This Stanford grad is taking on the pawnshops with a new credit card startup

There has been no shortage of startups offering lines of credit to the underbanked in recent years. Most talk about their mission to help people build credit, which is noble, but they also give credit because, let’s face it, lending money is lucrative.

Now, a startup founded by Stanford graduate James Savoldelli has found a new niche in the same industry, and it’s through pawnshops.

Called Pesto, the idea is creative – and savvy. For those in dire financial straits, pawnbrokers are a bank of last resort. An individual does not need to have a line of credit or a bank account or even an income. A customer with government ID can simply leave something of value behind – jewelry, electronics – and receive a secured loan in exchange for a percentage of that item’s value, plus interest. If he repays the loan, that person can get the item back; otherwise, it is confiscated and sold.

But these loans can be extremely expensive, depending on where a pawnshop is located. While in California stores can only charge 2.5% interest on the principal amount each month, in Florida, Georgia and Alabama a customer can pay 25% interest per month (or 300% per year). It’s no wonder that 12,000 pawnbrokers in the United States contribute to a market worth around $14 billion, according to the National Pawnbrokers Association.

Pesto hopes to capture some of these people online before they go down this path, in part by offering them a secure MasterCard offering up to 29.99% annual interest – but 0% interest if anyone repays his loan in full on time.

We spoke with Savoldelli yesterday about Pesto’s strategy, which he formulated after being offered a high-interest loan as a student and later spending time at a variety of pawnshops to better understand customer behavior. Investors are also clearly intrigued by what he is building. The startup – which went through accelerator Y Combinator in 2021 – just attracted $11 million in Series A funding from Activant Capital, Plural and others. More follows, edited for length:

During Covid, you were living with a classmate in Los Angeles and started working at a pawnshop. What happened?

I took a job at the biggest pawn shop in Los Angeles; it was considered an essential service. So I’m there every day with my mask, helping this clientele, and what I saw fascinated me. Customers got a loan, then paid it back, then got another loan and paid it back, and did it again and again and again. But that never helped them build credit. It never helped them move on to something better than what they just finished paying. So they were stuck in this cycle. That got me thinking: what if we could create a product that actually rewards people for paying something back? And the more I learned about credit, the more I [saw] the opportunity to build an asset-backed credit card where we give people access to what is, initially, much, much cheaper credit and [them] out of this world of payday loans, pawnbrokers, [and] title loans and traditional financial products.

It’s amazing that some states allow pawnbrokers to charge so much interest. Why are the laws regarding these companies so cowardly and horrible?

How much time do you have?

[Laughs.] I don’t think enough people honestly know about it or, frankly, are working on it. But it’s a horrible proposition through and through.

How exactly does pesto work? How — where — do you take possession of those valuables against which you extend credit?

Customers go online, they find our website. They go through a quick assessment by entering details of their asset and we give them an estimate of what their line of credit might be. Then we give them a QR code that allows them to enter any UPS store across the country, where it will be packed and shipped, fully insured, directly to us.

Once we receive the asset, we open it under video, inspect the asset and make them a final credit offer. From there, we spin a map digitally and the physical map arrives a few days later in the mail. The item is then stored in a temperature controlled safe for the time being, and when they switch to an unsecured card or close their account, we send their item back to them.

Are you worried about illicit goods?

We are a horrible way to close an object. Our clients go through a full KYC.

Pawnbrokers usually give people 30 to 120 days to pay them off. Is there no timeline with Pesto’s offer? Do you even care about assets or do you focus primarily on the interest on the loans you make?

You can use [your card] as long as it suits the customer. Our goal is to earn as much money as possible on the spent transaction. One of the reasons we have such low interest rates is that we earn money when the customer spends money, but we don’t charge it, like any standard credit card. We absolutely want customers to get their assets back.

Who are you partnering with on the back end?

We have partnered directly with MasterCard. We have an issuing bank that we work with directly: Continental Bank in Utah. We work with a credit card processor called ITC. By building a credit card, you take these pieces and put them all together to build your experience.

Is this demographic part of an opening gambit? Over time, will your credit card company target another population or industry?

We have lots of ideas of what we could do with this [after] spent the last two years building a modern credit platform. We have tons of stuff on the drawing board.