In recent years, there has been no shortage of startups offering lines of credit to low bank account holders. Most talk about their mission to help people get credit, which is noble, but they also extend credit because – let’s face it – lending money is lucrative.
Now a startup founded by Stanford graduate James Savoldelli has found a new wedge in the same industry, through pawnshops.
Called Pesto, it’s a smart idea. For those in dire financial straits, pawnshops are a last resort. An individual does not need to have a credit line or bank account or even income. A customer with a government ID can simply leave something of value – jewelry, electronics – and receive a secured loan in exchange for a percentage of that item’s value, plus interest. If he or she pays off the loan, that person can pick up the item; otherwise it will be forfeited and sold.
But such loans can be extremely expensive depending on where a pawnshop is located. While stores in California can only charge 2.5% interest on the principal each month, a customer in Florida, Georgia, and Alabama can pay 25% interest per month (or a staggering 300% per year). No wonder there are 12,000 pawnshops in the US, contributing to a market worth about $14 billion, according to the National Pawnbrokers Association.
Pesto hopes to catch some of those individuals online before they go that route, in part by offering them a secured Mastercard with an APR of up to 29.99% – but 0% interest if someone pays back their loan in full on time.
We spoke with Savoldelli yesterday about Pesto’s strategy, which he formulated after taking out a high-interest loan as a student and later spending time at various pawnshops to better understand customer behavior.
Investors are clearly also intrigued by what he is building. The San Francisco-based startup — which went through the Y Combinator accelerator in 2021 — just raised $11 million in Series A funding from Activant Capital, Plural and others. More to follow, edited for length:
Acutely.info: During COVID, you lived with a classmate in LA and started working at a pawn shop. What happened?
James Savoldelli: I took a job at the largest pawn shop in Los Angeles; it was considered an essential service. So I’m standing there every day with my mask on helping this customer base, and what I saw fascinated me. Customers took out a loan and then paid it back, then got another loan and paid it back, and did it again and again. But it never helped them build credit. It never helped them to graduate to something better than what they just paid off. So they were stuck in this cycle. That got me thinking, what if we could build a product that actually rewards people for paying back something? And the more I learned about credit, I [saw] the ability to build an asset-backed credit card where we give people access to what is much, much cheaper credit to begin with and get [them] from this world of payday loans, pawnshops, [and] property loans and in regular financial products.
It’s amazing that certain states allow pawnshops to charge this much interest. Why are the laws surrounding these companies so loose and terrible?
How long do you have?
[Laughs.] I don’t think enough people really know, or honestly aren’t working on it. But it’s a horrific proposition from start to finish.
How exactly does Pesto work? How – where – do you take possession of these valuables for which you extend credit?
Customers go online, they find our website. They go through a quick appraisal by entering details about their assets and we give them an estimate of what their credit limit might be. We then give them a QR code that they can use to walk into any UPS store across the country, where it will be packaged and shipped directly to us, fully insured.
Once we receive the asset, we open it under video, inspect the asset and give them a final credit offer. From there, we flip a card digitally and the physical card arrives in the mail a few days later. The item is then temporarily stored in a temperature-controlled safe and when they switch to an unsecured card or close their account, we send them back their item.
Are you concerned about illegal goods?
We’re a terrible way to shield an item. Our customers go through a full KYC.
Pawn shop loans typically give people 30 to 120 days to pay them off. Is there no timeline with Pesto’s offerings? Do you even care about the wealth or are you mainly focused on the interest rate of the loans you make?
You can use [your card] as long as it suits the customer. Our goal is to make as much money as possible from the spent transaction. One of the reasons why we have so much lower interest rates is that we make money when the customer spends money, but we don’t charge the customer for it like any standard credit card. We absolutely want clients to get their assets back.
Who do you work with at the back?
We work directly with Mastercard. We have an issuing bank that we work with directly: Continental Bank of Utah. We work with a credit card processor called ITC. When building a credit card, you take those pieces and put them all together to build your experience.
Is this demographic part of an opening move? Will your credit card company target a different population or industry over time?
We have a lot of ideas where we can go with this [after] spent the last two years building a modern credit platform. We have a lot of things on the drawing board.