Petal seeks borrowers with blemished credit histories

Millennial credit card provider Petal is expanding its target audience beyond thin-file consumers and those without credit histories. It will now also target those with blemished, non-prime credit histories.

The segment, which will be served by a new product called the Petal 1 card, expands the company’s available prospect pool to 150 million consumers, from the 70 million it already serves. This expanded base includes consumers who have established credit histories described as “complicated” and “anything short of perfect.” The Petal 1 card is designed to help consumers with blemished credit histories improve their credit with a card that offers them an opportunity to do so responsibly and affordably.

“According to the CFPB, half of all Americans have non-prime credit scores,” said Jason Gross, CEO and co-founder of Petal. “Given the current economic situation of high unemployment and millions of people going through financial stress … non-prime will become the new normal. Currently these Americans are being underserved as mainstream banks pull back, much like they did in the 2008 recession.”

Petal is aiming the card at consumers who are unable to qualify for mainstream credit and instead turn to secured credit cards and high-interest loans.

Ahead of the COVID-19 pandemic, many issuers were already focusing on providing better products for consumers who could qualify only for secured credit cards, with companies like Synchrony, Amazon and Ally making bids to serve this market. The companies determined that many of these potential borrowers would be categorized as prime if they had a chance to build a credit history, and aimed to offer a clearer path to graduate to a traditional credit card.

“When speaking of non-prime consumers, we think using the term subprime is pejorative,” said Gross. “It’s often used to describe a category of high cost, predatory loans that take advantage of people. What we are offering is more of a prime product aimed to help people improve their credit. The credit limits are higher than traditional subprime cards, it has reasonable APRs and no annual fee."

The Petal 1 card does not require a security deposit. It runs on the Visa network and is issued by WebBank. It offers credit limits ranging from $500 to $5,000 with a variable APR between 19.99% and 29.49%, according to its terms and conditions. The card does have a penalty late fee of up to $40 and a returned payment fee of $29. The card offers a cash-back reward of between 2% and 10%, depending on when used at select merchants.

Petal's mobile app provides visibility into the borrower's credit score and budgeting.

Petal’s original card, now called Petal 2, was launched in 2018 and is aimed mostly at millennials who were considered thin files or lacked any credit history. The lack of a large enough history typically put traditional bank credit cards out of reach for most millennials.

By focusing on consumers who are new to credit, Petal has been able to issue tens of thousands of credit cards using its proprietary lending analytics. Petal uses artificial intelligence to power its underwriting program which develops something it calls the “Cash Score.” This is where Petal analyzes a person’s banking history, in addition to any credit history, to make assessments of an individual’s creditworthiness.

“About 70% of the folks on our original [Petal 2] card had no credit history prior to joining us. In just three months of using the card they’ve achieved an average score of 673," Gross said.

Petal is sensing an opportunity to serve consumers with less than perfect credit as many mainstream banks have tightened lending standards on consumer loans and credit cards to a level higher than that seen during the Great Recession of 2008-2010. According to the Federal Reserve Bank of St. Louis, 71.7% of domestic banks have tightened their lending standards on credit cards in the third quarter of 2020. This is fully five percentage points higher than during the peak of the last recession, when it reached 66.7% in the third quarter of 2008.

Petal first launched its rewards program in 2019, prioritizing consecutive on-time payment histories over revolving bonus cash- back categories that many mainstream banks use. Petal reported that it will share further details in the coming months on a new feature that will give Petal 1 customers who use their card responsibly the opportunity to upgrade to a Petal 2 card with higher credit limits, lower APRs and cash back on all purchases.

According to Crunchbase, a website that tracks investments in private companies, Petal has raised over $435 million in debt and equity through nine funding rounds from 36 companies. Notable investors include Valar Ventures, a VC firm backed by Peter Thiel, as well as Great Oaks Venture Capital, RiverPark Ventures and Silicon Valley Bank. Petal’s most recent fundraiser was its Series C round, led by Valar Ventures, which closed in September and raised $55 million. Petal reported in this round that it has now raised more than $100 million in equity funding.