In recent years, there’s been no shortage of startups offering credit lines to the underbanked. Most talk about their mission to help people establish credit, which is noble, but they’re also extending credit because — let’s face it — lending out money is lucrative.
Now, a startup founded by Stanford grad James Savoldelli has found a new wedge into the same industry, and it’s through pawn shops.
Called Pesto, the idea is creative — and savvy. For those in dire financial straits, pawn shops are a bank of last resort. An individual doesn’t have to have a credit line 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 return for a percentage of the value of that item, plus interest. If he or she pays off the loan, that person can retrieve the item; otherwise, it’s forfeited and sold.
But such loans can be egregiously expensive, depending on where a pawn shop is located. While in California, shops can charge just 2.5% interest on the principal amount each month, in Florida, Georgia and Alabama, a customer can pay 25% interest per month (or a stunning 300% per year). Little wonder that in the U.S., there are 12,000 pawnshops contributing to a market sized at around $14 billion, according to the National Pawnbrokers Association.
Pesto hopes to capture some of those individuals online before they start down that path, in part by offering them a secured MasterCard that features up to a 29.99% APR — but 0% interest if someone pays back their loan in full on time.
We talked with Savoldelli yesterday about Pesto’s strategy, which he formulated after being offered a high-interest loan as a college student and later logging time at a variety of pawn shops to better understand customer behavior. Investors are clearly intrigued with what he’s building, too. The San Francisco-based startup — which passed 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 L.A. and began working at a pawn shop. What happened?
I took a job at Los Angeles’s largest pawn shop; it was considered an essential service. So I’m there every day with my mask on, helping this customer base, and what I saw fascinated me. Customers were getting a loan, and then paying it back, then getting another loan and paying it back, and doing this again and again and again. But it was never helping them build credit. It was never helping them graduate to something better than what they had just finished paying off. So they were stuck in this cycle. That’s what got me thinking: what if we could build a product that actually does reward people for paying back 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, at the outset, much, much cheaper credit and get [them] out of this world of payday loans, pawn shops, [and] title loans and into mainstream financial products.
It’s amazing that certain states allow pawn shops to charge so much interest. Why are the laws around these businesses so loose and awful?
How long have you got?
[Laughs.] I don’t think enough people honestly know about it, or are, frankly, working on it. But it is a horrifying proposition end to end.
How does Pesto work exactly? How — where — do you take possession of these valuables against which you are providing credit?
Customers go online, they find our website. They go through a quick appraisal by entering in details about their asset and we give them an estimate for what their credit line could be. Then we give them a QR code that allows them to walk into any UPS store across the country, where it will be packed and shipped, fully insured, directly to us.
Once we receive the asset, we open it up under video, inspect the asset, and we give them a final offer of credit. From there, we spin up a card digitally, and the physical card arrives a couple of days later in the mail. The item is then stored in a temperature-controlled vault for the time being, and when they graduate to an unsecured card or close their account, we send them their item back.
Do you worry about illicit goods?
We’re a horrible way to fence an item. Our customers go through a full KYC.
Pawn shops loans typically give people 30 to 120 days to pay them. Is there no timeline with Pesto’s offering? Do you even care about the assets or are you mostly focused on the interest from the loans you provide?
You can use [your card] for as long as it’s convenient for the customer. Our goal is to make money as much as possible off of the transaction spent. One of the reasons we have so much lower interest rates is we make money when the customer spends money, but we’re not charging the customer for it, just like any standard credit card. We absolutely want customers to get their assets back.
Who are you partnered with on the back end?
We partnered directly with MasterCard. We have an issuing bank that we work with directly: Continental Bank out of Utah. We work with a credit card processor called ITC. In building a credit card, you take those pieces and put all of them together to build your experience.
Is this demographic part of an opening gambit? Over time, will your credit card company target another population or sector?
We have a lot of ideas for where we could go with this [after] spending the last two years building a modern credit platform. We have tons of things on the drawing board.