TomoCredit pivots again, nears wider launch

I have been intrigued by TomoCredit ever since I heard it was offering a credit card with 20% crypto back last fall.

Later in 2019, the company pivoted away from cryptocurrency rewards in favor of cash back, and it tied the rate to how many friends users referred to the platform (again up to 20%). As TomoCredit nears a broader rollout later this year, it has shifted the strategy again. And this time, I think it’s going to stick.

The new plan isn’t as lucrative – 1% cash back for all cardholders – but the main utility of this card goes well beyond rewards. It’s all about establishing credit.

Founder and CEO Kristy Kim built TomoCredit to address the struggles she experienced while trying to build a credit history in the U.S. An immigrant from South Korea, Kim found that an impressive college degree (from the University of California, Berkeley) and a lucrative investment banking job were not enough to secure a car loan.

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Target audience

TomoCredit focuses on young adults, immigrants and others who are new to the credit system or recovering from a prior misstep that damaged their credit score. TomoCredit is a rarity in the credit card world: there is no credit check on applicants. Its underwriting process is 100% cash flow underwriting. It examines applicants’ incomes and expenses to determine their creditworthiness and, if approved, their credit limit.

The card is currently available to select users in a pilot program. It has a waitlist of more than 100,000 prospective applicants, acquired mostly through word of mouth and YouTube influencers. The plan, Kim told me, is to have more than 100,000 active cardholders by the end of the year.

In our recent conversation, Kim stressed that TomoCredit does not charge any fees, not even interest. All of the company’s revenue comes from interchange fees paid by merchants.

This is a seven-day charge card (another rarity). Purchases are paid off via autopay every week. It’s a credit card that essentially operates like a debit card, with the key distinction that it helps users build a credit history – which is helpful for securing future loans, apartment rentals, cell phone plans and so on.

Kim and her colleagues promote TomoCredit as a kinder, gentler credit card that will not lend you more than you can afford to pay back, with credit limits ranging from $100 to $10,000.

See related: How to get a credit card without a Social Security number

A massive yet underserved market

FICO, the credit scoring giant used in more than 90% of lending decisions, admits that 53 million people in the U.S. do not have enough data in their credit files to generate a FICO score. Another 79 million have scores below 680, which FICO notes is a common lender threshold of acceptable credit. That means almost half of the U.S. adult population has either no credit or subpar credit.

The current recession brought on by the COVID-19 pandemic magnifies TomoCredit’s opportunity even further. Credit card issuers are especially nervous about risk these days, and many consumers are gun-shy, too. Weekly credit card originations nosedived in March and were down more than 50% (year-over-year) for much of the spring, according to Equifax.

A sizable number of existing customers have seen their credit limits reduced to minimize risk. And many banks are reporting that debit card spending is holding up better than credit card spending, which appears to be somewhat by necessity and somewhat due to consumer preference. Many young adults are especially enamored with debit cards.

This seems like an ideal climate for a no-fee credit card that actually wants to lend to people who are shut out of traditional credit cards. TomoCredit isn’t for rewards chasers. It’s not competing with the likes of American Express and Chase at this point (though Kim says there is a longer-term roadmap that will encourage initial users to stick around once they’ve improved their credit scores and become more attractive to other card issuers).

The competition

TomoCredit’s closest competitor these days is probably the Petal Card, which I also like. It competes to some extent with “buy now, pay later” lenders such as Affirm and Afterpay, although those are more niche. As a Mastercard, TomoCredit is much more widely accepted.

Kim also notes that TomoCredit is all about building credit, whereas she views the “buy now, pay later” industry’s primary focus as easier checkout. Those entities rarely report to the credit bureaus; TomoCredit files monthly updates with Experian, Equifax and TransUnion.

Final thoughts

TomoCredit has secured $4.5 million in funding from venture capital firms and others. It was part of the prestigious 2019 Barclays Accelerator Program and received an investment from the bank. Kim is one of Inc. Magazine’s Top 100 Women Entrepreneurs of 2020. Clearly, TomoCredit is a hot fintech startup to watch.

Have a question about credit cards? E-mail me at ted.rossman@creditcards.com and I’d be happy to help.