Petal, a ‘beginners’ credit card company’ secured another round of funding of $34 million in October from Jefferies and Silicon Valley Bank. This comes several months after raising $13 million from Valar Ventures.
Located in New York, one of the main hubs of financial technology (also known as, “Fintech”), Petal is a more developed startup poised to disrupt the credit card industry. The ten biggest issuers, topped by Citigroup, profit tremendously from nearly 90% of the market. As of June 2017, 30% of respondents to the New York Federal Reserve Survey of Consumer Expectations applied for credit within the previous year. Though, roughly 40% of applications were denied. On top of that, 50% of those with credit scores below 620 have limits under $2,000.
Petal is prepared to swallow market share by simplifying the approval process for applicants with little to no credit. Their management acknowledges that getting started and building rewards is incredibly slow and difficult. Their solution: digitize the process by measuring borrowing history, income, spending ratios, etc. Using advanced algorithms, they are more selective with their products and can offer higher starting limits. The goal of Petal is simple: encourage responsible card management, enable consumers to build credit, and foster financial success.
They represent a strong venture capital candidate because of their consumer-friendly brand in an industry currently filled with skeptic consumers. Petal’s main target customers are millennials without an established history followed by minorities who struggle obtaining credit. Younger Americans are frequently opting for user-friendly platforms and transparent (and minimal) fee structures. Following fintech companies such as Robinhood or Venmo, Petal is differentiating itself by limiting the stress in starting which allows their users to immediately build credit inexpensively and track consumption.
The Petal Visa Credit Card was first launched on October 2, 2018 to a waiting list of over 100,000 people. European companies already have a similar concept due to favorable consumer regulations, but with current US companies taking advantage of poor financial literacy, Petal has a clear path to attract millions of Americans without credit.
The $34 million in funding was primarily intended to ensure a smooth product release. Though, Petal faces risk from their historically risky customer base. Their startup capital will help further simplify the platform and enable users to be better educated, thus mitigating the credit risk. Other significant benefits to their model include minimal costs towards maintaining facilities which frees capital to improve the online platform and customer service. The ultimate factor in determining profitability is if they can successfully analyze credit risk without using credit scores.
As of 2016, the annual amount of credit card payments was $3.16 trillion. The market is clearly dominated by a few major companies.The long-term potential of Petal will be recognized as they begin to grow their customer base over the next several months. By providing a truly differentiated service, Petal has a very positive upside.