Deepak Rao came to the U.S. from India to study computer science at Stanford University. After graduating in 2011, he got a credit card from a national bank, which gave him a $5,000 credit limit.
Ten years on, that card's limit hasn't changed.
Rao's credit history might be thin, but as the founder of the e-commerce firm Mine (which was sold to Twitter in 2013 for an undisclosed price) and now as CEO of the startup X1, his earning capacity could demonstrate the ability to repay a much higher balance. "The bank could see the salary coming into my checking account from Twitter, but there was a disconnect, as it didn't take my salary into account in assessing my credit limit," Rao said.
Another problem was that, when Rao started Mine, he maxed out his two personal credit cards by putting all his business expenses on these cards — and his credit score hasn't recovered. This meant that even after working at Twitter for four years, he couldn't qualify for credit cards with attractive rewards.
X1 aims to solve these problems by examining card applicants' bank accounts to use their current and projected income data to offer credit limits up to five times higher than traditional credit card issuers offer to people with stable incomes but low credit scores.
Rao co-founded X1 in 2017 and in July 2022 was able to raise $25 million in Series B funding for the San Francisco-based startup. X1's investors include Affirm CEO Max Levchin, Box CEO Aaron Levie and Yelp CEO Jeremy Stoppelman. Wesley Chan, co-founder and managing partner of venture fund FPV Ventures and Google Analytics cofounder, led X1's Series B round, which takes its total funding to $45 million.
However, this success hasn't benefited Rao's personal credit limit. Even now, when he applies for a credit product, he applies jointly with his wife — who, because she was born in the U.S., has a much longer credit history than he has.
"Traditional credit card issuers don't look at your income, they just rely on your credit score," Rao said. "X1 asks applicants to link their bank account to us via Plaid so we can see the income and spending in their bank account. Marrying credit bureau reports with bank transaction data and identity verification data gives us a more holistic view of a customer's financial capability to make repayments."
Credit history still plays a role, as it allows X1 to identify and decline people with a pattern of being delinquent in payments, Rao added.
X1's proprietary analytics software enables it to predict customers' future income based on the income flowing into their bank account.
"For example, we can see if someone gets salary raises or bonuses regularly, which helps us predict their future income," Rao said. "A traditional issuer might offer a recent university graduate who earns $70,000 a year, but has a thin credit file, a $1,000 credit limit on their credit card. We can offer five times that limit because we look at the income coming into their bank account."
X1 isn't the only company targeting this market, and its approach isn't the only way to lend to thin-file applicants. Many lenders, including large banks such as Wells Fargo and U.S. Bank, have programs for potential borrowers who don't have Social Security numbers. Instead, these applicants have
Lenders such as
"X1's credit approval process will attract cardholders who want higher spending limits but are restricted by existing credit approval models," said David Shipper, a strategic advisor for retail banking and payments at Aite-Novarica. "On the one hand, it's great to see innovative new companies change how we view credit approval. On the other hand, those legacy credit approval practices are time-tested and exist for a reason. Time will tell if the X1 model works in an economic downturn and periods of elevated delinquencies and credit losses."
X1 isn't solely targeting immigrants and other thin-file applicants. To make its product appealing to a broad audience, X1 offers rewards and the ability to create virtual cards that are valid for one transaction only or for a limited duration. "For some, X1 is their second credit card and for some it's their tenth card," Rao said.
A middle school teacher in California who asked to be identified only as Connor got an X1 card in December 2021 following a recommendation from a friend of a friend. "X1 gave me a $5,000 higher credit limit than my existing credit cards," he said. "I put 90% of my credit card spending on X1 as its rewards are better than my existing cards' rewards."
X1 pays 2% on all spending and, once a cardholder has spent $15,000 on the card during a year, the rate goes up to 3%, which is retroactive on all previous purchases from the start of the year. The card's interest rate can be anywhere from 15% to 22%, based on the borrower's creditworthiness, according to the X1 website.
"I used X1's one-time-use card capability to buy a present from a New Zealand merchant for my brother who lives there. I had no way of checking out the merchant's reputation but, as I used a one-time card number, they couldn't recharge me," Connor said.
X1 started issuing its Visa-branded credit card to people on its waitlist in October 2021 and is currently seeing $60 million in card spending per month, with transactions occurring every five seconds, said Rao. "We have 500,000 people on our waitlist, and are planning to make our card generally available in mid-September. Instead of marketing the card, we've been relying on word of mouth."
Cardholders can start using the X1 card as soon as they are approved by adding it to a mobile wallet. Forty percent of customers begin using the card through Apple Pay or Google Pay before the physical card arrives in the mail, Rao said.
X1 put a lot of emphasis into the design of its card, which is made of stainless steel and has a vertical format, with the cardholder information displayed on the back, said Rao. "We wanted the card to stand out, and we even put a video on our website of what the card sounds like when it is dropped on a table."
X1's Series B round will enable the public launch of its credit card, Rao said. Everett, Washington-based Coastal Community Bank, which has $2.97 billion of assets, is the issuer for X1's credit cards. Agreements with Coastal Community and other unannounced lenders help fund X1's receivables, Rao said.
Series B round leader Chan estimates that, by the end of 2022, X1 will have $1 billion in annualized spending on its card without spending any money on marketing.
"I think X1's underwriting model is unique," Chan said. "The fact that it doesn't rely solely on credit scores makes it very empowering. I haven't seen any other credit card issuers use a similar underwriting model."
