DEEP DIVE with Nova Credit: Financial Inclusion in Lending
DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech leader, discussing its history, products / services, and how it has grown to be an industry leader.
“We strive to enable the flow of humans not just for their economic potential, but because of the value of that movement itself in bringing new perspectives, creativity, community, and innovation..”
The world’s population continues to shift globally, migrating between different regions in search of new opportunities or escape hardship. The US is a country comprised of people from all over the world, who at some point arrived as newcomers. For these individuals resetting their lives in a new country, they leave behind their financial and credit history in order to start over again. Credit has become a requirement in life to accomplish critical tasks such as obtaining an apartment lease, a mobile phone plan, a credit card, or student loans. Newcomers arrive as “credit invisible” due to their lack of credit history in the new country. Building strong credit history in the US can take as long as 5 years.
Nova Credit, a San Francisco-based FinTech startup, has been diligently working to change the narrative by building an infrastructure to import financial histories from other countries. They have effectively become the first cross-border credit reporting agency, changing the way lenders provide loans to immigrants in the US.
HISTORY OF NOVA CREDIT
Together, Nicky Goulimis, Misha Esipov, and Loek Janssen founded Nova Credit in 2015 to help immigrants to the U.S. obtain credit based on their exisiting credit history from their native country. A first-generation immigrant from Russia, Misha moved to the US with his parents as a child — he had worked in banking (at Goldman Sachs) and private equity (at Apollo). Nicky was born in Greece, grew up in the UK, and came to the US as an international student. Loek was born and raised in the Netherlands, and first arrived in the US to go to grad school.
They had all met at Stanford University to pursue graduate degrees — Nicky and Misha were in the MBA program and Loek was working on his masters in the Institute of Computational Mathematics and Engineering. Like many international students, they felt the struggle in having to restart their financial life in a new country.
What started out as a class project looking for gaps in the current financial services industry, turned into the startup’s core premise. The group of three identified a need to solve credit access for non-Americans, which quickly developed into something greater. In their analysis, they uncovered the magnitude of this challenge and what data is available to eliminate the problem. Nova Credit was created to connect U.S. credit and foreign credit bureaus in order to benefit both consumers and banks.
“We made a discovery among the international students we surveyed, which was that many said they couldn’t get credit, cell phone plans, leases and anything else that required credit histories. Many of them said the same thing to us: ‘I feel like a second-class citizen.’ And that was the light-bulb moment for us. We saw it was a systemic problem, and four years later I believe we’re solving a decent share of this problem.”
Misha Esipov, CEO of Nova Credit (TechCrunch)
Lenders have showed continued interest in working with the team to solve this consumer pain point and gain exposure to a target market that was previously out of reach. Newcomers would be more able to apply and be approved for credit cards, apartment rentals, and auto loans.
how nova credit helps
Nova Credit’s core innovation is a global credit scoring system, the Credit Passport, which is similar to a U.S. credit report (containing credit lines and inquiry history). The product creates a FICO-equivalent score that allows individuals who recently arrived in the U.S. to show immediate creditworthiness to lenders.
Credit Passport can be used by any consumer who allows authorization to share credit history from their home country to a U.S. lender (who partners with Nova Credit and accepts their credit rating system). If a file in the database of a foreign credit bureau partner is located, the credit report can then be transferred to the lender.
The general concept involves Nova matching the native country’s credit score to U.S. credit ratings and risk levels based on comparable default rates. Once the default rate to score ratio is calculated, a domestic score can be created and adjusted for underwriting purposes.
In Nova Credit’s business model, a fee is paid to the credit bureau that retrieves the foreign records, and a fee is charged to the company that requested a consumer’s credit data. The companies initiating the request require a credit review as part of their customer due diligence process. This has evolved into a quality option in confirming credit worthiness in the US for newcomers with no credit history on file.
The product works well for individuals who had established credit in their countries of origins. However, there are still numerous immigrants to the U.S. that have not had the opportunity to establish any credit history due to economic, political, or financial reasons.
Credit Passport is still not a global product. Nova Credit has established partnerships with 11 countries so far, including Australia, Brazil, Canada, India, Mexico, Nigeria, South Korea, and the UK. This first group of countries tends to send the most people to the US. The list will continue to grow with China, Jamaica, Dominican Republic, Philippines, and Kenya. Since credit history and reporting is handled differently from country to country, a faster-paced rollout globally remains a challenge.
Nova Credit’s top fintech partnership
Partnerships are a critical component of Nova Credit’s business model — credit agencies, governments, and businesses are all a critical part of the credit ecosystem. Over the last 5 years, Nova has teamed up with MPOWER Financing, IntelliRent, Yardi, and UNFCU to improve credit access for immigrants in the US.
The most notable partnership the fintech has made is with American Express (in October 2019). Under the new partnership, Nova provides its Credit Passports from five countries (Australia, Canada, India, Mexico and the UK) to AMEX. Nova and AMEX estimate over 2.5M immigrants arrive in the U.S. annually (with 1/3 of this total coming from the five countries). Many of these newcomers are perceived as high-potential for credit since they are attending school or working at a top tech startup or company in the US.
The access to Nova Credit’s platform is embedded in the standard application process for AMEX. The additional Nova Credit check is a feature applicants opt-in to authorize — with the authorization, a pull of the credit report from their native country is executed (after additional verification points are confirmed, which can differ based on country). The result is typically a near real-time credit decision, which has an option for a virtual card while the physical card is being mailed.
what’s next for financial inclusion in lending
The challenge of access to credit extends beyond newcomers to the US. There’s a large portion of US-based individuals who lack a credit score or have no credit record on file with a bureau (estimated at $28M and $25M respectively from 2015). This represents the broad customer segment labeled “credit invisibles.” In order to build credit, these consumers need to apply and be approved by creditors — however, the decision criteria on these applications is based on credit history and score. Most standard application processes decline someone who is credit invisible.
Alternative credit products have been created to help this group establish or build credit. Some offerings involve placing a refundable security deposit in exchange for a secured credit card — the amount of deposit representing the credit limit on the card. Other products are set as monthly auto-savings programs with an interest rate being paid to a platform. The common factor with these programs is the monthly payment history being reported to the credit bureau to create and improve credit worthiness.
There are numerous fintech companies exclusively focused on the credit building space and others adding tools and services to helps users improve their standing. For newcomers, this includes the Deserve Edu Mastercard (no SSN, credit history, cosigner or deposit needed), Petal (an upcoming card that doesn’t require credit history), and Stilt (loan program for immigrants).
The market size of the credit invisible segment is a lucrative opportunity for fintechs and institutions to capture today. As risk models, data aggregation, and product design improve in the next decade, look for increased innovation and competition in this space. Specifically for the FinTech industry, the opportunity is dynamic in building lifelong customers, who started as credit invisible and become top-tier credit, and receive numerous products and services along the way.
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