<p><img src="https://static2.businessinsider.com/image/603d1cd887d37600190d0692-910/17 - ADP_5624 (1).png" border="0" alt="17 ADP_5624 (1)" data-mce-source="Courtesy of Katapult" data-mce-caption="Katapult CEO Orlando Zayas."></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>One out of five credit card applications were rejected in October, double the rate from before the pandemic, according to the <a href="https://www.newyorkfed.org/newsevents/news/research/2020/20201221">Federal Reserve</a>. Orlando Zayas, CEO of fintech platform Katapult, knows what it feels like.</p><p>A Puerto Rico-born army brat whose father died when he was 10, Zayas had to pay his own way at the University of Houston. He was always mindful of his credit score, but when Zayas was rejected for a Gap credit card in 2008, he was shocked.</p><p>Why wasn't his 840 credit score good enough' Wary lenders tightened their restrictions during the financial crisis, Zayas said. It happened again with the pandemic and could recur this year.</p><p>"The unemployment rate is still pretty high, and a lot of people may be missing a payment here and there, and that causes their credit score to go down," Zayas, 58, told Insider. </p><p>Now the former General Electric executive runs Katapult, which allows consumers turned down for credit by popular lenders, such as Affirm, to buy tires, laptops, and other goods on a lease-to-own basis. Customers pay a $45 initiation fee and the lease can be twice the cash price of the purchase, but it can still be cheaper to use Katapult than take on credit card debt because there are no late fees or compounding interest. Items can be returned within 30 days to Katapult, and if customers pay within 90 days, the cost is only 5% above the cash price, excluding the $45 fee. </p><p>Katapult's revenue, which was $17 million when Zayas took over in 2017, topped $200 million, in no small part, due to COVID-19. With the ecommerce boom and economic recession, more shoppers are using "buy now, pay later" (BNPL) services than ever. The pandemic accelerated the New York-based firm's timeline for going public. <a href="https://www.businesswire.com/news/home/20201218005404/en/Katapult-to-Become-a-Publicly-Traded-Company-Through-Merger-With-FinServ-Acquisition-Corp.">Valued at $1 billion in an SPAC merger agreement</a>, Katapult expects to trade on Nasdaq early next fiscal quarter.</p><p>Insider spoke with Zayas about how Katapult has thrived during the pandemic by accepting consumers rejected by other lenders.</p><p><strong>So Katapult accepts "non-prime consumers," people who get turned down by prime lenders like Affirm, for instance. What makes a consumer non-prime' A bad credit score'</strong></p><p>There's a host of reasons that people can fall into the non-prime. It could be a medical bill that got away from them that they didn't anticipate. Maybe they lost their job and they're trying to recover from that. Prime lenders have very little loss appetite, and we see that they approve at point of sale between 40% to 50% of consumers.</p><p><strong>Lending to a non-prime consumer sounds inherently <strong style="color: #000000;">riskier</strong>. Has that risk been shown in rates of repayment'</strong></p><p>No, and I think it's due to our really strong underwriting. We don't have long-term contracts with our consumers. Most of them pay off their leases in seven months on average. Our portfolio churns pretty quickly so if we start to see declines in paythrough we can tighten up pretty quickly. There's not a long tail of three years or a mortgage, which is more like 30 years. We are in a waterfall situation where, when the economy gets rough, the prime lenders tighten up. We're actually a beneficiary of that because we see a better credit quality than we've seen in the past get turned down, and we can still manage that risk. We don't get hit as hard as prime lenders do during a recession.</p><p><strong>Are there any purchases that are off-limits'</strong></p><p>We don't do things that aren't durable goods like clothing, groceries, jewelry. I want to help people get the items they need. You need a refrigerator, you need a sofa. You need tires for your car to go back and forth to work. You don't necessarily need a diamond bracelet. We stick to stuff people need versus want. I think that helps repayment as well as back because they want to preserve that credit option for future needs.</p><p><strong>Do you view prime lenders like Affirm or Klarna as competitors'</strong></p><p>No. We actually have a partnership with Affirm. We've talked to just about every prime lender there is about creating partnerships. It's all about the retailer. If a retailer relies on financing, they want their finance partner to approve 100% of consumers. But they don't do that because there is risk online of fraud but also just credit risk. The Affirms of the world aren't approving everybody so if they bring us in on a waterfall, suddenly their approval rate to the retailer goes up, and they're getting an incremental customer. </p><p><strong>Give me an example of how this referral system works.</strong></p><p>Let's say you go online to buy a Purple mattress through Affirm. You won't see our name anywhere but it does say that you agree to share your information with another lender if for some reason Affirm can't approve it. If Affirm declines a purchase, they send the data to us. If we approve it, a message will pop back up to the consumer saying, "Sorry, you were turned down for your loan with Affirm, but we have this offer for Katapult for lease to own." We're able to disclose exactly what the customer would pay, and then they can decide whether to take the offer.</p><p><strong>How did the pandemic impact Katapult' </strong></p><p>Heading into 2020, we were on track to do around $160 million to $180 million in revenue. COVID actually helped us because people were working and shopping from home. The stimulus helped actually; our second busiest day of the month was April 15 when the stimulus hit. I think the non-prime consumer felt comfortable that they could take out a payment plan to buy what they needed, and people were at home. For example, they were sitting on a couch, and thinking, "I really need to replace this couch with something more comfortable because we're spending a lot more time on it so let's look at Wayfair." People weren't spending money on going to the theater or going to football games and doing all these other things so they really focused on making their home comfortable, and we were the beneficiary of that a little bit. What also happened is that customers now understand how to buy stuff on e-commerce. To give you a personal example, I needed a new refrigerator, and I bought it online having never gone to the store to look at it. </p><p><strong>What led to the decision to go public this year'</strong></p><p>We were growing pretty fast [during the pandemic]. One of our competitors on the brick-and-mortar side made an unsolicited offer for the business in the summer. The board looked at it and we decided to see what the business was worth and what our options were. We went through that evaluation process, hired an investment banker, and then the SPAC came up. Quite frankly, I didn't even know what a SPAC was six months ago and I had to do my due diligence. I was like, "Wow, this is a pretty exciting way to go public," which I thought was in our future but down the line, maybe in a couple of years. This just accelerated that. Then we found Finserv, who really appreciated the fact that we had a strong management team, and that we were profitable because many of these SPACs are electric car companies that have a great idea but haven't really made any money yet.</p><p><strong>There is a dramatic contrast between the people who use BNPLpeople who sometimes can't afford necessary purchasesversus the BNPL founders who are beneficiaries of these massive IPOs. Do you see that as well'</strong></p><p>There is a juxtaposition between the consumer using BNPL and the people that are benefiting from the IPOs. I think I come from the world of the consumer. I was an army brat. My dad died when I was 10. I put myself through school. I understand why this non-prime consumer has to spread their payments out because Lord knows I spread my college tuition payments out as long as I could. I have never forgotten my background. How we treat these consumers at Katapult is very important to me personally because I was that consumer when I was in college.</p><p><strong>SEE ALSO: <a href="https://www.google.com/search'q=hayley+cuccinello+max+levchin&oq=hayley+cuccinello+max+lev&aqs=chrome.0.69i59j69i57.5558j0j7&sourceid=chrome&ie=UTF-8" >Affirm CEO and 'PayPal mafia' member Max Levchin just became the third billionaire minted by the 'buy now, pay later' boom</a></strong></p><p><strong>SEE ALSO: <a href="https://markets.businessinsider.com/news/stocks/amazon-andy-jassy-ceo-billionaire-stock-net-worth-2021-2-1030057018" >Amazon's next CEO, Andy Jassy, has a $270 million stake in the company. It would be worth $1.8 billion if he'd held on to all of his shares.</a></strong></p><p><strong>SEE ALSO: <a href="https://www.businessinsider.com/explosion-buy-now-pay-later-credit-klarna-regulation-2021-2" >Inside the explosion of buy-now, pay-later services like Klarna, as regulators move to legislate a potentially $350 billion industry</a></strong></p><p><a href="https://www.businessinsider.com/katapult-financing-orlando-zayas-ceo-2021-3#comments">Join the conversation about this story »</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/economist-weighted-voting-could-help-save-us-democracy-2018-5">A top economist explains how weighted voting could change democracy</a></p>
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