It’s been awhile since we caught up with Deserve, the credit card as a service pure play. Over the past year, the company has grown, and last month, the firm signed a partnership with modern issuer, Marqeta. Read/listen to our interview with Marqeta’s chief product officer about its move into credit via a partnership with Deserve.
Deserve CEO Kalpesh Kapadia joins me on the podcast to talk about where Deserve has come from and where it’s headed. We discuss how the tie up with Marqeta can unlock new use cases for credit cards that we wouldn’t have thought possible in the past. Kalpesh also describes how his personal experience as a new student in the U.S. informed founding and launching his fintech firm.
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The following excerpts were edited for clarity.
Genesis of the idea
The genesis of Deserve spawned from my own personal experience with credit in America. I came here as a student 26 years ago, and I had trouble getting access to credit and loans, even though I came from relatively similar backgrounds socioeconomically and academically as my classmates. And over the years, that population has grown. And the access has been restricted, even though they’re deserving but underserved.
Fast forward 10 years, I had a problem on my credit file, which to no fault of my own, put me in a penalty box for seven years. So I’ve been looking at this whole process of originating, underwriting, managing, servicing, and reporting credit, as an industry, which is kind of broken. It relies on what I call the three F’s: the First Datas, the fees, and it is failing the American consumer. It gets the F grade from me, and wanted to do something about it.
The underlying underwriting
So I started the company with a simple premise that we would develop workflow management software and an underwriting algorithm to underwrite credit cards or credit without the use of social security numbers or credit scores. If you have applied for a loan or credit card, you will know that these are the two primary things that every credit application has: I enter your social security number and that allows us to check your credit score, otherwise you cannot proceed.
So we pioneered offering credit without these two key important variables, and we use alternative data and government issued IDs to verify identity, to understand someone’s motivation, someone’s financial discipline, ability to pay, and willingness to pay. And we went in to talk to top banks in the country, and everybody thought it was a no brainer, but nobody wanted to be the first. So we said, we are going to do it ourselves.
We raised venture capital and we productized the entire thing. We launched our credit card. The market was doing quite well. What we didn’t realize during the process was we built the most modern credit card stack in the industry in the process.
From provider to platform
And a few companies came to acquire us in 2018. And one of them was Sallie Mae, which is the largest student bank/lender in the country. They are a $30 billion company. And they really liked what we had built in. They asked us to build such an infrastructure for them, so they can use it to offer credit cards as a second product after student loans and capture more of the relationship in the lifestyle of student. They have the largest market share in student lending in this country. And they have a long history and 5 million customers.
So we got an investment from Sallie Mae, and we built the infrastructure for them. And that’s where the business morphed into credit card as a service.
Fast forward another year and in 2019, Goldman Sachs had been working with Apple and MasterCard to launch a credit card for Apple. They had collectively spent $300 million in three years between three companies to build something that we had built on a similar infrastructure. Goldman Sachs really liked what we were doing and they became a large investor. They led our last round of funding, and then over 2020, we have been doing partnerships and business development and we are launching new cards in the market as we enter 2021.
New card launches
Last year, we launched a few cards. One of them was a wine affinity card. If you love wine, that is probably the best card in the market. It’s called Grand Reserve Credit Card — it’s a MasterCard World Card.
And this year, we are launching a card for crypto lovers, where you spend money in fiat currency and earn rewards in crypto, which is gaining a lot of attention with the press. The company we partnered with is called BlockFi. They just raised $350 million at a $3 billion valuation. And one of the use of proceeds is to roll out their credit card product. So we’re very excited about that.
We are powering a woman empowerment card in partnership with MasterCard and Seneca Women. Last year, we struck three key partnerships: with the large networks, Visa and MasterCard, and one with Marqeta, which is also very exciting for us.
Evolution of the credit card stack
When you look at the industry, there are sort of three phases: credit card 1.0, 2.0 and 3.0. Each phase is defined by 20 year increments. So 1.0 was the 1980s infrastructure: COBOL and mainframe. The leaders were First Data and Total Systems and others. They had a good 20 to 30 year run — what I call the Kodak of our industry. Kodak used to be big in the 90s. When I came to this country, you’d put Kodak film in a camera, go to Empire State Building and take pictures of New York City, and go and develop it in the lab and put it in the album and show it to your friends.
Then you had 2.0, which is circa 2000, where the architecture and infrastructure moved from COBOL and mainframe to client server databases and data centers. And then 3.0, in 2020, which is the cloud API and digital and mobile. Everybody’s on the phone now, as iPhone has included probably 30 devices that I used to have: GPS, music player, camera — probably $20,000 worth of devices are in this phone.
So I believe and Marqeta believes that eventually the phone is going to become your credit card. Apple has already shown that with Apple Card. So 2020, think of us and Marqeta as this next generation. It’s the evolution of the credit card stack.
We call ourselves an Instagram to the Kodaks. When you take the metadata that is associated with the picture, and you expose that to user, there are all sorts of applications that can come up as a result of that, that you haven’t thought of as a company. But the fact that you have exposed this API based in metadata, people can build interesting applications just like I talked about: the wine card or BlockFi bitcoin rewards card, women empowerment cards or other cards.
The Marqeta partnership
Now you make the credit card into software or data products. It’s like saying in 2000, Netflix used to mail your DVDs. And now nobody talks about it. Banks are mailing your credit card, which arrives in seven to 10 business days. And with Marqeta, our partnership, everything is going to be digital. You will never ever have to use paper or plastic.
It’s an excellent jigsaw puzzle: what Marqeta brings and their strengths with our strengths. We very complementary. So it’s a partnership made in heaven, if you will. They are pioneers in the issuing processing space with modern API based issuer processing.
In the debit card space or prepaid card space, there are things like the Program Manager. So we are a program manager, where we bring a bank partnership. In order to issue a credit card, you need a bank. So we have multiple bank partners, such as Celtic Bank or Evolve Bank. So that’s the first thing you need, that 16 digit number, in order to issue a card. Associations like MasterCard and Visa only grant that number to the banks.
We bring the back end balance sheet partnership. Credit is a loan and you have to finance the purchase, at least in the near term. So we bring balance sheet partnerships with Credit Suisse and Goldman Sachs.
We also bring customer service, disputes and chargebacks. Origination and underwriting is a key part of credit. You have to underwrite credit, and you have to separate good from the bad. I can’t give a card to everyone that applies. I need to have some logic behind who has good credit and who has bad credit. We bring all these things to the table — what Marqeta brings is the processing of transaction and settlement. That’s how the partnership works.
Both companies have an ethos that we believe in the API, cloud based instantaneous infrastructure.
Next steps
We will get invited to bid on large RFPs for co-branded cards with digital native brands. If you think of 1980s, you had Toys R Us and Macy’s and Banana Republic and Gap — they had credit cards. But in the 21st century, brands live on the internet and on the phone.
Think of Airbnb and Ubers of the world. They all want to include credit card as a payment mechanism. Apple has a credit card. Amazon has a credit card and I’m sure that Google, Facebook, and Microsoft are also looking at credit cards. So you have these tech giants that are looking at credit cards.
Then you have these digital native brands that are looking at credit cards as a product. And then you have large banks or midsize banks that want to enter the market, like I talked about with Sally Mae. We have another bank that we are working with called BankMobile. We have more banks. So we are responding to these RFPs as well as having active sales dialogue with some of these players in the market.
Goals for 2021
I would say that if we have one or two large scale partners, two or three medium scale partners, and couple of small scale partners, we would call it an immensely successful partnership. We have a number of opportunities that we are targeting together that will yield some of these results.
Deserve in the future
Credit card as a service is a concept that only now people are catching on to. Everybody thought that this was so complex and so difficult. We took that complexity and we made it super simple to launch credit cards. You’re going to see more people venturing into having a credit card in all sorts of use cases because the interchange is higher as a credit product. It can also help you win loyalty. You haven’t seen United Airline launch a debit card or Costco launch a debit card.
Credit cards have three unique functions: a payment mechanism, which is your utility, rewards, which is your loyalty, and a loan, which is your need. You can defer payments on credit cards. And it’s zero fraud, liability protection. Last year, three airlines around the world went bankrupt. If you had purchased a ticket for an airline using a debit card, good luck getting a refund with a bankrupt airlines. I happen to me: my mom had purchased a ticket with an airline in India called Kingfisher and it went bankrupt. If you had bought it with a credit card, you could just call the company and say hey, I dispute this transaction and they will take it up with the airline.
We have close to 140 employees. We’re growing to around 200 employees this year. Over the last three years, we have doubled every year.