Gen Xers (53%) and baby boomers (27%).

Bankrate analyst Tod Rossman said this is an unintended consequence of the Credit Card Accountability Responsibility and Disclosure Act of 2009. "It has become much harder for people in their early and mid-20s to obtain credit,” he said in a report about the survey results. “Establishing credit is a lot like getting started in your career. Everyone wants you to have experience, but it’s hard to get that first experience.”

Kim said that last week, when she visited the Berkeley campus to talk to students, she found about half lack a credit score and many didn't know what a credit score is. She will be relying at first on buzz among students like them until her advertising efforts get rolling.

“For now, it’s word-of-mouth from school communities at Berkeley and Stanford,” Kim said. “We are seeing more students from Berkeley signing up.”

Kim and her team estimate that 30 million students or recent graduates have high incomes and high purchasing power but low or no credit scores.

“That’s not because they’re bad, but because younger people behave differently, especially in big cities like San Francisco and New York,” Kim said. “They take Uber, they don’t buy a car, they get married later, they have no mortgage. Many young people are misrepresented by the existing credit bureau system, and then they get rejected by credit card companies or from services because they have no credit score.”

There is other research that backs this idea.

At American Banker’s Card Forum in May, Larry Santucci, senior research fellow at the Federal Reserve Bank of Philadelphia, said that in 2018, 45% of new secured credit card customers lacked a credit score.

“A lot of people who don’t have credit scores are new to the country, they’re students,” he said. “They don’t have blemished credit records, they just don’t have any credit record. So as they build their credit, 25% of them are considered superprime once they demonstrate account performance. Their graduation rates tend to be higher and charge-off rates lower.”

TomoCredit does not ask for or check the applicant’s credit score, Kim said. “We don’t care whether it’s 600 or 800,” she said. “All we care about is your cash-flow situation.”

Other fintechs talk about relying on alternatives to FICO scores or credit reports in their underwriting. But in practice they often use credit scores when available, sometimes because they consider the information helpful and other times to satisfy investors in the secondary market or regulators.

TomoCredit asks applicants to let it connect to their bank account using the data aggregator Plaid. The underwriting team analyzes six months’ worth of cash-flow data, which includes looking at the average balance, any overdrafts, and the largest spending categories (school, books, clothing). They look for consistency. In the future, the company may provide credit cards to people with at least $50,000 worth of cryptocurrency in a Coinbase account. It might take into account a person’s trading behavior.

“We are tech-driven, we want to be superinnovative,” Kim said.

If the applicants' behavior looks responsible enough, they are approved and given a $1,000 credit limit that can eventually be increased to $10,000. They are also rewarded with small amounts of cryptocurrency.

TomoCredit offers a 30-day charge card with a 0% interest rate. Customers auto-pay from their bank account. If on the due date there is an insufficient balance in a cardholder’s account, the card is frozen. The startup makes money through interchange fees.

In addition to young people, TomoCredit also targets highly skilled immigrants.

“I have so many friends working in tech in San Francisco,” Kim said. “They own their own companies or they are C-level in their companies, but they don’t have a credit score because they are new to this country. TomoCredit wants to offer them a credit score because they are highly skilled and high-income and a safe bet.”

TomoCredit has to conduct know-your-customer reviews and follow other bank regulations. Kim takes comfort in the fact that her chief product officer was head of product at Coinbase, so he is familiar with requirements for preventing fraud and money laundering.

The company is scheduled to start issuing plastic cards in mid-September.

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