When Kalpesh Kapadia moved to the U.S. from India as a student more than 20 years ago, access to credit was a major challenge for him. Without credit, buying car, a home or even signing a lease can seem out of reach.
In an effort to solve this problem, Kapadia founded Deserve (formerly called SelfScore) in 2013. The company’s goal was to offer credit cards for international students and other thin-credit file customers using transaction flow data and other factors that aren’t considered when calculating traditional credit scores. The Palo Alto-based company has since expanded its card portfolio (it rolled out a series of card products with Sallie Mae earlier this year, in addition to its own card products) and it’s working with credit bureaus on their efforts to develop new scoring models.
“I pitched the idea of using our underwriting, algorithms and data science to underwrite the deserving and underserved populations that are highly lucrative,” Kapadia said. Traditional lenders, however, are often focused on prime customers who already fall into the lucrative category.
Deserve, whose products are accessible to anyone living in the U.S., underwrites unscoreable customers through a series of identity and transaction flow verification steps. If customers don’t have a social security number — as is the case with many international students — individuals’ identities and immigration statuses are verified through document and visa status checks.
Unlike traditional credit score calculations, Deserve asks for information on income and expenses and, through an integration with customers’ financial accounts via Plaid, its platform is able to determine if the customer qualifies for a card product. “We make decisions on cash in and cash out, expenses and if you have recurring transactions on your account,” Kapadia explained. Deserve claims to have “tens of thousands” of customers across the U.S. Deserve has raised $47 million in equity funding and $50 million in debt financing.
While an early mover in the alternative data-based credit scoring space, Deserve isn’t the only company aiming to reach previously unscoreable customers. Other companies serving this market include Petal, which offers card products; Stilt, which offers loans for people living in the U.S. who are on work or student visas; and Nova Credit, which licenses its tech platform to institutions.
While businesses in this area could face pressure in an economic downturn, the advantage of this model, according to Aite Group senior analyst Leslie Parrish, is a live connection to customers’ transaction flows, allowing them to anticipate challenges when customers encounter financial difficulties. “Deserve is really looking at a narrow, niche market, and they want to become experts in underwriting for that category,” she said. “They can monitor account transaction data to see when customers are becoming more or less financially secure.”
While Deserve began with a direct-to-consumer model through its own cards, the path to growth involves business-to-business partnerships, of which the partnership with Sallie Mae is an example, and affinity-based co-branded cards. Deserve generates revenue through these partnerships through fees that brands pay. “We have three categories [for growth]: one is our design portfolio, which we will continue to grow; the second is offering our platform as a service; and the third is affinity co-branded cards,” Kapadia noted.
As banks tightened up lending practices following the Great Recession, startups like Deserve rushed to fill a gap to serve customers who weren’t being served by large banks, according to Ryan Falvey, managing partner of the San Francisco-based Financial Venture Studio, which operates a fund for early-stage startups. Alternative credit scoring is slowly making its way to traditional credit bureaus’ approaches, but the process is likely to take some time, he noted.
“There are a lot of gradiations in credit; the market isn’t really about prime and sub-prime,” Falvey said. “Over the last decade, technology and innovative distribution models have been able to parse out who is in those categories, or who might not be in one of them yet.”
The outreach to customers who may not be valuable yet is one of Deserve’s areas of emphasis. According to Kapadia, banks have been reaching out to Deserve for possible partnership opportunities. In addition, Deserve has been partnering with traditional credit bureaus and credit assessors, including Fico, Experian and Finicity on their efforts to evolve scoring models beyond traditional methods.
“[Traditional] credit scores are a lagging indicator,” said Parrish. “The mainstream bureaus are moving in that [alternative data] direction and the critical question is how quickly it will be adopted.”
Asked whether he has plans to offer bank accounts and pursue a ‘challenger bank’ growth path, Kapadia said Deserve is squarely focused on evolving its current product stack. “There’s no money in checking accounts,” he noted. “It costs institutions $5 to $10 [per month] to offer them to consumers.”