Penny Crosman (00:03):
Welcome to the American Banker Podcast. I’m Penny Crossman. Fintechs like a firm Klarna and Afterpay made the concept of buy now pay later popular. They made it easy for consumers to buy big-ticket items like TVs and sofas in installments. Consumers spent almost a hundred billion dollars using buy now/pay later credit in 2021, an increase of more than 300% over the previous year. According to Cornerstone Advisors, a recent survey found that about 60% of consumers prefer buy now/pay later over credit cards due to the ease of setting payments, the simple approval process, and lack of interest charges. At the same time, stories have also emerged of consumers getting heavily into debt through this seemingly harmless and free product. Is buy now/pay later a good idea for consumers and for lenders? We’re here today with Kristy Kim, CEO of Tomo Credit, who has some misgivings about this movement toward buy now/pay later. Welcome Kristy.
Kristy Kim (01:04):
Hi. Thank you for having me.
Penny Crosman (01:06):
Thanks for coming. So first of all, why do you think buy now/pay later became so popular?
Kristy Kim (01:12):
Buy now/pay later? I think they did a great marketing and everyone hears the words and it’s easy to digest: you buy now, pay later. It’s just eating a fast food that it gives you instant satisfaction of buying the things that you want that you cannot afford. So I think it has this psychological draw to consumers, especially younger ones who have not matured enough yet to make a critical judgment and they might want to buy something now and then pay later. And I think that can be dangerous in some scenarios. So I’ve been fascinated to watch how the trend is shaping up.
Penny Crosman (02:02):
What do you think are some of the dangers?
Kristy Kim (02:05):
In my mind, financial habits are like working out. It’s like your actual physical health that you do certain things over and over again and then eventually it has a huge impact on you. So buy now/pay layer might not seem detrimental to you, but in the longer term it can be really harmful. So for me, the way I think about it is at Tomo Credit, we want to empower our customers in a longer term period, not instantly. Meaning that I want my customers, Tomo members, to thrive five, 10 years down the road financially. I want them to reach financial freedom and the best way to get there is train users to build healthy financial habits and responsible purchasing habits. It’s like anti-buy now/pay later, because buy now/pay later might give you instant satisfaction, but longer term it can be damaging to you.
Penny Crosman (03:20):
Can you kind of spell out how your credit works? So if I want to buy a refrigerator, say, and I want to use Tomo Credit, how does that actually work?
Kristy Kim (03:36):
Oh yeah. So let me give you the overview of Tomo Credit, knowing that some of the listeners might never have heard of Tomo yet. So at Tomo Credit we issue credit cards for people who do not have an existing credit score or have a thin credit profile. So traditionally speaking our user base, our customers have been neglected by major credit card companies and the financial system. We built our own proprietary underwriting algorithm that allows customers to apply and get approved without having to have a credit score. So with this approach, we have acquired so many amazing young consumers who have yet to establish a credit score in the U.S. and we ask everyone to pay us back on a weekly basis and we tell our customers that hey, Tomo Credit is not here to encourage you to overspend. We are here to encourage you to build healthy financial habits.
So eventually you can get to your financial freedom faster. So in your refrigerator example, at Tomo Credit, we do not recommend you to buy a fancy high-tech refrigerator if you cannot afford it. If you cannot pay it in the next seven days, we advise you not to. But buy now/pay later companies, that’s the opposite because they are on the side of the merchant, they represent the interest of refrigerator companies. So for Peloton, it’s better for them to sell more Pelotons. It doesn’t matter whether consumers can truly afford it or not. For them their incentives are selling more bikes. But at Tomo Credit, we side with our customers and our members. We want them to have critical thinking that do I really need this? Do I really need to buy this right now? So I think it’s a big change in the fundamental approach: as a fintech, do we side by our consumers long term success or do we side by merchant success?
Penny Crosman (06:11):
So just to clarify, so if I buy a $2,000 refrigerator and I use Tomo Credit, I have to pay that $2,000 off within a week or pay it back within a week?
Kristy Kim (06:23):
Penny Crosman (06:24):
Okay. So it’s almost like a payday advance except that you’re not advancing someone’s payday, but that very short term nature seems like it has something in common with that. How did you find people’s preferences changed during the pandemic? Either with your own consumers or with consumers overall?
Kristy Kim (06:55):
Yeah, so we launched during the pandemic and we benefited from it in a way. The pandemic basically made it normal for younger consumers to get their first bank account, first credit card from fintech instead of walking into a branch like a physical location. So in that way I think we were able to get a lot of new customers coming into our website and our product. So that sense it was great. And during this downturn in Q3, Q4 this year, we also saw a huge spike in consumer interest, in consumer demand. And we found it very fascinating because normally credit card companies, they are concerned when the market is not good. Because when the market’s not good, consumers cannot pay them back and people’s default rates go up, et cetera. But with Tomo we have a weekly payment cycle. So we fundamentally attract the group of customers who do not need to borrow to survive, but who want to be mindful and smart about their money.
So our customers come to us and use the Tomo card instead of using debit card because a debit card doesn’t give you a credit score. So if you buy that refrigerator, $2,000 refrigerator with debit card, it doesn’t give you any credit history or credit score. But if you buy that with Tomo’s credit card you get to pay that $2,000 seven days later and we report that transaction to the credit bureau. So you have the credit history of borrowing $2,000 and paying back $2,000 on time very fast, like seven days. So that benefits you and your credit score. So our customer base, they are very savvy and they know that Tomo is helping them boost their credit score fast so they can get to that 850, the best credit score, as soon as possible and reach their financial freedom down the road.
Penny Crosman (09:10):
What if somebody can’t pay the full amount with back within a week? Is there some recourse or some other alternative for them other than going into collections?
Kristy Kim (09:24):
Good question. Yeah, so first of all, we do not have any APR. So we do not charge you interest rate. So you don’t have to worry about going into a debt spiral with the Tomo product. In that sense, Tomo Credit is fundamentally a safe product for you. And we say that loud and clear from the very beginning to our customers that hey, it’s a weekly payment cycle, don’t come to us just to with the intention of borrowing for a month and paying APR. That’s not why Tomo exists. There are other products that exist out there that encouraging you to do so. But for Tomo we are the opposite. We would encourage you to be critical about your spending. So if you are a big spender who wants to spend on the items that you cannot afford, basically Tomo is not the place to be. It’s more of how can you translate your day to day small purchases like a meal at a restaurant, like a grocery bill, et cetera, and turn that into a credit score.
That’s where Tomo really shines because we are turning your everyday purchases into a credit score and we help you boost your credit score as fast as possible. And when it comes to big ticket items and the refrigerator, we are training our customers to think critically. First, do you really need it? Okay, then can you afford it? If not, can you look for the items that actually you can afford to pay us back within seven days? I think that’s just the financial muscle training that we are doing with our young consumers to really figure out whether they need it or not and whether they can afford it or not and they’re making the right choices.
Penny Crosman (11:26):
So you mentioned your customers are young, what else can you tell us about them? Are they high earners? Because it sounds like you’re saying cash flow is not necessarily the problem, it’s lack of a credit record, lack of a credit score. Is that right?
Kristy Kim (11:41):
Yes, you are right. So I describe my customer base as high achievers and ambitious young customers. They are not necessarily rich by a traditional standard, but they see themselves as potentially wealthy down the road and they envision themselves being financially free in the next 10 to 20 years. So that means that our customers, they have a different type of cash flow. When you are in college, you might have no cash flow at all. However, one thing in common is that they are determined to put their financial health as their priority and do the right things. So that’s why Tomo’s mission and the mechanism works for them because they know that even though Tomo doesn’t give them instant satisfaction of buy now/ pay later, we do the opposite. But they are aware that it benefits them in the longer term. So we attract the group of customers who are ambitious and responsible in that way.
Penny Crosman (12:58):
So Tomo recently closed a 100 million debt facility with Silicon Valley Bank. Can you tell us a little bit about that and what will that enable you to do?
Kristy Kim (13:10):
Yeah, so when we first approached that facility, many of them were confused because the first comment I would get is, wait, you don’t use credit score? How do you underwrite? And after some conversations they felt uneasy about the fact that Tomo is not using credit score because the traditional way of underwriting a new client is understanding the portfolio and the credit scores of the portfolio, but we don’t have that. Instead we have a Tomo score and the reaction is, what is a Tomo score? How do I trust a Tomo score? So we had to wait a little bit to have mature cohort data to prove that you might not trust the Tomo score, but here is the actual performance, here is the actual defer rate, take a look and then you tell me if you think that score is good or not. Because our performance is so good that it’s a no brainer for you to have some idea that even though you might not understand what really goes into to score, you will have a idea that it’s going to the right direction.
So when we got connected to Silicon Valley Bank, we already had more than one year of performance data that was absolutely stellar compared to any other lending products here in the U.S. So they were intrigued but they also wanted to do thorough due diligence. So we spent a lot of time going back and forth and they sent their team to our office in San Francisco and interviewed our team members and looked into our loan books just to make sure that everything was accurate. And after that they decided to work with us and we were able to close a big facility. And through that journey, I think we learned a lot because we were able to define our reporting structure. Because we knew that performance is good but we never had to report to anyone officially like that. So we kind of trained our team to come up with a better reporting structure. And now we are in a really great shape and our performance continues to be better than industry average.
Penny Crosman (15:52):
So what will you do with that $100 million?
Kristy Kim (15:55):
So we are going to use that capital to grow our user base and then also increase the credit limit of some of our ecosystem user base.
Penny Crosman (16:09):
Do you ever worry about having too much debt?
Kristy Kim (16:13):
Not at all. As long as the Tomo score continues to perform well and that means that it is an ongoing process and ongoing monitoring because as we learn from Covid and this year is that market is volatile, it changes every single moment. And the good thing is that Tomo has been always disciplined, from day one. We were selective in our approval process. We did not approve anyone and everyone to support the sake of growth. We didn’t do that. So we had that good discipline in our basis. And we’ve been continuously training our underwriting model to define our Tomo score. So right now we have the five scoring mechanism that we have our own score based on 30,000 plus different data attributes that we have learn learned through the process. And we gathered more than 7.5 million actual user bank account data. So that that’s a lot of data to train our model with and I’m excited to see how what’s the potential of our underwriting because we have ambition to do more than just a credit card. We want to try auto loan, we wanna try a mortgage. And by that time we might need to trick our underwriting a little bit because each lending product is unique and we might need to modify our credit underwriting to do auto loan and a mortgage for fundamentally we have all the right pieces in the place.
Penny Crosman (18:11):
All right. Well we’ve been watching you from the beginning, so we will keep watching as you develop this company. Kristy Kim, thank you so much for joining us today.
Kristy Kim (18:21):
Penny Crosman (18:22):
And to all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by Kevin Parise. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I’m Penny Crosman, and thanks for listening.
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