Financial Inclusion

Petal CEO: Using Cashflow — Not FICO — To Issue Credit Cards

For the 47 percent of Americans with prime credit scores, getting and using a credit card isn’t much of a problem.

The problem, Petal co-founder and CEO Jason Gross told Karen Webster, is that it leaves around half of all Americans with only a few options: a credit card with expensive strings or no credit at all.

Petal wants to change the math on how consumers gain access to credit – and turn the tables on how creditworthiness is assessed.

What Powers Petal

According to Gross, the Petal product is designed differently, from the ground up. Instead of looking at the traditional credit score – which, he notes, is backward-looking and also a static, itemized list of what a customer has already done, rather a prediction of what they will do – Petal plugs into a consumer’s bank account and looks at their monthly cash flow. In addition, Petal looks at such information as where the funds go, whether they save money and even how they save money.

“One of the interesting things we learned – if you take two customers who save an identical amount each year, but one puts a consistent amount of money away each month and the other just saves whatever they don’t spend, the customer on the regular savings plan ends up doing better as a financial manager in the long run,” said Gross.

Using their technology to analyze that kind of data, Gross noted, means they will be able to accept more customers and, in general, offer higher credit limits to customers (up to $10,000) because they have a much clearer picture of what they can afford.

And while they will charge interest – as interest and interchange are their sources of funding – they will not charge fees for failing to manage an account well, as that would make their customers’ failure their win, said Gross. Instead, he noted, the tool is designed without fees, with a goal of making customers more likely to pay – and pay on time – by helping to educate them about how to be better financial managers on the whole.

At a basic level, that meant designing their app around an entirely mobile-first experience, to maximize accessibility for the millennial consumer group, who they forecasted would be among its heaviest users.

At a more intricate level, it meant using that mobile technology to give customers greater transparency into their financial lives.

“We are building a value-based business with a mission to make our customers’ lives easier with honest and easily accessible financial services products,” said Gross.

That means, for example, when a customer is scheduling a payment, the app tells them in terms of dollars and cents what making a minimum payment on the card will cost them in interest over the next payment period, so they can “understand exactly what it costs to borrow that sum of money for that period of time.”

Showing a customer an APR, he noted, doesn’t really tell them the true cost of borrowing money – and even a detail that small can greatly change how consumers orient their financial decisions around paying on their cards.

Particularly among the user segments Petal targets with its services.

Who Petal Serves

Some of Petal’s user groups, Gross noted, were expected when they were first designing the product, and signing up the 60,000-person waitlist for the Visa-branded card that will be going out over the next 12 months. The groups included those new to using credit, people new to the U.S. market, older consumers who had paid off a mortgage and let their credit profile go a bit stale, and returning members of the U.S. military whose credit went dormant during their service period.

There have, however, been some surprises.

“We’ve actually seen a totally different segment appearing on the waitlist – these are people who already have access to credit, have other cards in their wallet but who are looking for a different experience with their providers,” he said. “There are folks who respond to our company’s promise to treat the customer a bit better and help them make better choices.”

There is also a huge opportunity in what Webster and Gross called “the second chances” market. As the PYMNTS Financial Invisibles report indicated, once damage has been done to a report, bouncing back can be a huge challenge.

And bouncing back is something lots of good customers have to do, Gross noted. Life happens to people in a lot of ways, and the credit markets tend to punish people for those types of events for a long, long time.

“I think one of the great promises of more fair and accurate underwriting is bringing people back into the markets that have had an issue,” he said. “Negative information stays on a credit report for at least seven years – and in an era where income volatility is higher than ever before, that means more people are going to have bad news credit stories following them around for a long time.”

“Dings” on a credit report, Gross noted, can occur for a lot of reasons: a death in the family, disease, unexpected emergency, divorce. A lot of financial catastrophes are brought on by bad decision-making, he pointed out, but an awful lot are also built on bad luck that was well out of the consumers’ control.

“And for that customer that has gotten back on their feet and have the ability to pay on their obligations and are demonstrating that by paying their bills and saving accordingly? That person should be able to qualify for a safe and affordable credit product.”

Today, they mostly can’t – but in the world of Petal’s newly released product with WebBank, it is their sincere hope that availability becomes a more regular part of the financial system, and soon.

The Long March

After what Gross described as “a long wait,” the tens of thousands that have signed up for Petal’s Visa cards will start getting their invitations to apply over the next few weeks, and the cards themselves will start shipping out shortly thereafter.

It’s been a journey, particularly on the compliance side, as offering a brand-new credit product to underserved consumers using a new underwriting model is generally something regulators want to hear more about.

“Before we ever sought a dime of angel investment dollars, we were talking to financial regulators in D.C. about their vision,” Gross noted.

And on the whole, they found regulators to be good partners in this quest, because at the end of the day, they have an aligned mission: greater financial access for all. Access that can be successfully leveraged into a consumer life.

“Our approach to transparency and responsible credit is well-aligned with policy makers,” Gross said. “We want to make sure customers have a clear and unambiguous understanding of how the product works.”

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