Ongoing economic challenges aggravated by inflation and high interest rates have spurred some
Pesto, a San Francisco-based startup, provides a way for consumers who lack cash or healthy credit scores to rebuild credit by shipping their valuables including gold, gems and watches to the firm via UPS as collateral to obtain a secured Mastercard.
"We're the first secured credit card where a consumer's credit line is determined by the value of their assets, rather than a cash deposit," said James Savoldelli, founder and CEO of Pesto, which last month announced an $11 million funding round from 12 venture capital firms plus Y Combinator.
The card, billed as an alternative to pawn shops, provides a unique way for cash-strapped consumers to trade their existing possessions with resale value for a credit line equal to the amount of the items Pesto accepts. Pesto vows to report users' payment activity to credit bureaus.
But Pesto's fees and potential risks already are causing some analysts and consumer advocates to question its safety for struggling consumers.
"I can't help but wonder, if you're struggling to put food on the table, are you really going to mail your best asset — for example, your grandmother's diamond ring — to someone at a company you've never met?" asked Ariana-Michele Moore, an advisor in Aite-Novarica's retail banking and payments practice.
Pesto's secured Mastercard has a 29.99% APR tied to the prime rate and an annual fee of $40, which Pesto breaks into monthly increments of $3.33. There is also a $40 fee for each late or returned payment. Continental Bank of Salt Lake City, Utah, a $178 million-asset FDIC-insured bank, issues the card and Redwood City, California-based i2c is the card's processor.
To obtain a line of credit from Pesto, users must first provide basic identity information online and confirm they're the lawful owner of the item being pledged as security. Pesto provides an online calculator to give borrowers a rough estimate of how much credit their item may fetch, based on details such as the weight of precious metals or the cut and carat of gems.
If Pesto accepts an item through the online prequalification process, the applicant can ship the item to Pesto, using a prepaid label Pesto provides (with shipping insurance). The exact credit limit is determined based on the item's value after its official appraisal, usually about one day after Pesto receives the item. In some markets, Pesto also directs users to local affiliates who can appraise items directly.
Borrowers whose appraised items are accepted may begin spending their allotted credit amount immediately via a virtual version of the card; they will also receive a physical Pesto Mastercard in the mail.
Savoldelli, who launched the firm at the end of 2020 after graduating from Stanford University, said Pesto's rollout this year amid rising inflation and interest rates is coincidental.
"We launched with our own technology stack, which was a huge undertaking, to create a way for people with low FICO scores or no credit scores and no credit history to build their credit while increasing liquidity from an asset they already own," he said. Consumers may repay their loan and request the return of their valuables at any time.
The biggest challenge so far has been educating prospective customers on how Pesto is different from a secured card or a short-term loan like a pawn, payday or title loan, Savoldelli said.
Although Pesto declined to say how many customers have signed on since the product launched late last month, the company noted that many consumers are being denied access to traditional credit through cards or loans due to the tightening economy.
Statistics vary around how many consumers are routinely denied credit because of poor or no credit history. About 18% of consumers who applied for credit cards last year were rejected, up slightly from 17.5% in 2021, the
In a survey Aite-Novarica conducted among 3,000 consumers in North America and the U.K. during the second half of last year, about 54% of people applying for a credit card during the previous 12 months said they were denied, Moore said.
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Pesto touts the fact that customers can use its service with 0% interest by making monthly payments, with a three-week grace period. The average pawn loan charges a monthly interest rate of 200% to 300%, which kicks in the moment an item is accepted as collateral for cash, according to comparison charts Pesto provides on its website.
Pesto's methods of collecting and securing items could be another area of risk, according to some consumer advocates.
"The product raises a lot of questions, particularly about the security of shipping something valuable, and whether a traditional pawnbroker might give a desperate consumer more money for their valuables than Pesto's appraisal," said Ruth Susswein, director of consumer protection at Consumer Action, a Chevy Chase, Maryland-based nonprofit organization specializing in consumer advocacy and education.
Another expert notes that Pesto's appraisal and collection process includes a lot of friction.
"It would seem to add a lot of overhead costs to assess items and store them, not to mention the cost of selling these items to execute on the security," said Lauren Sanders, associate director of the National Consumer Law Center.
Savoldelli expressed confidence that Pesto's service has a strong business plan, with the firm initially concentrating its marketing around Los Angeles and Atlanta.
Along with Y Combinator, investors so far included Activant Capital, Plural, Sozo Ventures, Commerce Ventures, NJF Capital, Soma Capital, NOMO Ventures,Human Capital, OVO Fund, OEL Ventures, Core Innovation Capital and Great Oaks VC.
