Q&A: How Kalpesh Kapadia and Deserve.com Are Helping the “Credit Invisibles”
- March 29, 2018
- Posted by: Andrew Rombach
- Category: Credit Card News
For any individual at the college stage, obtaining credit is a necessary milestone on the path towards financial freedom and recognition. For instance, if you want a mortgage down the line, you need to have an established, successful credit history. Chances are you started building your credit in college. While this seems like a given, this step is considered impossible for a group of consumers who are considered "credit invisible."
There is an increasingly large number of college students, many of them foreign, in the United States who are considered "credit invisible," meaning they do not have the credentials to be approved for a simple credit card.
This is where a company like Deserve steps in. By utilizing alternative, forward-looking data, Deserve can increase the likelihood for an "invisible" applicant to obtain credit.
As a part of our executive leader interview series, I was able to interview CEO & Co-Founder of Deserve - Kalpesh Kapadia. He was able to offer all sorts of insight into the "credit invisible" market, and he discussed how Deserve's products can help these individuals get on track with credit building.
Read on to learn more about Deserve's, and Kalpesh's, mission to serve the underserved.
The Company Mission
Q: How would you describe Deserve's company mission?
A: Our mission is to provide access to fair credit to deserving, but underserved populations and lead them to financial independence. Our key values are access, advocacy, and independence.
So, we want to provide access to fair credit, meaning we don't want to offer you a card that has a high interest rate and fees. We want to lead with advocacy, so we want to promote and reward good credit behavior. We put a heavy emphasis on credit education and financial literacy. And last but not least is financial independence. If you are a young person and we help you build credit history, then you won't have to rely on cosigners on loan applications.
Overall, we want to promote the right kind of behavior. Our products have a guard rail that keeps you out of trouble. Contrary to this, the business model of most banks involves getting you into just enough trouble to get a lot of money out of you, but without getting into too much trouble that you'd charge-off. Our model is the opposite.
We want to help you get a good credit score; we want to help you get rewarded. That's what we're all about.
The Journey from Self Score to Deserve
Q: Could you explain your inspiration for starting a company like Deserve?
A: The inspiration for starting Deserve derived from my own personal experience with the banking and credit system in the US.
I came here about 23 years ago. I earned my Masters in Engineering at NJIT then an MBA at Carnegie Mellon. Before that, I was top-of-my-class in India - an over achiever, but I came here and the system treated me as if I didn't exist. At the time, there were hundreds of thousands of students in the US from all over the world; now, there are 1.2 million students.
After 9/11, legislation was passed that made it increasingly difficult for the credit system to recognize this group of students. Fast forward to the 2008-2009 crisis, the CARD Act was passed which made it increasingly difficult for credit card companies to market on campus, restricting banks in that market. These two things combined with how the bureaus worked created this opportunity for Deserve.
So, I was very frustrated with the system as it existed, and it left out too many deserving people. I decided to do something about it, and that was the inspiration for Deserve.
Q: What was the inspiration for the name change from Self Score to Deserve?
A: The company was launched as SelfScore because we are able to give students with no credit history or FICO score their own “self score” by looking at their credit potential and not their risk. Their self score takes into consideration factors such as identity, stability of identity, earnings potential and ability to pay. We rebranded to Deserve because the name aligns with our mission of providing access to fair credit to deserving but underserved populations.
In our desire to help millennials and Gen Zs become financially independent, you could say that SelfScore was the how and Deserve is the why.
Q: What were some of the major challenges during your startup phase with Deserve?
A: One of the major challenges was the difficulty in launching a new credit card. Most people don't realize that there have only been five new credit card launches since the financial crisis, and one of those brands has already folded. It is increasingly difficult to launch a new credit card company.
Banks launch new credit cards all the time. But for a brand new company - to get it off the ground, to put the infrastructure in place, to originate, to market, underwrite, and service - it's really hard, time consuming, and costly. Then you have the regulatory aspect of this business such as marketing and underwriting regulations.
These all create barriers to entry, and it also creates growing pains for startups like Deserve. It's sort of like building a plane while flying it or jumping off a cliff and assembling a parachute on the way down.
So, it's a difficult startup with challenges that we need to overcome. But it's fascinating to see the product used by so many consumers.
Q: Was partnering with Mastercard essential in driving your business? Did you consider Visa?
A: We looked at both Mastercard and Visa. To me, they're kind of interchangeable, so I didn't see any significant difference between the two. Our bank partner under which we issue cards happened to have a Mastercard partnership ready to go, and time to market was essential to us.
Q: You mentioned that banks have the ability to drop new credit cards all the time So how do you expect to compete with the traditional competitors moving forward?
A: Well, now it's easy for us. We have launched five cards. So, there is a level playing field in the sense that starting up was hard, but now we can launch cards probably faster than any bank.
Secondly, how do we expect to compete? The industry has competed for the longest time on two X's: price and reward. The price is the APR ticker on the interest rate. The rewards is the rewards structure such as travel benefits, cash back benefits, and airline benefits. We say there is a third X: the user experience.
If your price and rewards are market competitive, then people don't switch cards. As long as we keep consumers happy, our product will stick with our users who are new to credit.
Also, if it's your first credit relationship, then there's all the more reason to keep a Deserve card alive. After all, length of credit history has a 15% weighting on your credit score, and this is from your first credit card. Most people shouldn't cancel their first card, and that is an advantage in our favor.
Q: Would you say Deserve Mastercard is more of a long-term product for consumers as opposed to a first-step credit card? Do you expect your users to keep on using your products?
A: Yes, we want to provide an upgrade path for consumers, meaning better rewards down the road, better interest rates, and higher credit limits. So, if we can give you all three in addition to a good user experience, then there's no reason for you to switch credit cards.
Offering Credit to the Underserved
Q: So, a big part of this is access to credit, serving underserved applicants. So, how does your approach to underwriting open up your products to these individuals?
A: Our underwriting relies on what we call ABCD, analytics-based credit decisioning. At the basic level, it takes into consideration: identity, validity of identity, eligibility, and ability to pay.
We want to be able to know you, the one who applied. So identity is very important which can be verified in a number of ways whether it's photo ID or government-issued ID. Two, validity of identity is associated with your address - a digital or physical address. Then we have eligibility - you must be 18.
We determine ability to pay through self-reported information in the application, and then we verify this through your bank account activity. We want to see your digital financial records - debit, credit, deposits, withdraws, payments, late fees, and anything else in your bank account. We electronically take that information and analyze it in real-time.
When you enter information in the credit application on our website, we verify all of this info in real time and lead you to an approve or decline decision. That's how our underwriting works. You don't need to have a credit score. You can still obtain credit using these four tenets.
Q: Could you elaborate on how exactly machine learning is used in your underwriting model?
A: Unlike traditional credit card companies, Deserve uses machine learning and alternative data to to assess applicants. Our proprietary algorithm predicts credit potential (future) instead of assessing credit history (past). For example, rather than requiring a social security number, the company can draw on alternative data to verify an applicant’s identity. Machine learning also allows Deserve to look into other financial factors that offer insights into the creditworthiness of a student or immigrant.
Q: Which alternative, self-reported piece of data is weighted most significantly?
A: Education is only positively considered. In other words, if you don't have enough money, then we can still give you credit based on your credentials. If you are going to college for a major that will allow you to get a job quickly and make money, we take that into consideration even if you might not have an income right now.
Q: You said earlier that you don’t need a credit score to be approved. If someone does have a credit score, then how would that be weighed against alternative data?
A: Having a credit score without blemishes on your history is still considered a positive. If you have a credit score, then you're welcome to apply for a Pro product which takes into account traditional credit history. The Pro product is a graduation product, or upgrade product, for our Edu customers. We encourage people who are non-students and have good credit to apply for a Pro product. Also, if you're not a student and still new to credit, then you can apply for a Classic product.
Q: What was one of the biggest revelations you found from implementing this underwriting algorithm?
A: How you use your bank account as a debit card user was very indicative of how you use credit. If you have a bunch of overdrafts on your bank account activity, this indicates whether you are going to use a credit card responsibly.
Moving Forward into 2018
Q: Which Deserve product are you most excited about in 2018?
A: The Deserve Edu card is going to be our flagship product because Amazon Prime is free for students during the first 18 months. We offer 1 percent cash back, and we are working on other perks.
We're partnering with millennial-focused brands to offer three types of perks in addition to cash back. Number one will be in the category of "have fun." Number two is "be smart." Number three is "do good." These three categories will have evergreen rewards. We will have seasonal rewards as well as one-time good behavior rewards. So, we have three-by-three metrics: have fun, be smart, do good and evergreen, seasonal, and one-time rewards.
You're going to get a lot more than just a credit card. You get Amazon Prime. You'll get 1 percent cash back on all purchases. You'll know your exact APR. And you'll get all sorts of perks. There are a few other things coming down the pipeline, and that's why I'm most excited about the Edu product.
Q: Do you plan on offering other products in the near future, whether it’s a credit card product or not?
A: I imagine our next product would be a bank account and debit card. It fits really well with our credit card business. We have interest in going to the loan market, but it is highly capital intensive and the economics are not that appealing.
Q: Can you share Deserve’s growth expectations into 2018?
A: Last year, we grew by about 4x, and we expect to triple in growth this year. So, in other words, we expect to triple our account base, our user base, balances, and more.
California-based startup Deserve specializes in offering credit to underserved, yet deserving consumers in the United States. More specifically, Deserve offers credit card products to these underserved populations by utilizing alternative data as well as a unique underwriting model. This population includes consumers who are either new to credit or lack the traditional criteria for a successful credit application.
About Kalpesh Kapadia
Kalpesh Kapadia came to the United States 23 years ago and subsequently earned a Masters in Engineering from the New Jersey Institute of Technology as well as an MBA from Carnegie Mellon University. He went on to work as an analyst at Wall Street as well as founded his own company, Equanum Capital. During his time in the US, he had trouble accessing credit as a "credit invisible" consumer. These difficulties inspired him to co-found Deserve, a company that offers lines of credit to the underserved, "credit invisible" population.