Tearsheet’s Where Credit’s Due podcast Ep. 1: Credit for the underbanked

Welcome to Where Credit’s Due - Tearsheet’s podcast covering the latest trends in lending. I’m your host Iulia Ciutina, senior reporter at Tearsheet, welcoming you to our very first episode. 

Today we’ll be discussing how fintechs are helping immigrant communities to get access to credit, speaking with the chief executives of Nova Credit and TomoCredit, Misha Esipov and Kristy Kim. 

As credit history typically stops at the border, many people who move to the US from abroad have to build consumer credit from scratch. Nova Credit wanted to address this problem and created an alternative score to assess foreign residents’ creditworthiness based on their home country credit data.

Nova partnered with American Express and launched a Credit Passport, which is integrated into the American Express online Card application process, enabling applicants’ international credit records to be instantly translated into a US-equivalent credit report and score. 

At Tomo Credit, founder and CEO Kristy Kim created a technical underwriting solution that would allow immigrants and others without a credit history to build a credit score. With the Tomo Credit Card, one has access to a $10,000 unsecured credit limit, the ability to build a credit score, and all the points and benefits of a credit card. Approval can be done within two minutes. There are no fees, no interest rate.

Unlike other major credit cards, Tomo doesn’t require a credit score and works independently of FICO. Despite having no marketing budget, TomoCredit managed to acquire more than 2 million organic applicants within 12 months, and its revenues jumped tenfold over the same period.

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The following excerpts were edited for clarity.

The financial industry welcomed a number of companies targeting consumers without credit histories, with Nova Credit and Tomo Credit being two great examples of that. You've both founded your companies to bring financial services closer to those who would traditionally get rejected by the legacy system. However, you each had a different approach - what's your perspective on the problem?

Misha Esipov: Nova Credit started as a cross border credit bureau, really in pursuit of helping unlock financial services for people that are new to this country. Just to color the problem a little bit - a few million people move to the US every year and when they first arrive, they need to get a place to live, a credit card, a cell phone plan, an auto loan, potentially a student loan, and any of those products and many more require having a US credit history.

But by virtue of having just arrived, this segment doesn't have any US history - they don't even have a US bank account, so they're effectively locked out of being able to access mainstream financial services. The core of what we set out to do was to create a systemic solution to that problem. And our thesis from the very beginning has always been that if you can give people access to their own data, then you can enable them to bring that data with them to put their best foot forward and create a more complete picture of who they are. And so our product now helps recent immigrants get approved for American Express cards for auto loans for student loans for apartment leases, and much more.

Kristy Kim: I came here at pretty young age, when I was only 11 years old. I thought that I was doing everything right, following my American dream, studying, getting a job, etc. I didn't imagine that I would struggle to rent an apartment in San Francisco, or get an auto loan or a credit card in the US. This was a really interesting experience - I found it fascinating in a way that in such a diverse country like the US, the system can be so outdated. So I thought that if someone can figure out different ways to evaluate and underwrite customers, that would be an amazing opportunity. I feel very humbled and honored to build a company who is tackling the problem.

You initially wanted to build this product and license it out to banks, but then you found that it would have taken them too long to implement something like this. Why do you think that it’s taking so long for the incumbent banking system to include these communities?

Kristy Kim: Speaking of bigger banks and traditional banks, I do understand their struggle. With the need for change, I think they see the problem themselves as well. But I think they need to prioritize. And for them, the priority is serving their existing customers and making sure that their legacy portfolio is performing well and performing healthy. They can't just enter into a territory they don't know anything about - in this case, people without a credit score. Without any FICO history, it's an unchartered territory that they have no experience with. They don't know the risk. As a big bank with a lot of compliance risk internally, it's hard for one of them to be the volunteer to be the first one to take a shot.

I think that brings a big opportunity for startups like Tomo Credit and Nova Credit that we can do things differently. We can be innovators, because a bank's job is not to be an innovator. They're more of a follower than innovator. In that sense, startups are going to be the ones who are leading the innovation and showing people that this works. And then eventually five to ten years down the road, I hope all the mainstream banks will follow and adopt this new change.

Misha Esipov: Our philosophy on this question is that it's not that banks or the credit bureaus are intentionally excluding recent immigrants - I think everyone generally wants to serve all Americans, and new Americans newcomers. But the challenge is that there's never historically been a way to understand who these customers are, right? Because when you first arrive, you're effectively credit invisible. You don't have a financial identity here, you can't easily be KYC. All traditional KYC and underwriting processes are effectively broken for this particular segment, at least for their first few months of arrival.

A lot of what we do at our core B2B business is partner with some of the leading banks and alternative lenders out there, enabling them to use our technology, our infrastructure and analytical capabilities. This allows them to convert applicants who they initially perceive as credit invisible because they don't have any US credit bureau information, and be able to look at them as if they have a complete credit history upon arrival.

Is it difficult for them to underwrite for these types of populations?

Misha Esipov: Oh, yeah. If your underwriting processes only rely on data that exists within traditional US credit bureaus, that information is very sparse or non-existent for this segment upon arrival. And so those traditional methods of underwriting just don't work because there's no real data to actually underwrite the segment with. The core of what we and many companies out there are trying to do is to introduce new data sets to really empower consumers to unlock more information about who they are at their point of need, and to use that to paint a more complete picture of who they are.

What what type of data has not been included before and is now being part of the conversation over what should define someone's credit worthiness?

Kristy Kim: The credit bureau system, if you think about it, is not based on real time data to begin with. So if I lose my job today, or get a promotion today, it's not reflected into the score because it's not a liability event, it's an income event. Credit bureaus have no idea about my income events. What's really cool about doing real time cash flow underwriting is that we can capture all the income events, which is really important when looking at a user base without a credit history. That's where we really focus on - how to leverage real time data by capturing life events in order to be smarter about assessing risk.

Misha Esipov: Our view on this is that the credit bureaus are doing the best they can. They've existed for a long time - their core mechanism of building their existing data assets depends on data furnishing from banks, and that system does well for people who are able to start building credit. But it's precisely around those credit on-ramps where the challenge exists for people that haven't yet been able to start to establish their own credit history. We're trying to think about the ways consumers can get information about themselves to paint a more complete picture of who they are, and share that information with lenders so they can make a more fair and sound and inclusive lending decision.

At Nova Credit, you basically translate credit histories for people from one country to another, so I'm curious here, how much do these systems communicate? How difficult is this to do?

Misha Esipov: The short answer is that they don't communicate, and that's kind of one of the reasons why we exist. For better or worse, we are credit reporting nerds and we've studied the whole world's credit reporting system. I think the irony is that if you look at the world's credit reporting landscape - there's almost 300 credit bureaus all around the world, and none of them talk to one another. Every every credit bureau kind of exists within its own national silo.

The core thing that we've done, part of our secret sauce, is we've gone around the world, we built partnerships with all these credit bureaus that operate in over 20 countries at this point, and we're able to look at data from India, Canada, Mexico, China, Korea, Australia, UK, Nigeria, Kenya, a bunch of other countries - look at all of that and understand it in a single format. We call that format The Credit Passport, where in the same way that your passport is how you travel the world, your credit passport is how you access financial services as you move from one country to another.

Given that a credit score is so central to someone’s financial life in the US, how do you expect this role to change in the future? What needs to happen in order to make it effective for everyone?

Kristy Kim: My take on this is that lenders always need some type of score, whether it is the traditional FICO score, or an alternative score, because they need to make a decision at the end of the day. And bigger, more established companies, they have their ways of doing it, they've been doing it for the last 50-200 years, and it's really hard for them to make any drastic change. I'm expecting for them to continue to add incremental changes to their core underwriting system that they've been using. So in 10 years later, it will get better.

What's exciting for us is that I don't have to make incremental changes, I just come up with a different core, so my underwriting is completely different. The benefit of that is that we can serve the customers in need faster, because I give them what they want. I've sold them their problem in a drastically better way instead of incremental change ways. That is great. And I think that is also good for the industry, because someone has to make a drastic change to show that it works without the legacy underwriting as a core. I think that kind of brings this positive effect that make more banks feel comfortable to add more and more incremental changes at a faster pace. In that sense, overall, everyone will benefit because consumers will be happy that more lenders participate in alternative underwriting and banks are happy because startups have done this and then shown the result. So banks internally, they don't have to pound the table. They just have to look over there - startups are doing it, it's performing, their loss rate is better than us or at par with us. I think that brings the change to the entire ecosystem, and I think that's a win win.

Misha Esipov: Maybe to add to that, I agree with a lot of those points. There's over 50 million Americans that are not 'scorable' just based on like traditional FICO credit scoring approaches. The problem is that those individuals tend to also be the types of individuals that aren't going out proactively and trying to boost their score or accelerate building their history, but they still run into situations where they have a need for financial products, or they've been in an unfortunate position where they need to borrow. It's precisely in those moments where this becomes a real problem because it prevents them from being able to access financial services. I think our whole philosophy, in many ways similar to what Tomo Credit does, is being able to enable consumers to unlock more information about themselves, whether it's bank transaction data, or other types of information, that allows them to get a leg up and get boosted to actually be able to get approved for the products they need when they need it the most.

What is the incumbent industry’s role in all of this? What should be the main thing for it to focus on right now that would help unlock more opportunities for people in the US?

Misha Esipov: In our view, it's all about consumer permission data - that is the answer to making credit invisible Americans visible. When consumers are applying for financial products, they need tools to unlock more data about who they are, and for that data to be used in a compliant manner to help them get approved. That is ultimately the the way that the system should operate. And there's a lot that has to happen for the mainstream financial services to learn from what innovative companies like Tomo Credit have been able to do with banking transaction data, and other players have done with payroll data, or our credit passport data or other other products out there that allow consumers to paint a more complete picture of who they are.

Kristy Kim: I agree with Misha, I think that's a really good point that the industry is not going to go backwards. And consumers have changed. Consumers are now younger, they have different type of assets, and they are more willing to share data. It's now up to the lenders, whether they want to embrace this change or not, but if they don't do it, it's just not going to be good for their profis down the road.

Definitely, we have to think about younger generations coming into the market with a different level of interaction with technology and approach towards financial services in general. So how is the fintech industry aiming to attract and include these young people in the financial system?

Kristy Kim: During the pandemic, we saw amazing growth, and it was unexpected. I thought that less international students were coming so I was in trouble, but in reality, the opposite happened and so many people signed up. I learned that for younger customers, their first experience with the banking system is digital, it's no longer going into the bank branch to get your first bank account or credit card. It was like that for me, like 10 years ago, or 15 years ago. That was my first interaction with US banking system going into the branch, say hi to people there and ask them questions. Younger customers are trusting digital FinTech players way more than before, because that's their first interaction with banking system in general anyway. I think that's a huge advantage for startups, because we don't have physical stores. That was something that was interesting and beneficial for Tomo Credit. I think that this just tells us that younger customers, especially Gen Z, they are different, and we need to understand what they want and then provide the product that meet their unique needs.

Misha Esipov: I mean, taking a slightly more of a B2B lens. To this question, maybe I'll pull out a famous Andreessen Horowitz quote, which is something like the battle between every startup and incumbents comes down to whether startups get distribution before incumbents get innovation. That's the case in point for what's going on. If you look at the industry here, you've got some really incredible startups in the credit card space, like Tomo Credit bringing innovation to underwriting. Then you've got businesses out there like us who are trying to help the incumbents learn how to use innovation, whether it be marketing or underwriting or KYC. Ultimately, it's a race for some of the new startups to reach real scale and distribution faster than the incumbent banks learning how to innovate and adopt some of these capabilities to be able to stay ahead - that really is the tension that exists out there right now.