These startups want to make credit scores a thing of the past – TechCrunch
Welcome to The Interchange! If you received this in your inbox, thank you for signing up and your declaration of confidence. If you are reading this as a post on our site, please register here so that you can receive it directly in the future. Each week, I’ll take a look at the hottest fintech news from the previous week. This will include everything from funding rounds to trends to an analysis of a particular space to hot takes on a particular company or phenomenon. There’s a lot of fintech news out there, and it’s my job to stay on top of it—and make sense of it—so you can stay up to date. — Mary Ann
Credit scores have been around since 1989, or for over three decades. They are also known as FICO scores; and FICO stands for Fair Isaac Corporation. The Consumer Financial Protection Bureau (CFPB) describes FICO as “a pioneer” in developing a method for calculating credit scores based on information collected by credit reporting agencies. Many financial institutions have long touted the FICO score as a fair way to determine a person’s creditworthiness. Whether you can take out a mortgage and how much interest you pay is based on your FICO score. The higher it is, the better chance you have.
But there is a problem with this model. It appears to reward people who are already doing well financially and punish those who are not. And the rejection of the latter’s applications for housing or car loans or other types of loans can undoubtedly perpetuate a vicious circle of not being able to break out of poverty or other conditions. For example, if you can’t get a loan to buy a car or can’t afford the interest rates, it can make it harder for you to get a job.
In recent years, a number of fintechs have emerged to try to challenge the current model. In May, I wrote about Jay-Z-backed Altro, which raised $18 million to help people build credit through recurring payments like digital subscriptions to Netflix, Spotify, and Hulu. Earlier this year, Petal announced that it raised a $140 million Series D funding round at a valuation of $800 million to help turn around the “broken” traditional credit system. Founded in 2016, New York-based Petal offers two Visa credit card products aimed at underserved consumers with little or no credit history. The startup says its goal is to help people “build credit, not debt.”
And this past week, TechCrunch reported on two other companies that want to make credit less about points and more about how much money a person can have in the bank. First, Anita Ramaswamy wrote about X1, which just raised $25 million in funding. X1 Card takes a different tack by guaranteeing customers based on their income rather than credit score, which the company says allows it to set credit limits up to 5 times higher than traditional card providers. It’s an appealing proposition for all kinds of people who have stable incomes but low credit scores, such as recent graduates.
Then, later in the week, TomoCredit announced its own raise — $22 million in equity at a $222 million valuation. The startup was founded by South Korean immigrant Kristy Kim, and also secured $100 million in debt financing. Like, X1, TomoCredit does not rely on FICO scores to underwrite. Rather, it uses a “proprietary” underwriting algorithm (Tomo Score) to identify “high-potential borrowers” without credit scores. The TomoCredit card requires no credit check, no deposit, 0% APR and no fees. The fintech says it offers cardholders credit limits of up to $30,000 based on their cash flow.
To this we say: What is fintech about if it is not trying to upend the status quo??
Weekly news
Despite a cooling market, the start-up of the company’s consumption management Ramp reports that it has more than doubled its revenue run since the beginning of the year. In March, Ramp confirmed it had secured $550 million in debt and $200 million in equity in a new financing that doubled its value to $8.1 billion. Now, the company isn’t just seeing more SMB customers—a logical assumption considering that Ramp’s biggest competitor, Brex, recently announced it would largely stop serving businesses in that category. According to CEO and co-founder Eric Glyman, whom I interviewed, it sees increases across all stages of company maturity.
The fintech funding boom In recent years, large amounts of capital have flowed into so-called neobanks, digital financial companies that offer banking services to markets – general and niche. The overall idea behind the push made sense – many traditional banks are IRL first and digital second, and their physical way of doing things led to costs being passed on to consumers. It was a pretty good idea, frankly, and like any such idea, it attracted a number of founders and financial backers. But after a period of epic fundraising and a few exits, sentiment apparently shifted against the model. How many neobanks could the market really support? Had some of these gone also niche in the effort to segment the market more finely and fine-tune their products? Read more from Alex here (subscription required).
Meta CEO Mark Zuckerberg announced that the company is launching a new “payments in chat” feature on Instagram. With this new feature, users can purchase products from small businesses and track orders via direct messages on Instagram in the US. To use the new feature, users can start by sending a direct message to a qualified small business they are interested in buying from. In the same chat thread, they will then be able to pay, track their order and ask follow-up questions to the business.
Try as we might, we can’t seem to get away from the Better.com news. Natasha Mascarenhas reported on how the digital mortgage company is still trying to proceed with the SPAC deal despite all the negative headlines, investigations and lawsuits surrounding Better and/or its CEO, Vishal Garg. In the latest roadblock, Inman reported that the SEC is investigating the company as Barclays and Citigroup — the banks acting as advisers on the deal — resigned their roles and distanced themselves from the company. One might think that disgruntled laid-off employees would be happy that Better.com is being scrutinized by the authorities. But a couple of the employees have told me that it’s actually the opposite — because if the SPAC doesn’t go through, their options will be worth very little or nothing. One in particular told me via Twitter DMs: “It’s not looking good for SPAC. That was my silver lining to the whole experience. I am ambivalent. I think the employees deserve justice, but more than that, we have the right to the fruits of our labor.” The same worker expressed frustration at former manager Sarah Pierce’s lawsuit against the company, saying: “We were all robbed. It is terribly ironic how one rich person’s fight for ‘justice’ ruined thousands of employees’ chance for closure or anything resembling restitution.”
Speaking of mortgage technology companies, Denver-based startup Maxwell has released Maxwell Español, a Spanish-language loan app it says offers “a fully translated loan application, from landing page to submission.” In a blog post, the company said many existing points of sale rely on translation through a Spanish-speaking representative or only offer a Spanish landing page or subtitles in the loan application. In contrast, Maxwell says the new app provides “an immersive Spanish language experience.” The company claims the new offering will help lenders better attract, convert and engage native Spanish speakers.
A new fintech has emerged with the task of accelerating access for impact investments in private markets. Specifically, Josh Hile and Marshall Dunford started Citizen Mint, a new impact investing platform designed to help investors generate both financial returns and positive social and environmental impacts. “The demand for investments, particularly among Gen X and Millennials, who align financial resources with personal interests and values is simply not being met in today’s market,” Hile, who will serve as Citizen Mint’s CEO and chief investment officer, said in an e- postal message. More here.
Financing and M&A
Sudanese fintech Bloom gets $6.5 million backed by Y Combinator, GFC and Visa
Arrenda appears with Adelanta, a financing offer for landlords in Latin America
Casavo, an Opendoor-style proptech from Italy, raises $410 million to expand its instant buyer platform across Europe
Fonoa raises $60 million to automate tax compliance and calculations for global companies like Uber and Zoom
TechCrunch is pleased to announce the launch of TC Sessions: Crypto, taking place on November 17 in Miami, Florida. This is our first dedicated foray into the crypto roundup and we look forward to hearing from some of the leading movers, shakers and risk takers in web3, DeFi and NFTs. Take advantage of our special launch prices. Buy your Passport or Startup Exhibitor Pack today and save $250 and $200 respectively.
And with that I’m outta here. Thanks again for your support and have a great weekend. xoxo Mary Ann
