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One out of four credit-card applicants were rejected in February, more than double the rate from before the pandemic, according to the Federal Reserve. Orlando Zayas, the CEO of the fintech platform Katapult, knows what it feels like.
A Puerto Rico-born Army brat whose father died when he was 10, Zayas had to pay his own way at the University of Houston. He was always mindful of his credit score, but when Zayas was rejected for a Gap credit card in 2008, he was shocked.
Why wasn’t his 840 credit score good enough? Wary lenders tightened their restrictions during the financial crisis, Zayas said. It happened again with the pandemic.
“A lot of people may be missing a payment here and there, and that causes their credit score to go down,” Zayas told Insider.
Now the former General Electric executive runs Katapult, which allows consumers turned down for credit by popular lenders, such as Affirm, to buy tires, laptops, and other goods on a lease-to-own basis. Katapult went public Thursday via SPAC merger with blank-check company Finserv, and opened at $14 a share under the NASDAQ ticker KPLT. Zayas has a 3.6% stake and 3 million exercisable options per the May prospectus worth some $92 million combined.
Customers pay a $45 initiation fee, and the lease can be twice the cash price of the purchase. But it can still be cheaper to use Katapult than take on credit-card debt because there are no late fees or compounding interest. Items can be returned within 30 days to Katapult, and if customers pay within 90 days, the cost is only 5% above the cash price, excluding the $45 fee.
Katapult’s revenue, which was $17 million when Zayas took over in 2017, topped $200 million in 2020, in no small part because of COVID-19. With the e-commerce boom and economic recession, more shoppers are using buy-now-pay-later (BNPL) services than ever. The pandemic accelerated the New York firm’s timeline for going public.
Insider spoke with Zayas about how Katapult has thrived during the pandemic by accepting customers who were rejected by other lenders.
So Katapult accepts “nonprime consumers,” people who get turned down by prime lenders like Affirm, for instance. What makes a consumer nonprime? A bad credit score?
There’s a host of reasons that people can fall into the nonprime. It could be a medical bill that got away from them that they didn’t anticipate. Maybe they lost their job, and they’re trying to recover from that. Prime lenders have very little loss appetite, and we see that they approve at point of sale between 40 to 50% of consumers.
Lending to a nonprime consumer sounds inherently riskier. Has that risk been shown in rates of repayment?
No, and I think it’s due to our really strong underwriting. We don’t have long-term contracts with our consumers. Most of them pay off their leases in seven months on average. Our portfolio churns pretty quickly, so if we start to see declines in paythrough, we can tighten up pretty quickly. There’s not …read more
Source:: Business Insider