PayJoy Raises $18M to Bring Mobile Finance to the Next Billion

PayJoy is delighted to announce $18M of new funding to help us bring mobile finance to the next billion.

The raise includes an $8.5M Series A equity investment led by Union Square Ventures, $4M of venture debt from Western Technology Investment, and $5.7 M of private lending capital. Following $4M raised in 2015, this brings PayJoy’s total financing to over $22.5M.

We’re fortunate to welcome four additional VC firms to the PayJoy family:

USV partner John Buttrick will join PayJoy’s board of directors, and new board advisors include Mitch Kitamura, Raj Date, Olawale Ayeni, and Arjan Schutte.

We are excited to use this investment to bring modern financial services to the underbanked, helping them join the digital economy and climb the economic ladder to success. Our unique mobile finance solution allows underserved consumers to afford modern smartphones for the first time. PayJoy leverages the power of mobile to connect the underbanked to the financial services they need most.

General inquiries: info@payjoy.com
Jobs: careers@payjoy.com

payjoy_exec_cropped_sm

PayJoy founders Mark Heynen (CBO), Doug Ricket (CEO), and Gib Lopez (COO)

 

PayJoy Raises $18M to Bring Mobile Finance to the Next Billion

Paypal’s John Dukellis discusses PayJoy and the next wave of consumer finance

john dukellispaypal-logo-20141

I spent some time late last week chatting with one of our earliest investors, John Dukellis.  John is a Senior Director at PayPal and leads their next generation wallet offerings.  We are privileged to be one of a few investments he has made, and to have access to his perspective and expertise.  Here is a writeup of our chat.

What’s your background?  What parts are relevant to PayJoy?

I was in venture for five years, part of about 30 deals, a lot of which were focused on fintech.  I have been in payment startups for 8 years, including running a Mastercard spinout, and COO for a company doing youth accounts.  From there I went to PayPal, been there for about two and a half years, managing our next generation wallet team of 35 global product managers.

PayJoy is finding a way to protect your downside risk and finding a way to serve a market that is underserved with better use of data.  It seems very analogous to what Uber is doing for leasing to drivers, as they have controls and good data and they are serving an underserved market.

What inspired you to invest?

The presentation at Village Capital (link) really got to me.  I tend to evaluate based on where I think competitive advantage can win and throw a few hard questions in, and the plan was buttoned up.  Doug [Ricket, PayJoy’s CEO and co-founder] was a Stanford and MIT guy, as was I, so that gives me additional confidence.

 What are the big trends you see going forwards in consumer finance, and how does PayJoy fit in?

Trend 1:  If you’re not using more data, then you’re shooting in the dark and getting cherry picked.  The whole thing [PayJoy is] doing on underwriting, tapping into social media, and finding a way to do that very very cheap — if you’re not doing that you’re running into an adverse selection problem. 

Trend 2: In my travels in Latin America people are used to the installment method, and the underserved segment in the US is likely to get used to that as well.  In Brazil that’s just how people buy, and they’re willing to pay a premium for that.  You even see Apple come in with a rent a phone type plan, but even better is an installment schedule where you own the phone. 

Trend 3:  Particularly on the loan side, how do you incentivize people to the right behavior, which involves asking for the right downpayment?  For me there is a behavioral part to this.  If you’re an Uber driver, you need to drive a certain amount to make your payment, or your car gets shut off.  In this case, its down to the amount you put up front.  PayJoy asks people to put 20% down, and the phone doesn’t work if you don’t pay.  You have to count on consumers to behave the way you want them to behave, not just focus on a loss pool.  That’s where I am seeing consumer finance heading. 

Also, no one has cracked retail yet except for big box appliance stores, where heavy underwriting made sense.  The fact is that electronics is now where people are spending a lot of their money.  Someone has to win this.  You see Apple coming in with their strategy.  PayPal credit has struck some partnerships where they have done a lot of consumer electronics financing successfully.  Electronics are now considered a core utility with a high up front costs.  PayJoy is solving a known problem in a hugely growing area.

Where is the biggest need for PayJoy?

I think it’s in the market where the phone is the computer.  There’s a heavy underserved population that’s looking to help get that purchase done.  By getting that purchase done you’re helping them do a lot more and a lot more cheaply.  Moving from a flip phone or a low end smartphone to a full end smartphone can make their lives significantly better.

How will mobile impact payments and finance?

On the product side, the fact is that mobile is so important that it needs finance.  I think consumers are expecting to do everything on their mobile phone.  Here you are in this situation where all servicing is happening electronically.  Because you’re tied into a phone and you’re servicing through the phone, you’ve cut your admin costs down tremendously.  Admin costs have traditionally been a significant cost of the account, depending on the yield.  That’s a serious competitive advantage that you don’t have to worry about the paper based costs.  Also, the fact you have a direct line into the borrowers on the products they’re using is critical. 

If you would like to have a chat about payments and onboarding the next billion, please don’t hesitate to reach out on mark@payjoy.com

Paypal’s John Dukellis discusses PayJoy and the next wave of consumer finance

How we buy phones

The way we buy phones is changing.  People in the mobile industry may be aware of these changes, but it is fair to say a lot of people aren’t. That’s because the process of paying for a phone is complex and often intentionally obtuse.

Why care?  The smartphone market is enormous.  Here is our in depth analysis of where we stand today from Asymco data.

mobile market

Here’s a brief rundown of how buying a smartphone works in the US in 2015, as well as some tips and tricks for getting the most bang for your buck.

THE OLD SUBSIDY REGIME

Getting a phone used to involve complicated contracts, penalties, and a rigid structure that kept people locked-in for years. All of this was done mainly to get people to pay off their phones without realizing how much it was actually costing them.

It used to be the cost of the phone was folded into a two-year service contract. Carriers would subsidize the full cost of the phone, so a buyer could get a $600 iPhone 6 with only a small down payment. But the buyer would still need to pay the subsidy back a little bit each month. That’s why the two-year contract was so important: it ensured that the buyer would pay back the full cost of their phone before they upgraded to a new one.

The problem was that these plans didn’t allow much flexibility. If the buyer wanted to upgrade to a new phone before the end of their contract, they would be charged a large fee.

 

THE SHIFT TO INSTALLMENT PLANS, AND WHY IT’S BETTER FOR EVERYONE

Eventually the carriers realized that they — and customers — could benefit by switching to a model that gives consumers the flexibility to upgrade more often. They started offering equipment installment plans (EIPs) that separate the purchase of service from the purchase of the device. Now, consumers get to pay for their smartphones over time without committing to a long-term contract. Customers pay for service month-to-month, and can upgrade their phones whenever they want as long as they pay off the full cost of their previous device.

This change is happening fast. T-Mobile was the first to get rid of contracts in 2013. Verizon was the last major carrier to embrace EIPs, and they’ve seen a huge growth in the number of consumers that are choosing them: 58 percent of their phone activations in the third quarter of 2015 were on installment plans compared to only 12 percent in the third quarter of 2014.  Below are more numbers from the past year.

postpaid

The EIP model is a much better deal for consumers. It’s a more transparent pricing structure; people now know what their phone is really costing them. They can also keep their old phones when they upgrade—a big benefit considering that a certified pre-owned smartphone can be resold for hundreds of dollars.

What’s even more fascinating is that these installment plans are spreading to places like India, where “EMI” plans are now a popular way to buy devices.  Rather than charge an interest rate or markup, the retailers simply withhold discounts for consumer who want to pay monthly.  These plans also required credit checks, so are really for the top 1%.

PRICING INNOVATION: LEASING AND PREPAID PLANS

Consumers can also lease smartphones now. The arrangement is similar to an EIP, except that after a certain number of monthly payments, the customer has to trade in (not keep) the phone.

Carriers like the leasing arrangement because it sets the consumer up for a long-term relationship where they are continually upgrading and trading in their old phone. But for most consumers, it makes more sense to use an EIP through a carrier or PayJoy, where you can pay out your balance at any time and own your device. Or, opt for a hybrid like the Apple upgrade plan, where consumers are eligible to upgrade after 12 payments, but can also make 12 more payments to own their iPhone outright. The main benefit of the leasing arrangement is that you can skip the process of reselling your old phone.

Another option for getting a phone is to use Mobile Virtual Network Operators (MVNOs) such as Tracfone, which sells its phones through Wal-Mart and other retailers. MVNOs buy access to multiple carrier networks at wholesale, so they can play them off each other to get the best price for minutes. MVNOs often use prepaid plans, so there’s no need for a credit check, and there’s a ton of low cost options out there. There’s also no contract or commitment of any sort. MVNOs are a great option if you don’t have credit history and you don’t want to spend a lot.

HOW TO GET THE BEST SMARTPHONES TO THE UNDERSERVED

But what if you’ve got a tight budget, limited credit history, and want to use a high end phone not offered by an MVNO? Unfortunately, the major carriers only offer their EIPs and leases to consumers with good credit, so a lot of Americans are still being excluded from this business model. These people can get prepaid smartphones for cheap, but these tend to be lower-end devices. For the high-end smartphones that cost $600 or so, these consumers can’t qualify for the installment plans or pay that cost upfront.

PayJoy fills this gap by giving people an option to pay over time for premium smartphones regardless of their credit history. Our installment plans give a new option to a large segment of the population that hasn’t yet had convenient access to the best smartphones. Once a consumer pays the phone off, they can keep it, trade it in, or sell it themselves.

The process of buying a phone has become more transparent; now we’re working to make it more accessible to the next billion consumers.

With contribution by Bryan Jinks of Hippo Reads.

How we buy phones

Smartphones and the Wealth of Nations

In America it seems like smartphones are ubiquitous. Everywhere you go, people are paying for their coffees, depositing checks, Snapchatting and Instagramming, and scheduling appointments from their phones. In fact, most people, when faced with the choice of choosing to give up their car, their laptop, or their smartphone, would let go of their phone last.

Why? It’s not because they couldn’t live without Instagram. It’s because smartphones have become a utility in our lives, as important to our daily functioning as electricity. That’s why refugees will wait hours for a YouTube video to load on a camp’s overburdened 3G network, if they can’t get WiFi from a volunteer carrying a hotspot in his or her backpack. Internet access from our smartphones is simply something many people can’t live without.

Last week we pointed out how this kind of digital access is still proving elusive to 80 million Americans — more than you would assume.

Globally there are billions of people who don’t have access to internet at all, much less a smartphone. These people are on the wrong side of a swiftly widening digital divide. In 2015, for the first time, more people in the UK identified their smartphone as the “most important device for connecting to the Internet” than did their laptop or desktop (33% vs. 30% and 14%, respectively), and this is heavily weighted to younger, lower income, and thin file segments of the population buying smartphones now (below).

The smartphone is increasingly the main portal to the internet for the middle classes of the developing world, and adoption is running on a fundamentally different trajectory (below from Asymco).

But this does not capture the sheer number of people involved.  The chart below from Asymco provides a better picture (y axis is in millions of users), but is echoed by other studies showing that by 2020 four in every five smartphone connections will be in developing nations.

Those who don’t make the shift to an internet-connected mobile device will increasingly be cut off from from important flows of information. But perhaps more importantly, they are cut off from the most important tool for increasing financial inclusion that the world has ever seen. More than 2 billion people—roughly three-quarters of the world’s poor—do not have access to financial services. Being unbanked is more than an inconvenience: it can hold back economic productivity, disempower women, and discourage preventative health measures. Luckily, the increasing proliferation of smartphones can help.

not just smartphone growth — financial growth

Commercial uses of mobile phones can be surprisingly high in areas with low internet connectivity. One study found that fishermen in southern India reduced risk and boosted profits by sharing information on catch volumes and market prices via mobile phone. Another found that mobile-enabled communication between grain traders in Niger helped improve outcomes during the 2005 food crisis. This obvious value add is driving widespread adoption of smartphones outside of the West.

This trend is even more apparent when it comes to financial services. Studies have shown that the poor in countries like Uganda and Tanzania are much more likely to use mobile payments systems than they are to use bank-aided transfers, Western Union, or other methods. Companies that provide these services in developing nations are expanding rapidly. M-PESA, launched by Kenyan telecom giant Safaricom in 2007 as a system for microloan repayments, was used by two-thirds of Kenya’s adult population in 2013. At the end of 2013, there were 219 mobile money services in 84 countries sprinkled across Africa, Latin America, and Asia.

In the developed world, we often worry that the “digital trail” we leave on the internet will be turned against us. But for the unbanked in developing countries, this digital trail can help prove their creditworthiness in the absence of credit scores.

Widespread dispersal of smartphones could really go even further to serving the unbanked. In the developed world, we often worry that the “digital trail” we leave on the internet will be turned against us. But for the unbanked in developing countries, this digital trail can help prove their creditworthiness in the absence of credit scores. Startups like Lenddo and Affirm are already using social media identity as a proxy for FICO when making loans, while Socure uses similar information for fraud prevention.  This technique could work with poorer, more marginal populations as well. For instance, some researchers have suggested that microfinancial institutions could get a better assessment of potential borrowers’ creditworthiness by studying their internet activity.   So universal smartphone access can have a massive impact on being able to secure and extend credit.

Obstacles to access — and how PayJoy helps

Many hurdles stand in the way of full smartphone penetration. Perhaps the most important one is the simplest: smartphones are expensive. In the U.S., a new iPhone costs more than $650 without a contract. It’s true that cheap Android phones are proliferating in developing markets, many of them for the equivalent of $30 or less. However, these low-end phones don’t seem to be meeting the needs of the average user: the average Android phone purchased today still costs $220. For people without access to credit, this is a high bar.  Realistically, phones will need to be priced fundamentally differently to serve the next billion new users.

In economic terms, smartphones are an inelastic good: the more affordable they become, the more people will buy them. The last five years has seen an explosion of companies exploiting this low-cost trend, including Xiaomi, the so-called “Apple of China,” and India’s homegrown Micromax brand. The only way that more established corporations like Apple or Samsung will be able to compete is if they make their products affordable and approachable to poorer users.

With PayJoy, we can make make that a reality.  We enable any Android phone to become a pay as you go device through our proprietary locking technology.  We don’t require credit bureaus or other paperwork, and offer extremely low interest rates to anyone who is willing to put up a small downpayment, has a government ID, working phone, and Facebook account.

With contribution by Jill E. Merriman and Nathalie Lagerfeld of Hippo Reads.
Smartphones and the Wealth of Nations

We should never have to give out our social security number to buy a phone

Today T-Mobile’s CEO John Legere announced that 15 million customer records were breached on an Experian server connected with credit checks for device financing. The WSJ points out that records included names, birthdays, and social security numbers — sufficient detail for any hacker to steal user’s identities.

It may be time to ask whether giving out our social security numbers to buy a device makes sense anymore.

We give this sensitive data to banks to get a mortgage.  Maybe we give it to a car dealership to finance a car.  But these are high value purchases.  Given the increasing pace of identity theft in the US, we should be cautious about sharing this information.  For context, see how identity theft has ballooned since the dawn of the Internet:

In this environment, submitting this data to a complete stranger working hourly for a carrier (or to Apple, for that matter) whenever we buy an installment contract starts starts looking like a risky proposition  This is probably the smallest purchase you have financed.  Probably by an order of magnitude.  And yet most Americans are doing it

But why?  We don’t do this for electricity, even though the electricity companies install expensive equipment at our houses.  We don’t do it when we drop our car off at a garage.  There are countless other cases.

The unfortunate reason is that no other option has been tried.  And in fact, the smartphone is so much more like electricity than a car purchase.  It is a critical utility.

Rather than collateralizing your credit score, opening up prime customers to identity theft, and not allowing subprime customers to pay over time, we at PayJoy are suggesting a fundamentally different model.  We qualify people with a government ID, working phone number, and Facebook account, and simply shut off the device if a payment is not made.  Like electricity.

We look forward to partnering with carriers to help them do the same.

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We should never have to give out our social security number to buy a phone

Why we want to pay as we go — for everything

As we wrote last week, Apple’s iPhone upgrade plan charges folks a premium for paying for their phone over time, provides insurance, and gives them the option to get a new phone every year.

A lot of people responded to the post saying they still thought it was a fair deal, especially considering the convenience of having a predictable payment level and hassle free upgrading.  Now, Samsung is rumored to be rolling out a similar plan.

Both Apple and Samsung are being driven by a broader trend.  Many have argued we have entered a post ownership society here in the US as millennials reject their parents’ stuff-filled lives.  As one example, many people are finding that Uber is cheaper than owning a car in the Bay Area.  This realization, among other factors has led to a stall in nationwide vehicle registrations (see chart below).  Finally, in a “gig economy” where the smartphone becomes a means of getting and doing work, paying for it on an incremental and predictable basis feels a lot more natural than a large, upfront expenditure.

Ironically, this movement is already well underway in other parts of the world, and in many ways, the US is just catching up.  

When Doug, our CEO, was in Africa selling D.Light solar systems in 2009, he found that the up-front cost was a significant hurdle for people with limited cash.  He developed a remote management technology to meter small scale solar systems and accept monthly payments.  A $200 device became a $20 per month device, sales ballooned, and millions of people were able to afford electric light for the first time.

Solar is also financed and paid monthly here in the US (again, paying over time allowed the industry to explode), but it is based on credit scoring and to some extent home ownership.  The D.Light system worked without these onerous requirements.

This is important because even minor technological improvements can have a massive impact on customers that are typically ignored or overlooked.  Solar may help lower electricity bills for folks in California, but it is a revolutionary source of electricity for millions in developing countries.  Similarly, smartphones are a great work tool for many of us in the US, but are the most important lifeline for refugees and many people’s only computer.

This is what makes PayJoy such a powerful concept.  We have devised a smartphone-based, pay-as-you-go system that works for any device, anywhere.  We are beginning by allowing people to collateralize their smartphone, but eventually, we can enable them to pay over time for any device on easy installment plans, without requiring extensive credit checks or collateral.

Why we want to pay as we go — for everything

The iPhone upgrade plan — deal or no deal?

This week Apple announced for the first time that it would be offering consumers the option to pay monthly for a new, unlocked iPhone every year “from $32 a month.” (details below)

I wouldn’t go so far as to call this deal diabolical, but it is probably only a helpful option for those who don’t qualify.

First of all, Apple is actually offering a monthly installment plan, just like we enable at PayJoy, and just like carriers are offering all over the US.  Installment plans have replaced the carrier subsidy regime, spelling an end to two year contracts for most customers and ushering in an age of people paying for devices over time.  Apple is the first large OEM to offer these directly, and differentiates it from Sprint, which is offering a lease option for iPhones for $15 per month.

Let’s assume you clear the credit check and sign onto the cheapest possible 24 month installment plan of $32.41 per month for the iPhone 6S.  After 12 months you will have paid $389 (note the price for an unlocked iPhone 6 right now is $600).  At that stage, you will have the option to return the phone to Apple for free and get a new device.  Apple is likely to turn around and sell this device (in Asia old iPhones are more desirable than the latest Android phones) and you will not see any of that revenue.  You will then pay another $389 for the next year of the next device.  Ars Technica put together some excellent charts showing the different options.

If you use a normal installment plan, from a carrier or through PayJoy, you can pay out the remainder of the plan anytime and own the device outright.  This means you can get back the money you paid by selling the phone yourself, and then start a new installment plan.  Ultimately this turns out to be cheaper on most carriers except AT&T (below).  With Apple, the only scenario where you can get ownership of the phone is if you hold onto it for 24 months.  (I have verified this by talking to a number of folks from my local Apple Store.)

So where is the difference?  

If you are buying this, you are effectively pre-buying AppleCare+ and agreeing to a subscription without being able to get ownership of the device (unless you hold onto the device for 24 months, which would be even more costly).  Even folks who argue the upgrade plan is cheaper than going on a carrier plan with insurance recognize the carrier insurance actually covers more.  There is fundamentally no economic benefit besides the ability to pay over time for an unlocked and insured phone (and not having the hassle of reselling your phone).  Or, as the WSJ points out: “If you know you want the phone for two years or longer, T-Mobile’s current promotional offer of $20 a month for 18 months seems the best bet.”

In short, if you qualify for the Apple payment plan, it probably isn’t for you.

So what’s Apple up to?

Apple obviously is drawn to having more subscription revenue from its user base, adding onto Apple Music, HBO Now, and a number of other monthly services.  But it seems this may also be more about gaining leverage over carriers, initial adversaries and then willing partners in the iPhone’s stunning growth.  Through a direct commercial relationship with customers, and the ability to set prices independent of carriers, Apple can continually push carriers to comply with new pricing plans, require bundling of insurance, subscriptions, etc.

This is a big win, but Apple is ignoring a big opportunity.

Apple, just like the other carriers, is still ignoring the 40% of American adults that don’t have a credit card. Many of these people would actually be sound customers but the mainstream economy does not yet know how to serve them. At PayJoy, we are forging a new path to the consumers that Apple and others are ignoring. These customers want the same, high-end smartphone technology but lack the access to credit that many of us take for granted. With PayJoy, these customers can use the same device they are purchasing to securitize a loan for it. This allows them to access the phones they want at a reasonable price, building a credit history in the process.

So, while the new offer from Apple is a good way to pad the bottom line and capture more wallet share from existing consumers, it does nothing to reach out to the new consumer base that PayJoy is serving.

The iPhone upgrade plan — deal or no deal?