Basing credit decisions on the future, not the past
Being an immigrant, Kalpesh Kapadia understood what it was like to come into the U.S. with no access to credit and no financial history in this country.
As the founder and CEO of Deserve, Kapadia wants to deliver credit cards to students and underbanked young adults through a system that underwrites credit without relying on FICO scores and instead by judging the applicants on their future potential.
"We wanted to develop a 21st Century way of underwriting credit," Kapadia said. "And the problem I had in coming here 23 years was just exacerbated for foreign students because of the 9/11 attacks and the Card Act that restricts some marketing of credit card products."
Advancements on the web also provided a place for Deserve to check "so many digital markers that are predictive of someone's financial behavior and credit behavior," Kapadia added.
With students, for example, "there is usually no payment history, so we are banking on the students' credentials and future, as opposed to their past," Kapadia added.
Kapadia started this project two years ago under the company name of SelfScore, first focusing on international students ages 18 to 29 years old who were mostly using a parent's credit card or some type of debit/prepaid card.
Deserve is launching its Mastercard-branded cards this week. The effort is boosted through a $12 million funding round from Accel, Aspect Ventures, Pelion Ventures, Mission Holdings, Alumni Venture Group and GDP Venture.
Research indicates that students opt to use cash most often and, so far, have not been inclined to jump on board with mobile wallet use. Part of that behavior stems from not yet establishing credit history with a traditional credit card.
Those applying for a Deserve card must be 18 or older, enrolled in a college and in good academic standing. They also must have a Social Security number, and a driver's license or passport.
Deserve also asks for bank statements to determine if any behavioral changes have taken place. Finally, applicants must provide a phone number, e-mail and physical address.
The company runs this data through its own algorithms to determine approval for the Deserve Edu card, which it designed for college students. As a cardholder establishes a payment history and shows good credit behavior, the account becomes eligible for better credit limits and an upgrade to the Deserve Pro card.
"Over time, we offer better rewards and conditions on the card if you use it the right way," Kapadia said. "You can move from Edu to Pro as you advance financially or get older. Based on a job and income, you get a better credit line and more rewards."
Initially, Deserve targeted about 1.2 million potential student applicants in all 50 states on just more than 180 college campuses. But now, the company markets to all young adults without vast experience with banks or development of a credit rating. That gives it a potential applicant pool of more than 40 million, Kapadia said.
"We want to be their first credit relationship," Kapadia said. "We will provide them with the training wheels needed in our advocacy model. We want to reward good credit behavior and payments behavior, and we don't want them mounting debt."
Deserve Edu operates with a 19.74% interest rate, while Deserve Pro is at 16.99%. There are no other fees, including no foreign transaction fees if it is used overseas.
While operating with plastic cards now, Deserve is working on delivering rewards through a mobile app and getting Deserve cards more firmly entrenched in mobile wallets.
Kapadia acknowledges that a key competitor in the student market is Discover, which for the past three years shifted some of its focus toward college-age applicants.