The fintech startup Petal announced a partnership Wednesday with WebBank to officially launch a credit card for the estimated 65 million people who have insufficient credit history to qualify for a traditional credit card.
Petal CEO Jason Gross says his team has been working on the technology behind this offering, which includes artificial intelligence software programmed to predict creditworthiness, for three years.
The fintech-friendly WebBank already works with LendingClub, Prosper and PayPal – fintechs are a huge part of the Salt Lake City bank's business model.
Petal first unveiled its card in September, when it also announced a $3.6 million seed funding round it had raised earlier in the year. It issued a limited number of cards in beta. More than 60,000 people have joined the wait list at petalcard.com.
In mid-January, Petal announced it had raised a $13 million Series A funding round led by Valar Ventures, Peter Thiel's investment firm.
Along the way, Gross has put together an experienced team, including co-founder David Ehrich, who formerly headed credit strategy at JPMorgan Chase; Shiri Wolf, a senior counsel with the Consumer Financial Protection Bureau who is now Petal’s general counsel; and Ariana Poursatip, who led the Square Capital business for Square before joining as Petal’s head of product.
On Wednesday, Petal said it is partnering with WebBank to start the process of making the card available nationwide. That process will take place over the next several months.
Asked why this credit card is necessary, Gross relates a story of one of his co-founders, Berk Ustin, who is now a data science academic at Harvard and an adviser to Petal. When Berk came from Turkey to the U.S. in 2005 for undergraduate studies at UC Berkeley, he was turned down when he applied for a credit card.
“Despite the fact that he had a great educational background, he had worked at Amazon, he had worked at a hedge fund making money, he had no credit history,” Gross said. “That caused a number of issues. He was declined for a credit card, had trouble signing for a rental lease and getting set up with a cellphone that wasn’t prepaid."
Berk went on to specialize in machine learning, AI and data science. He focuses on fairness in algorithmic decision-making and applying machine learning technology in highly regulated spaces where models have to be nondiscriminatory, like criminal justice, healthcare and consumer finance.
Around the same time, the Consumer Financial Protection Bureau started publishing research about credit access in the U.S. and so-called credit invisibles.
“The CFPB has identified 45 million people who have no credit score,” Gross said. “Experian and others have indicated that there are 50 million more people that are thin file people and have a have a credit score that’s not accurate because of limited data at the credit bureau. Andreessen Horwitz has estimated 90 million people are misscored — that’s a third of the U.S. population. Not only are we talking about a huge number of people, but we’re talking about a problem that a disproportionate number of young people, minorities, immigrants, low- and moderate-income Americans, military veterans and other groups.
“You have a system that works well for certain consumers but misses huge swathes of the U.S. population,” Gross said. “For us, the key has been using machine learning, data science and more financial data to make accurate and inclusive credit decisions.”
Instead of relying on credit scores, Petal has what it calls cashflow underwriting. It considers how much money consumers make, the bills they pay on a monthly basis, and trends in volatility in their income and expenses.
It’s similar to the way small-business lenders like Kabbage and OnDeck analyze a business’ cash flow, based on bank account data, to determine creditworthiness, rather than the small- business owner’s FICO score.
Interest rates for the PetalCard range from 14.5% to 25.5% and there are no fees, Gross said.
The type of customer Petal seeks, he said, is the “invisible prime” — people who are new to credit or people who once had financial difficulty but are now in a better place.
“Existing products don’t do enough to help consumers make responsible financial decisions,” Gross said. “We view it as an obligation to provide products that are safe and affordable, simple and transparent and that help consumers to make good decisions about their finances, encourage them to responsibly spend, borrow and stay out of the negative side of credit.”