In recent years, there has been no dearth of startups offering credit lines to the underbanked. Most talk about their mission as helping people establish credit, which is great, but they’re also growing credit because — let’s face it — lending money is lucrative.
Now, a startup founded by Stanford grad James Savoldelli has found a new niche in that same industry, and it’s through pawn shops.
Called Pesto, the idea is creative — and sensible. For those in dire financial straits, pawn shops are banks of last resort. The person doesn’t even have a credit line or bank account or income. A customer with a government ID can leave behind something of value — jewelry, electronics — and receive a secured loan in exchange for a percentage of that item’s value, plus interest. If he repays the loan, the person can get the thing back; Otherwise, it is confiscated and sold.
But such loans can be extremely expensive, depending on where the pawnshop is located. While in California, Florida, Georgia, and Alabama, shops can charge just 2.5% interest on the principal amount each month, a customer could end up paying 25% interest per month (or an astonishing 300% per year). Little wonder that according to the National Pawnbrokers Association, there are 12,000 pawnshops in the US, contributing to a market of roughly $14 billion.
Pesto hopes to capture some of those individuals before they start down that path online, offering them a secured MasterCard with up to 29.99% APR — and zero interest if someone pays their loan back on time. Does.
We spoke to Savoldelli yesterday about Pesto’s strategy, which he modeled after being offered high-interest loans as a college student and subsequently entering various pawn shops to better understand customer behavior. . Investors are clearly impressed with what he’s building. The startup – which will pass through the Y Combinator accelerator in 2021 – attracted $11 million in Series A funding from Active Capital, Plural and others. More follows, edited for length:
During Covid, you stayed with a classmate in LA and started working at a pawn shop. What happened?
I took a job at the biggest pawn shop in Los Angeles; It was considered an essential service. So I’m out there with my mask on every day, helping this customer base, and what I saw fascinated me. Customers were getting a loan, and then paying it back, then getting another loan and paying it back, and doing that over and over again. But it was never helping him in making credits. It was never going to help them get something better than what they just paid for. That’s why they got trapped in this cycle. That got me thinking: What if we could create a product that actually rewarded people for giving something back? and the more i learned about credit, i [saw] opportunity to create an asset-backed credit card where we give people access to initial, very affordable credit and [them] Out of this world of payday loans, pawn shops, [and] in title loans and mainstream financial products.
It is surprising that some states allow pawn shops to charge this much interest. Why are the laws surrounding these businesses so lax and terrible?
how much time you have?
[Laughs.] I don’t think many people honestly know about it, or are openly working on it. But it’s a terrible proposition from end to end.
How exactly does pesto work? How – Where – Do you have possession of the valuables for which you are providing credit?
Customers go online, they find our website. They go through a quick assessment by entering details about their assets and we give them an estimate of what their credit line might be worth. Then we give them a QR code that allows them to walk into any UPS store across the country, where it will be packed and shipped, fully insured, directly to us.
Once the property is received, we open it under video, inspect the property, and we make them a final offer of credit. From there, we digitally spin a card, and the physical card arrives a few days later in the mail. Items are stored in a temperature-controlled vault for a period of time, and when they move to an unsecured card or close their account, we send them their item back.
Do you worry about illegal goods?
We are a terrible way to fence something. Our customers go through full KYC.
Pawn shop loans typically give people 30 to 120 days to pay back. Is there a timeline with the pesto offering? Do you care about the property as well or do you mostly focus on the interest from the loans you provide?
you can use [your card] As long as it is convenient for the customer. Our goal is to earn as much money as possible from the transactions spent. One of the reasons we have such low interest rates is because we make money when the customer spends money, but we are not charging the customer for it like any standard credit card. All we want is for our customers to get their property back.
Who are you partnering with on the back end?
We partnered directly with Mastercard. We have one issuing bank that we work with directly: Continental Bank out of Utah. We work with a credit card processor called ITC. In building a credit card, you take those pieces and put them all together to create your experience.
Is this demographic part of an early ploy? Over time, will your credit card company target other populations or regions?
We have lots of ideas for where we can go with this [after] Spending the past two years building a modern credit platform. We have a lot of things on the drawing board.
