In recent years, there has been no shortage of startups offering lines of credit for those who do not have access to a bank. Most talk about their mission to help people build credit, which is noble, but they’re also extending credit because — let’s face it — lending money is profitable.
Now, a startup founded by Stanford grad James Savoldelli has found a new opportunity in the same industry, and it’s through pawnshops.
Called Pesto, the idea is creative — and clever. For those in dire financial straits, pawn shops are a bank of last resort. An individual does not need to have a line of credit or a bank account or even income. A customer with a government ID can simply leave behind 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 repays the loan, that person can retrieve the item; otherwise it is lost and sold.
But these loans can be extremely expensive, depending on the location of the pawn shop. Whereas in California, stores may only charge 2.5% interest on the principal amount each month, in Florida, Georgia and Alabama, a customer can pay 25% interest per month (or a whopping 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 these individuals online before they start down that path, in part by offering them a secure MasterCard with an APR of up to 29.99% — and zero interest if someone pays the loan back in full on time.
We spoke to Savoldelli yesterday about Pesto’s strategy, which he formulated after being offered a high-interest loan as a college student and subsequently registering with several pawn shops to better understand customer behavior. Investors are also clearly intrigued by what he’s building. The startup — which went through the Y Combinator accelerator in 2021 — just attracted $11 million in Series A funding from Activant Capital, Plural and others. More follows, edited for length:
During Covid, you lived with a classmate in LA and started working at a pawn shop. What happened?
I got a job at the biggest pawn shop in Los Angeles; was considered an essential service. So I’m wearing a mask every day, helping this clientele, and what I saw fascinated me. Customers were taking out a loan and then paying it back, then taking out another loan and paying it back, and doing it again and again and again. But it never helped them build credit. It never helped them graduate into anything better than what they just paid. So they were stuck in this cycle. That’s what got me thinking: what if we could build a product that actually rewards people for paying something? And the more I learned about credit, I [saw] the opportunity to build an asset-backed credit card, where we give people access to what is, in the beginning, much, much cheaper credit and we get [them] out of this world of payroll loans, pawnshops, [and] securities loans and in traditional financial products.
It’s incredible that certain states allow pawnshops to charge so much interest. Why are the laws surrounding these businesses so lax and horrible?
How much time do you have?
[Laughs.] I don’t think many people honestly know about it or, frankly, are working on it. But it’s a horrible proposition through and through.
How does Pesto work exactly? How – where – do you take possession of those valuables against which you are extending credit?
Customers go online, they find our website. They go through a quick assessment by entering details about their asset and we give them an estimate of what their credit line could be. We then give them a QR code that lets them walk into any UPS location across the country, where they’ll be packaged and shipped, completely secure, directly to us.
Once we receive the asset, we open on video, inspect the asset and give them a final credit offer. From there, we create a card digitally and the physical card arrives a few days later in the mail. The item is then stored in a temperature-controlled vault for the time being, and when they switch to an unsecured card or close their account, we ship the item back.
Are you concerned about illicit goods?
We are a horrible way to fence an item. Our customers go through a full KYC.
Loans from pawnshops typically give people 30 to 120 days to pay them back. No timeline with the Pesto offering? Do you care about assets or are you primarily focused on the interest on the loans you take out?
You can use [your card] for as long as is convenient for the customer. Our goal is to earn as much money as possible from the spent transaction. One of the reasons we have such low interest rates is that we make money when the customer spends money, but we’re not charging the customer for it like any standard credit card. We absolutely want customers to get their assets back.
Who are you partnered with on the backend?
We partnered directly with MasterCard. We have an issuing bank that we work directly with: Continental Bank of Utah. We work with a credit card processor called ITC. When building a credit card, you take these pieces and put them together to build your experience.
Is this demographic part of an early playthrough? Over time, will your credit card company target another population or industry?
We have a lot of ideas where we could go with this. [after] spending the last two years building a modern lending platform. We have tons of stuff on the drawing board.