Nova Credit has raised VC funding of around $70mn till date. They have recently closed Series B funding of $50mn from Kleiner Perkins and Canapi Ventures in Feb 2020. In this Nova Credit review, we analyze the factors due to which it is attracting so much of investor interest.
However, first let’s understand what it does.
What does Nova Credit do?
Nova Credit converts the international credit history of the immigrants to its US equivalent, so that they can get credit. In short, Nova Credit can be described as a cross border credit bureau as it translates the international credit data into a US equivalent credit reporting format. They call this report: Nova Credit Passport that contains trend lines, US equivalent FICO score, and inquiry history. This Passport allows newcomers to demonstrate their creditworthiness to the financial lenders, who in turn can take their lending decision based on it.
Now let us also look at
Why VC’s are investing in Nova Credit
Venture Capital funds invest into a business when they find it attractive enough to multiply their money. Nova credit fits this criteria and is poised to grow exponentially. Therefore, it is attracting lot of VC funding. Let’s look at the factors due to which VC’s may have invested in Nova Credit.
The Nova Credit Team
All 3 founding team members of Nova Credit are well qualified (Stanford graduates) and have gained experience at reputed companies. Let’s look at their background:
- Misha Episov is a former Goldman and Sachs and Apollo Global Management employee. His experience at both of these companies helped him understand how to link value and credit
- Nicky Gouilimis has worked as a consultant at Bain Capital
- Leok Janssen is a researcher who has worked on stochastic signals and holds experience as an engineer at Adobe.
Interestingly, the founders personally faced the problem of creating credit history in the US as they also arrived as immigrants (more on this later).
Even the second line of command has impressive credentials:
- Sumeet Ajmani is General Counsel. He previously led the Legal and Compliance functions at Credit Karma. He has also worked as an analytic consultant at FICO & as an attorney for the Board of Governors at the Federal Reserve System.
- Sarah Davies is Head of Risk and Analytics. She formerly was Senior Vice President of Product, Analytics, and Research at VantageScores. She has also authored whitepapers and research on consumer credit behavior analysis.
Large unexplored market
Over 1mn people enter the US each year as it has become the most promising destination for education and career. We believe that every new immigrant entering the United States naturally becomes a potential customer for Nova Credit. In 2017, 13.7% of the US population was foreign-born which is expected to become 88% by 2060, says Research Pew. These figures give Nova Credit with a huge market of potential customers to render their services.
After excluding the 45% of undergraduate students entering the US, it still leaves Nova credit with more than the majority of immigrants to service. These numbers are more than capable of showing the huge unexplored market which is available for Nova Credit.
According to an estimate, immigrants can avail financial services worth $600bn, only if their credit histories are available. Not only are the current numbers promising but the future growth prospects can help the company reach new heights.
Number of immigrants coming to the US may stay constant in 2020 due to Covid-19 but people have not shelved their plan. They may have only postponed it to 2021 or 22. Therefore, Nova Credit will continue to experience steady growth and will have a huge market to cater to.
Nova Credit has the First Mover advantage
When an immigrant arrives in the US, he is credit invisible to the lenders. That is, no one is willing to lend to him due to no credit history in US. Although, they may be having excellent credit score in their home country but as there is no way to convert it to the US equivalent, they face this problem. Even the founders of Nova Credit, Leok Janssen and Nicky Goulimis had to rebuild their credit histories from scratch when they moved to the U.S.
However, if we look at this problem a little deeper, we realize that the purpose of credit history is to gauge the repayment pattern of the borrower. And in general, this pattern should not change due to change in geography. Therefore, ideally credit history of one country should be good enough to lend to that person in another country. However, as there no credit agency is ready to verify this, millions of immigrants continue to face this problem. The only option left for them is to start from scratch by availing low value (but expensive) loans / credit cards etc. This way they can build their history over a period of time.
Nova Credit has revolutionized this space and is the only known player that helps immigrants convert their credit history from their home countries. Nova credit has the entire market available for itself which is a huge positive for the company. Moreover, it will be difficult for any new player to match the scale at which Nova Credit is operating.
Data is the new oil
Nova credit now covers more than than 1 billion consumer credit profiles. This is larger than the current 3 leading bureaus (TransUnion, Equifax, and Experian) according to Nicky, co-founder & COO. After developing this massive data and serving many immigrants, Nova Credit can now use it to offer many other services. It can also explore following:
Partner with Banks to offer financial services
Nova Credit has already partnered with apartment rental companies for student housing and American Express to provide credit cards. On similar lines, they can tie up with various other financials institutions and offer various financial services to its users.
Tie-up with large IT companies
Many large IT companies transfer their employees to US to work on temporary / permanent basis. These employees need access to credit in US and therefore conversion of their home country credit history would be very helpful. Nova credit can tie-up with such companies and reach out to such immigrants.
Currently, the individual customers reach out to Nova credit to get their international credit report. With these corporate tie-ups, Nova credit can get large number of customers in one go. The companies, on the other hand can offer Nova credit Passport as an additional advantage to the employees.
Partner with universities
Nova Credit can also tie-up with leading universities to help their students get access to credit. They can start with students pursuing master’s degree as they may have credit history back in their home country.
Easy exit option for VCs
Every startup aspires for an IPO but most of them get acquired by other bigger companies. Therefore in this Nova Credit review, we focus our analysis on various acquisition possibilities. Nova Credit is a very lucrative business and a pioneer in this space. It can become a target acquisition for many businesses that are in the credit business.
American Express has already partnered with them. Amex can also acquire them as it has a large traveling business and Nova Credit can help it to grow it further.
Other financial institutions
Other banks and financial institutions may also be interested in acquiring Nova Credit to offer this service to immigrants who require credit. This will reduce the bank’s rejection rate as they will have ready credit history which will help them evaluate the profiles of immigrants as well.
Large credit bureaus like TransUnion, Equifax, and Experian may also want to acquire Nova Credit. By acquiring Nova Credit, they will be able to expand their international offerings and add credit history translation (conversion) to their services.
As Nova Credit is the only company to provide this service, therefore it has a huge competitive advantage. Nova Credit operates on a three-dimensional model. They have demand on one side, supply on other, and the customers on the third side of the triangle.
- On supply side, they pull data from international credit bureaus,
- On demand side, they provide this data to financial lenders and US based credit bureaus
- Customers are on the third side. Nova Credit does not charge the customers, but the financial institutions and the credit bureaus.
This makes Nova Credit a pull product as it helps customers get access to credit with absolutely no cost to pay. Financial institutions get a ready credit report and can lend to immigrants, whom they would otherwise reject.
At the Paris Fintech Forum 2020, Nicky mentioned that they helped American Express accept 5x more customers. This shows how Nova Credit can create win win situation for all stakeholders.
Is Nova Credit Scalable?
Nova Credit does not need any physical presence as it is completely tech-enabled and software-based. Therefore, with just a click they can import the credit histories from Australia or India and convert them to US equivalent.
Currently, Nova credit converts credit histories from 6 countries to US equivalent. Going forward they can:
- Cover more countries and start converting their credit scores to US equivalent.
- Reach out to more and more migrants from the countries that they cover.
- Expand to other countries, let’s say UK i.e. convert other countries’ credit score to UK equivalent.
- Help people living in the US to get equivalent score of any other country as they are already familiar with and have data from both systems. This will completely integrate the world of credit histories.
- Enter into more partnerships, as mentioned above.
It short, Nova Credit can become an international bureau, with which every immigrant can access his credit report and avail credit in any country.
What are the risks VCs should consider?
As Nova Credit works primarily with the immigrants, the immigration policies and laws have a direct impact on the business and any change in these can adversely affect the company.
According to a Forbes report, The National Foundation for American Policy projects that the number of legal immigrants will decline by 49% (or 581,845) between FY 2016 and FY 2021 due to Trump administration policies. (From 1,183,505 in FY16 down to 601,660 in FY 2021). If this comes true, then it can have a direct impact on Nova Credit’s business model.
Moreover, if Trump wins the upcoming US elections then he may place many more restrictions on immigration. The current state of the economy due to COVID-19 may also dampen the immigration prospects for sometime.
Translating various countries’ credit scores
In an attempt to be an international credit bureau, Nova Credit will have to make huge investments in software. To gather different countries’ data and convert it into its US equivalents score is a lengthy task. And this may be the reason, why none of the credit bureaus have done it so far. As of now, the company is converting score of few countries but as they start covering scores from other countries, they may face challenges unique to each of those countries.
Difficulty in proving credibility
As of now, Nova Credit partners with few financial institutions, and wants to grow this list. These lenders rely of Nova Credit Passport to provide credit to customers. However, since it is credit and the stakes are high, financial institutions can rely on Passport only if they trust Nova Credit’s reporting format. The company can have a difficult time establishing its credibility with new financial institutions.
If they are unable to prove that their basis for translating international credit is detailed and accurate, they cannot win new financial institutions. Therefore, if Nova Credit Passport is not widely accepted then, customers may not see much value in it.
As of now, Nova Credit may be the undisputed leader but considering the traction they have got, other players (especially the credit bureaus) may also enter in this space.
Moreover, as the financial institutions have multinational presence, they can get access to a customer’s data from the branch located in home country of the immigrant and provide credit based on that.
Key facts about Nova Credit
What is the problem Nova Credit trying to solve?
Creditworthiness is of utmost importance to anyone who wants to live in the US. The credit history is required for may purposes, such as approval of loans, renting an apartment, and a mobile postpaid plan, to name a few. The average credit score in the US is in the range of 660-719. However, one has to work throughout his career with a decent income to establish this credit score, which tends to increase with age.
In the US, credit score above 780 is considered to be the top most slot. However, less than 12% of population gets it before 40 years of age and less than 21% before 50 years. The data is highly skewed towards below-average credit scores (621-680) for people in the 40-49 age group. The majority of people are able to generate decent or above decent credit scores only after 50 years of age (which may include 20-25 years of work experience).
This becomes even more difficult for an immigrant who enters the US after living some part of his life in his home country. A working professional immigrant may have already worked in his home country for the initial years and the relocation to the States shall put him back to square one in the US to build his entire score.
Even if he has a good credit history in his home country, he has to start from scratch and reaching the magical figure of 780 becomes even more difficult for him. This is the exact problem that Nova Credit is trying to solve by providing the equivalent score to immigrants by analyzing the credit score from their home country.
How Nova Credit Started?
The idea of Nova Credit developed when Nicky Gouilimis, a student from the UK entered the United States. She was rejected a credit card, was provided a prepaid mobile plan and was asked for a 6 months deposit to rent an apartment. She faced this problem for a simple reason, that is she was ‘credit invisible’ in the US despite having a good credit history in the UK.
Nicky isn’t the only one to face issues with credit availability, several other immigrants face this in the United States. She collaborated with Misha Episov, and Leok Janssen to work on a research paper on this subject. They realized that no one else is solving this problem and this idea can have a market, therefore they started Nova Credit in 2016.
What is Nova Credit’s Business Model?
The service for the customer is always free. Nova Credit pays for the data that it obtains from the international credit bureaus. They charge the banks or any other financial provider who would want to use this data to render its financial services to that particular individual.
After obtaining the data, they create a US equivalent credit reporting format which is the Credit Passport®. This contains an equivalent US FICO score, tradelines, and inquiries. The companies who have partnered with Nova Credit use this credit passport of the individual to provide him credit. Moreover, Nova Credit also provides financial institutions with tons of analytics based on data science so that they can take an informed decision.
Nova Credit: VC funding
The company has raised around $70mn till date and is valued at more than $295 Million as per the report published by PitchBook in Feb 2020. They are lucky to close their Series B round of $50mn just before the pandemic began. The details of various rounds are as follows:
- Series B: It received Series B funding of $50 million in February 2020. This round was led by Kleiner Perkins, a company which has previously invested in companies like Amazon and Google.
- Series A: Received $16 million Series A funding from General Catalyst, Index Ventures, First Round Capital, NYCA, and Core Innovation Capital in 2018
- Seed:- $3.3 mn in Sept 2016 from Index Ventures, First Round Capital, NYCA, and Core Innovation Capital.
- Pre Seed:- $120,000 in August 2016, from Y-Combinator.
Nova Credit’s Business Partners
Today, the Y-Combinator backed start-up has raised sufficient funds for the next 3 years but along with it, it has also partnered with some global companies:
- American Express is the key business partner of Nova Credit. AMEX provides credit cards to immigrants when they approach Nova Credit for their Credit Passport.
- Apart from American Express, they have also partnered with MPower Financing which provides student loans,
- Yardi Systems that assist in housing rentals,
- And various other companies like Intellirent, First Advantage apartments, and Jetty.
In our Nova Credit review, we find that it is the only cross border credit reporting company. Today, it covers more than 1 billion consumer credit profiles. This is equivalent to over 50% of the most popular U.S. immigrant countries of origin. As per one of the founders, Misha Episov, Nova Credit is growing at 10x since 2017.
It has partnered strategically with all ancillary companies who are in the business related to immigrants such as house rentals and student loans. They have partnered with credit bureaus across Canada, UK, Mexico, India, Brazil, Nigeria, South Korea, and Australia. Therefore they are able to provide US equivalent credit score to immigrants from these 6 countries, so that they can avail credit in the US.
Nova Credit started from scratch and has successfully built the required infrastructure. It has also helped its partners in financial inclusiveness as it allows them to increase their customer base by accepting people whom they would otherwise reject.
As Nova credit is the only company in this space, therefore they have a large target market in front of them, waiting to be captured. The day is not far when their technology will enable every individual to travel across borders and take his credit history along with him.
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