PayJoy installs on Android smartphones a bios-level in-house developed solution which allows to completely disable phone functioning remotely. Through this method, PayJoy is able to reduce payment delinquency by an order of magnitude in comparison with existing smartphone device financing solutions.
PayJoy has announced on Monday, July 11th the close of a Round A for a total of $17,650,000 . The round was composed of $8mil in equity led by Union Sq Ventures; $4mil in venture debt lead by WTI which can be used for either corporate expenses as lending capital; and an additional $5.65 mil in debt capital. The valuation, which should be expected to be in a 3 to 6 the invested amount ($50mil to $100mil) was not disclosed. This round follows a previous seed round in October 2015 under the same structure with a $4mil equity, $1mil venture debt and $1mil in lending capital.
The founders expect this investment to finance the company until the end of 2017. However if lending volume grows faster than expected the company may need additional lending capital earlier.
The cost of defaults
The greatest headache for unsecured consumer lending has always been recovering from delinquents. Once a consumer defaults it is usually uneconomical for the lender to pursue the borrower for recovering the pending principal and accrued interest. This is because of the high litigation costs associated with pursuing the customer (versus the lending amount in consumer finance which is usually in thousands of dollars). This has resulted in an artificial increase in APRs for especially the sub-prime category, penalizing the good borrowers because of the few defaulters. Payjoy has been able to create a technological solution for this consumer finance problem.
The remote-phone disabling technology makes Payjoy special in the already crowded smartphone financing market as it allows a markup in the range of 15-45% as compared to 200 to 500% for other financing companies. The start-up has 3 patents filed on its unique locking technology and this technology can be extended from smartphone to any other electronic product as well.
San Mateo-based Payjoy was founded in February 2015 and has 22 people in the firm. The founders are Doug Ricket(CEO), Gib Lopez(COO), Mark Heynen(CBO) and Tom Ricket. It was launched at Stanford University’s StartX Accelerator and was subsequently selected for the Draper University FinTech Connection Forum and Village Capital’s 2015 FinTech program. Doug has a Masters from MIT and an MBA from Stanford. He has worked at Google and spent 2 years in Africa as a teacher which gave him the horizon to understand the credit and technology needs of the next billion consumers in the developing world. Gib has also received his MBA from Stanford. The company has raised $4.3 mil in capital, with equal proportions of debt and equity. Red Swan Ventures and Metamorphic Ventures were the lead for equity investors.
The startup was inspired by a friend of co-founder Doug, who launched an installment plan for solar kits in India. To improve the default rates, the company would switch off the solar systems when customers missed a payment. This gave Doug the motivation to create “kill-switch” technology which will remotely lock any electronic device by shutting off a microchip. The founders have classified their tech as “Hardware-as-a-service” with unique applications in consumer finance. The Fintech startup is currently active in California, Florida, and Texas and looking to roll out in the entire country in the coming year. It is acquiring customers by partnering with mobile stores, who are able to offer higher end smartphones via Payjoy to customers who do not usually qualify for buying a phone through contract services from any carrier. The company is looking to partner with carriers as well and has a pilot starting with a national carrier.
Enabled by the new funds raised PayJoy will start offering an indefinite cell phone rental program which, to date, has been a great product for prime clients but does not exist for underbanked clients. In this program, each client will decide how much they are willing to pay monthly which will translate on how often they can upgrade their device. By paying more per month and by choosing a cheaper or a more expensive handset customers can have a new phone model as often as every 12 months or as infrequent as every 16 months.
Thorugh this indefinite rental program, PayJoy hopes to increase the customer life time value. This program is also psychologically positive for clients as it is not a debt product : customers can terminate at any time the program, and stop making payments if they return the device.
No credit history needed
The company has achieved great reception among immigrants as they have thin credit histories, thus historically condemning them to prepaid phones. Also according to the founder, over 25% of the United States is under-banked and Payjoy gives them an opportunity to own a great smartphone which they can pay over 3, 6, 9 or 12 months. This flexibility allows them to use all the apps and their complete features which are usually not available in cheaper smartphones. With the freelancing economy booming thanks to the likes of Uber, TaskRabbit, Instacart etc, it is vital that workers have the technology to access such apps 24/7. Therefore, a great smartphone is not a splurge but a necessary investment.
The company would look to expand to Mexico, Brazil, India and other developing countries were credit is not well developed, and will essentially allow Payjoy to lend by using the smartphone as collateral. The lender will expand its association with customers by offering them further credit depending upon their payment history and by re-collateralizing their smartphones. The company has also included a damage protection plan so that the borrower is incentivized to keep paying his debt even if the phone were to break down.
Default rates and numbers
To date, PayJoy has financed 1000s of phones in partnership with 100s of retail locations. All these strategies, according to the founder, have led to a default rate in just single digits versus the 30-40% default rates for similar unsecured lenders. The company has completed originations of over $1 mil to a couple of thousand borrowers. The products financed range from $150 to $700 and the average transaction size is $500.
The company is currently only focused on Android as it fits with its target demographics and Apple is famously obsessed with centralized control of its iPhones. The start-up would have to scale the model before it can think of convincing Apple to allow it to have a “kill-switch” for the iPhones. The company is expanding aggressively to that end, with volume in February 2016 surpassing the entire Q4 for 2015.
On the debt side, the company has structured an off-balance sheet funding structure. It is not taking a direct loan; they have created an external fund which purchases all the loan contracts originated by Payjoy and holds them to maturity. Debt investors put money in the fund and will directly not be lending to Payjoy.
Prepaid handset market in the United States is estimated to be over $15 bil annually. Payjoy’s competitors have not been able to penetrate more than 2-3% of the market. The low default rates because of its proprietary technology have allowed the startup to offer the lowest lending rates in the market. This, in turn, will allow it to capture significant market share. The application of its technology are not limited to smartphones or America, and it can revolutionize how we create feasible credit for third world countries without charging exorbitant rates.
For readers who are familiar with Pokemon Go, and the need of high end with long battery phones, it should not be a surprise that PayJoy is even planning a promotional campaign around Pokemon Go.