*By Tanaya Macheel* Credit card startup Petal has raised $30 million in Series B funding led by Peter Thiel’s Valar Ventures. Petal's mission is to make credit safer and more accessible to consumers by measuring objective components of creditworthiness not typically considered in credit approval decisions — like how much they earn, save and spend over time, and the bills they pay monthly. It’s also focused on budgeting, transparency, and helping users make smart financial decisions. "Credit cards are a feature of American life, and building credit is often essential to achieving many of life’s biggest milestones — like owning a car or purchasing a home,” co-founder and CEO Jason Gross told Cheddar. “The first step is leveling the playing field and making sure that safe, affordable, high-quality credit is available to anyone that can afford it, not just those who have had the opportunity to build credit in the past." Petal offers a no-fee credit cards with limits ranging from $500 to $10,000 and annual percentage rates between 15.24 percent and 26.24 percent, designed for students, expats and other new-to-credit customers. Petal plans to use the money to hire and scale its credit card, which launched in October, to serve “tens of thousands” of new customers, Gross said. Petal launched in 2016 with four employees and funded the first year of operations with its own savings. Today, it has more than 60 employees. It’s currently on a hiring spree in New York City, with more than 15 open positions across the company. Credit card startups have raised almost $240 million in venture capital funding in the last year. Petal raised $13 million in Series A funding last January. In July, the credit card management startup Tally raised $25 million; Brex, the company providing credit cards to early-stage startups, raised $57 million in June followed by another $125 million in October. In October 2017, Zerocard also raised $8.5 million. In the same period, point-of-sale financing companies have come out of the gate looking to replace today’s credit cards. Affirm says it’s “reinventing credit for the 21st century” and Klarna, Affirm’s European counterpart that offers a credit card in addition to small short-term loans, is making a big push into the U.S. market. All of them are looking to cut into the most profitable part of the business of large legacy banks — which currently control more than 90 percent of the credit market — the way online lenders have. Fintech companies originated more than a third of personal loans in 2017 compared to less than 1 percent in 2010, according to TransUnion data. Gross said the credit card industry is "resistant to change, addicted to fees, and out of step with consumers." "We’re in the early stages of a sea change in this market," Gross said. "Startups already offer consumers more convenience and better prices in banking, stock trading, student loans and wealth management. Those same changes are coming in credit… Get ready for credit cards that help you stay on track with your budget, avoid fees and interest, discover new stores and restaurants in your area and find opportunities to save money.” Credit cards startups are following a predictable pattern among fintech startups, which often get their start by identifying micromarkets that are, for one reason or another, underserved by the legacy banking industry, according to Jason Brown, CEO of Tally. That reason tends to be that the banks aren’t interested in underwriting loans for high-risk customers. Startups also try to meet the emotional or philosophical needs of certain customers (such as Aspiration’s checking account that markets itself as having "fairness, trust, and conscience” built into it) with a brand that speaks to them. “It's really really hard to move outside the micro market to the tangential markets, which are heavily served by the existing banking industry, and it's difficult to compete head to head with legacy banks because it becomes a customer acquisition cost game – and in that game, the bank always wins," Brown said, "They can always give more for the customer than the startup can and the market potential becomes limited." That’s why so many fintech startups are really mere features destined to be acquired by a large bank – or a well-established and popular fintech company like Robinhood or SoFi. Innovative ideas are only interesting to investors if founders can find a way to scale it, said Nyca Partners principal David Sica. Cross-selling has always been difficult in the existing financial system because of its siloed legacy systems. But with design and a full-stack technology solution, cross-selling could be effective for truly digital banking companies. “If companies can prove that they can acquire customers in a cost-effective manner and that the economics of acquiring a customer makes sense, investors become interested." Offering the same products that banks offer – like credit cards – to underserved markets or tweaking the user experience of existing banking products to a micromarket may be a difficult way to build long term value, but the reality is the percentage of people offered top end rewards is relatively small, Sica said. If a customer doesn’t have the ability to get a card that offers great rewards, the combination of design and a rich reward offering is enough to get customers. "It doesn’t sound like that big of a deal but the banks aren’t doing it,” he said. "Fintech companies have reached enough scale to develop mindshare among consumers. They trust them, the experience is better, they're able to use design and tools to budget — that wins." "It’s better for consumers to have more choice,” Brown said. "The startups are doing a good thing by going in and serving those markets. The reality is that they’ll be stuck in those markets because it’ll be difficult for them to move tangentially or the banks will eventually come around to the idea that it is a valuable market, and they’ll come and compete away all the margins by paying very high prices for customers.”

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