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 vote of confidence. If you’re reading this as a post on our site, sign up here so you can receive it directly in the future. Every week, I’ll take a look at the hottest fintech news of 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 in the know. — 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 an equitable way to determine a person’s creditworthiness. Whether or not you can take out a home loan and how much interest you pay is based on your FICO score. The higher it is, the better chances you have.
But there’s a problem with this model. It seems to reward the people who are already doing okay financially and penalize those who are not. And the rejection of the latter’s applications for home, or auto or other types of loans can arguably perpetuate a vicious cycle 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 afford the interest rates, it might 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 payment forms such as digital subscriptions to Netflix, Spotify and Hulu. Earlier this year, Petal announced it raised a $140 million Series D round of funding at an $800 million valuation to help upend the “broken” traditional credit system. Founded in 2016, New York–based Petal offers two Visa credit card products aimed at underserved consumers with little to 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 getting credit less about scores and more about how much cash an individual might have in the bank. First up, Anita Ramaswamy wrote about X1, which just raised $25 million in funding. X1 Card is taking a different tack by underwriting customers based on their income rather than their credit scores, which the company says enables it to set credit limits up to 5x higher than traditional card providers. It’s an appealing proposition for all sorts of people who have stable incomes but low credit scores, such as recent college graduates.
Then, later in the week, TomoCredit announced its own raise — $22 million in equity at a $222 million valuation. Founded by South Korean immigrant Kristy Kim, the startup also secured $100 million in debt financing. Like, X1, TomoCredit doesn’t rely on FICO scores to underwrite. Rather, it applies a “proprietary” underwriting algorithm (Tomo Score) to identify “high potential borrowers” without a credit score. The TomoCredit card requires no credit check, no deposit, 0% APR and no fees. The fintech says it offers cardholders credit limits up to $30,000 based on their cash flow.
To this, we say: What is fintech about if it’s not trying to upend the status quo??
Despite a cooling market, corporate spend management startup Ramp reports that it has more than doubled its revenue run rate since the start of the year. In March, Ramp confirmed that it had secured $550 million in debt and $200 million in equity in a new financing that doubled its valuation to $8.1 billion. Now the company is not 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, who I interviewed, it’s seeing increases across all stages of company maturity.
The fintech funding boom of the past several years saw huge amounts of capital flowing into so-called neobanks, digital financial companies offering banking services to markets — general and niche. The overarching idea behind the push made sense — many traditional banks are IRL first and digital second, and their brick-and-mortar way of doing things engendered costs that were passed on to consumers. It was a pretty good idea, frankly, and like any such idea, attracted a host of founders and financial backers. But after a period of epic fundraising and a few exits, sentiment seemingly shifted against the model. How many neobanks could the market really support? Had some of these gone too niche in their work to segment the market more finely and 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 United States. To use the new feature, users can start by sending a direct message to a qualified small business they’re interested in buying from. In that same chat thread, they’ll then be able to pay, track their order and ask the business any follow-up questions.
Try as we might, we can’t seem to get away from Better.com news. Natasha Mascarenhas reported on how the digital mortgage company is still trying to proceed with its 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 serving as advisors on the deal — resigned their roles and are distancing themselves from the company. One might think that disgruntled laid-off employees would be happy that Better.com is being scrutinized more closely by the government. But a couple of those employees have told me it’s actually the opposite — because if the SPAC doesn’t go through, their options will be worth very little to nothing. One in particular told me via Twitter DMs: “It’s not looking good for the SPAC. It was my silver lining for the whole experience. I’m ambivalent. I think the employees deserve justice, but more so we’re entitled to the fruits of our labor.” That same worker expressed frustration with former executive Sarah Pierce’s lawsuit against the company, saying: “We all got robbed. It’s terribly ironic how one rich person’s fight for ‘justice’ ruined thousands of employees’ chance at closure or anything resembling restitution.”
Speaking of mortgage tech 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 that many existing point-of-sale systems 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 its new app provides “an immersive Spanish language experience.” The company asserts that the new offering will help lenders better attract, convert and engage native Spanish speakers.
A new fintech has emerged with the mission of accelerating access for impact investing 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 societal and environmental impacts. “The demand for investments, especially among Gen X and Millennials, that align financial resources with personal interests and values simply isn’t being met in today’s market,” said Hile, who will serve as Citizen Mint’s CEO and chief investment officer, in an emailed statement. More here.
Funding and M&A
TechCrunch is excited to announce the launch of TC Sessions: Crypto, taking place on November 17 in Miami, Florida. This is our first dedicated foray into the cryptoverse, and we can’t wait to hear from some of the leading movers, shakers and risk-takers in web3, DeFi and NFTs. Take advantage of our special launch pricing. Buy your pass or startup exhibitor package today and save $250 and $200, respectively.
And with that, I’m outta here. Thank you once again for your support and have a great rest of your weekend. xoxo Mary Ann