High Potential Startup #7: Karat Financial
Black Card for Creators
If you want to apply for a credit card, the credit limits are determined by a combination of income level, credit scores, credit history, repayment history, credit utilization etc. But what if you don’t have enough credit and repayment history, have fluctuating monthly incomes or lack of credit score but interestingly enough you are still comfortably poised to become a high net worth individual?
Influencers/creators with massive social media followers are an example of this customer segment and traditional financial service institutions using traditional underwriting criteria/metrics will probably reject them or give them laughably low credit limits. Many creators are young and won’t have a credit history and are often in the process of further building and monetizing their audiences.
Karat steps in to fulfill this opportunity gap and calls itself the premium Black Card for Creators. Karat using social media follower metrics and income, provides creators the credit limits that they deserve. If you are a Youtuber, the number of subscribers and ad revenue will be used. For Instagram creators, followers, engagement rates and sponsorship deals are some key metrics to model credit risk.
Karat is a charge card (that doesn’t revolve and has to be paid in full after each month) with no annual fee and no personal guarantee requirements. The company makes its money currently from interchange fees from merchants and the card is issued in partnership with Stripe and Visa. Karat has this little ‘delight’ feature of customizing the card with your logo. Karat offers customized rewards based on the spending requirements of the creator. For example, a travel cum food vlogger may spend a lot of money on food and can customize higher rewards towards that (press reports suggest rewards of 3% to 5%). And Karat suggests the rewards scale with social media followers.
Higher credit limits will be much needed by creators as it may cost a lot of upfront money to create content. A gamer who streams on Twitch might want to incur the necessary expenditure of upgrading her gaming setup. A travel vlogger will have to spend a good chunk of money on travel, food and stay to create high quality content. And many need to constantly upgrade the quality of the content. For example, look at the quality videos that Wendover Productions, a Karat card holder, publish on YouTube. While banks may offer much lower credit limits, Karat credit lines start at 50,000 USD. Karat also offers instant revenue/payouts (advance credit) for confirmed sponsorship payments that increases cash flow for the creators.
Karat has snagged a bunch of high profile influencers and creators including Alexandra Botez, Carter Sharer, Nas Daily, creators behind Youtube channels like Real Engineering and Wendover Productions.
Karat seems to be starting with a safe ‘floor’ limit of followers. General expectations are minimum 100k subscribers for Youtubers, 125k followers for Instagram and 2.5mn followers for TikTok. The company estimates the average card holder income is around 500,000 USD. But once more creators adopt the card, more data flows in and the underwriting can become better and Karat can expand credit limits as well as cater to those with a slightly smaller follower base.
Also once the underwriting becomes better, one limitation that Karat can selectively waive is the lack of revolving credit.
Being a creator, influencer has become a viable and even career preferred option with the rise of social media, the attention it commands and tools and infrastructure like payments.
Harris Poll, 2019
There are never ending niches on the internet and creators can make sizable incomes with just a hundred true fans.
What this bodes is hundreds of thousands of creators earning incomes well above average in the near future. Karat has a very good head start in this customer segment.
The same reasons why banks don’t extend higher credit limits for this customer segment will also be the reason for denying other services like mortgage and business lending. Karat has a big lucrative adjacent opportunity as it improves understanding of this customer segment.
It is very clear commerce monetization will be a much bigger monetization opportunity for influencers and creators (than say ads) and Karat can aim to be the preferred business lending partner for these creators down the line.
Karat is founded by Eric Wei and Will Kim and is backed by stellar angel investors who were founders/operators of the big creator/social media platforms like Steven Chen of YouTube, Biz Stone (twitter), Kevin Lin (Twitch), Ankur Nagpal (Teachable) and many others. Union Square Ventures led a recent fundraising round.
Solving a key problem for (and accumulating spending insights about) a lucrative, highly underserved and growing customer segment; big longer term adjacent opportunity and a strong head-start make Karat Financial a High Potential Startup to watch out for.