Rent-to-own fintech startup Kafene raises $18 million to take on BNPL • TechCrunch

Kafene, a lease-to-own startup targeting underbanked consumers who don’t have access to traditional credit, raised $18 million in a Series B funding round.

Although there are similarities to buy now, you pay later to make purchases, The cafes CEO Neal Desai emphasizes that the company’s model is different in a few ways.

First, many argue that BNPL is just another form of debt – but packaged differently. Rather, Kafene’s agreements are, according to Desai, debt-free. Another way it differs, in his view, is that BNPL is often used for more “nice-to-have” purchases, while lease-to-ow is primarily for “must-have” purchases, such as a refrigerator or tires, for example.

In essence, Kafene’s model is based on the premise that at the point of sale, the prime consumer is likely to go with BNPL, while the subprime consumer does not have the credit score to do so, and will typically do lease-to-ow as their alternative financing mechanism.

The cafes, according to Desai, are looking to increase financial inclusion by helping consumers, who don’t qualify for credit cards, a “flexible and affordable” option to make larger, necessary purchases. The company works with merchants – currently mostly smaller and medium-sized retailers – to offer the lease-to-own option at the point of sale.

The startup model also differs from BNPL in that if a consumer decides after a few months that they can’t afford, or simply don’t want, a leased item, they can “return it” without penalty. In contrast, with BNPL you can only return a product based on the individual seller’s guidelines. So essentially a Kafene user will have paid to use an item for however many months they were in possession of the product.

The advantage for merchants, startup touts, is that they are able to close more sales, which leads to increased revenue.

While Desai declined to disclose hard revenue figures, Kafene saw revenue growth of 500% year-on-year, he said.

Kafene had most of its Series A capital still in the bank when it decided to raise additional funding in a bid to compete with BNPL and other funding providers. It plans to take product market to ultimately accommodate those at all ends of the credit spectrum, according to Desai.

“We raised this money to take advantage of the opening that the market provided by allowing traditional lenders to tighten up,” he told TechCrunch. “We saw opportunities expand to the gap and serve some of those dealers are seeing withdrawals from their other existing financing options. There is a very nice tailwind, and that was the logic for raising Series B.”

Here’s how it works: The cafes buy the product from a seller on behalf of the consumers and lease it back to them over 12 months. If they make all payments, they own the item. If they make them earlier, they get a “significant” discount, and if they can’t, the Cafes take the item back.

“The rent-to-own consumer has a cancellation capability, wThis is very important, especially when you think about the macro environment we are about to enter,” Desai told TechCrunch. “Having that built-in flexibility is super important for that consumer base.”

In addition, using Kafene’s offer can help people improve their credit scores, according to Desai. If they buy out of the loan earlier than the 12-month term, Kafene reports them as a positive payer and their credit score goes up. If they stop making payments without returning the item, their credit will be deleted. Their credit score will not be affected if they return the item in the middle of the deal.

Image credit: CEO and co-founder Neal Desai / Kafene

“With the voluntary termination program, we will pick it up and the deal will be dissolved,” Desai explained. “So if they made five payments, their credit will show five payments.”

The cafe’s insurance model leverages more than 20,000 data inputs to inform AI-powered approvals, Desai explained. This means the funding is “layered based on actual risk rather than one-size-fits-all,” making it less dependent on interest rates, he noted.

Because leasing is fundamentally and legally different from debt, the company claims, consumers are not charged interest. Instead, Kafene charges people who pay their leases within the first 90 days a “nominal” processing fee that varies by state (in California, it’s $0). About half of customers fall into this category, Desai said.

Those who only pay the minimum payment over the maximum period pay more, but according to the company, “most people are somewhere in between.” At the extreme end of the curve, the highest is 2.5x when it comes to total ownership costs in relation to retail price.

Only a minority of consumers who buy with Kafene end up paying that much (which is a lot, to be clear) for an item, according to Desai. Eighty to 90% of those who work with Kafene end up owning the item they finance, he said.

And when a consumer decides to return an item, Kafene cooperates with infrastructure and delivery companies nationally to ensure that it pays to collect the item. The company then has a number of resale and disposal mechanisms that allow it to either try to make money on the item or simply write it off.

Third Prime led Kafene’s latest round, which is on top of the nearly $30 million it raised last year in two tranches of a Series A funding. Global Founders Capital and Third Prime Ventures co-led with $15 million A1 round. Third Prime and Peter Thiel’s Valar Ventures led the A2 expansion.

Uncorrelated Ventures, Company Ventures, Xffirmers, Gaingel’s FJ Labs joined Third Prime to support Kafene in the B raise.

The company plans to use its new capital primarily to increase the number of employees so that they can continue to expand the offer to more sellers and thus consumers.

Wes Barton, co-founder and managing partner of Third Prime, said his firm was drawn to Kafene’s vision “that by leveraging proprietary guarantees and flexible payment structures, the company can lower borrowing costs for consumers while increasing flexibility.”

“Since our first investment in 2019, we have been thoroughly impressed by the pace of innovation and market demand for Kafene’s unique product,” he wrote via email. “With many lenders in retreat today, Kafene is leaning in and will take significant market share over the next year.”

New York-based Kafene was founded in 2019 and has 100 employees. It currently works with over 1,000 retailers across the United States

Reporter’s note: This story was updated after publication to clarify the number of merchants Kafene works with.

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