Tomocredit Raises $7M to Bridge the Credit Gap

The Challenge of Establishing Credit

Obtaining credit can be exceptionally challenging for individuals lacking an established credit history.

TomoCredit, a burgeoning startup, directly addresses this issue. The company’s founder and CEO, Kristy Kim, conceived the idea following repeated rejections for an auto loan during her early twenties.

A Personal Experience Drives Innovation

Kim, who immigrated to the United States from South Korea with her family, found it frustrating that a non-existent credit history presented such a significant barrier. This was despite having stable employment and consistent income.

In January 2019, she partnered with Dmitry Kashlev, also an immigrant, to develop a solution for others facing similar obstacles – particularly foreign-born individuals and young adults.

Later that year, the startup, also known as Tomorrow’s Credit, gained acceptance into the Barclays Accelerator program, powered by Techstars.

A Fintech Solution for First-Time Borrowers

Based in San Francisco, this fintech company provides a credit card specifically designed to assist first-time borrowers in building credit.

Unlike traditional credit assessments, TomoCredit bases its decisions on an applicant’s cash flow, rather than relying on FICO scores or conventional credit reports.

Securing Seed Funding for Growth

Tomo recently announced a $7 million seed funding round, attracting investment from a diverse group of firms.

Participants included KB Investment Inc. (KBIC), a subsidiary of Kookmin Bank, alongside Barclays, Knollwood Investment Advisory, BAM Ventures, Passport Capital, Ulu Ventures, and Strong Ventures.

Angel investors and individuals also contributed, such as Arlan Hamilton, founder of Backstage Capital, Michael Vaughan, former Venmo COO, and James Kim, previously the head of finance at Tinder.

Addressing a Significant Market Need

According to the Consumer Financial Protection Bureau, over 30 million young adults possess substantial cash reserves but have limited or no credit histories.

This often restricts them to using debit cards as their sole payment method.

How TomoCredit Operates

TomoCredit functions similarly to a debit card model, issued through Community Federal Savings Bank, an FDIC member.

Users benefit from a seven-day automatic payment schedule, with no fees or Annual Percentage Rates (APR) applied.

Credit limits typically average around $3,000, with the potential to increase to a maximum of $10,000. Borrowers can also link investment accounts to potentially raise their credit limits.

A Different Approach to Credit Evaluation

“Our goal was to create a system that was not only more inclusive but also fundamentally different from existing credit card offerings,” Kim explained.

She clarified that the card isn’t exclusively for immigrants, but for anyone categorized as having “no file” or a “thin file” credit history.

Recognizing the Importance of Credit Access

Kim’s initial rejection for an auto loan highlighted the critical role of credit scores in the U.S. financial system.

“Regardless of income or savings, a credit score is often essential,” she stated. “We aimed to utilize alternative data sources, particularly cash flow, instead of solely relying on credit history.”

She added that the increasing popularity of open banking makes accessing cash flow data more feasible.

A Revenue Model Focused on Cardholder Success

A distinctive feature of Tomo’s business model is its reliance on merchant fees rather than charging consumers fees.

“We are not incentivized to impose late payment fees on borrowers; our revenue grows alongside our cardholders’ spending,” Kim emphasized.

Rapid Growth and User Adoption

TomoCredit cards became available in late summer 2020.

“We initially had modest expectations, as it was our first launch and we didn’t invest in marketing,” Kim recalled. “However, we quickly attracted over 300,000 sign-ups and were able to pre-approve approximately half of them. We’ve been actively issuing cards ever since.”

Viral Growth Through Social Media

Demand for the company’s card surged last year after gaining traction on YouTube and Reddit.

“Following our launch, we experienced a significant increase in traffic. We discovered that numerous YouTubers were commenting on and reviewing Tomo, with viewers expressing a need for a solution to build credit quickly and effectively.”

Future Plans and Expansion

Currently, Tomo has over 10,000 active users and intends to issue cards to all remaining pre-approved applicants by this summer.

Kim acknowledged the challenge of convincing investors regarding the risk associated with extending credit to individuals with no credit history.

“I had to help them understand the evolving landscape,” she said. “The new generation of consumers, particularly Gen Z and millennials, often have thin or no credit files, which isn’t necessarily their fault.”

Investor Perspectives

Arlan Hamilton, founder of Backstage Capital, expressed her support for TomoCredit’s mission.

“I dedicate much of my time to investing in and promoting products that address the injustices my family and many others faced during my upbringing,” she stated via email. “Establishing and maintaining good credit, and having alternatives to predatory lending, are key themes. Tomo Credit appears to be tackling this issue in a scalable and mainstream manner.”

Mariquit Corcoran, group chief innovation officer at Barclays, praised Kim’s “tenacity and passion” in addressing “a genuine problem faced by many who have historically struggled to access credit and build a financial profile.”

“I am eager to witness their growth and impact on how an individual’s creditworthiness is determined,” she added.

Investing in Talent and Product Development

Tomo plans to utilize the new funding to triple its team of 15, primarily focusing on hiring full-stack and data engineers.

The company recently appointed Chaomei Chen, a former LendingClub executive, as its acting chief risk officer.

Funds will also be allocated to product development, including the addition of more interactive features.

Competition in the Alternative Credit Space

Tomo is not alone in offering alternative credit models. X1 Card determines credit limits based on current and projected income, while Grow Credit helps customers build credit by providing a credit line for recurring subscriptions like Spotify and Netflix.