Millennials often find themselves in a credit card Catch-22.

Since the financial crisis hit, cards have been harder to come by for the college aged, but it’s tough to get one after graduation without a credit history.

Lenny Credit Inc., a Santa Monica startup, has taken aim at that conundrum with the launch of a mobile app in March that offers kids in their late teens and 20s small-dollar loans, peer-to-peer payments, and credit-score education – all while reporting users’ payment activity to credit bureaus to help establish a history. The firm uses alternative metrics such as a student’s grade point average, major, and school to help vet a borrower’s credit risk. Lenny has extended about 1,400 lines of credit in California so far totaling $215,000, according to Joe Bayen, 40, its founder and chief executive. The firm plans on expanding to Texas, New York, and Florida in the next six weeks.

“We’re not reinventing the wheel; we’re modernizing it,” Bayens said.

Millennials’ lack of credit might be due to a few different factors. First, they shoulder a heavier debt burden after college than their parents – perhaps even their older siblings. Between 2004 and 2014 alone, average debt at graduation rose 56 percent to nearly $29,000 – more than double the rate of inflation over the same period, according to the Institute for College Access and Success.

And on top of new regulations limiting how credit card companies can market to college-age students, consumer credit has tightened. Some millennials might also be eschewing credit cards on purpose, using cash and banks accounts until they buy a home. While only 35 percent of adults 30 and older don’t have a credit card, 63 percent of millennials (those between 18 to 29) lack one, according to a 2014 study by New York consumer finance website Bankrate Inc.

“It’s a pretty underserved niche in the financial markets,” said Alex Johnson, director of Boston-based Mercator Advisory Group Inc.’s credit advisory service.

Despite that need, a key to success might be figuring out how to keep customers and grow with them as their credit improves and they can access traditional products from big banks, according to Colleen Poynton, vice president of Hollywood venture capital firm Core Innovation Capital, which specializes in financial tech investments.

“There’s still a lot to be proven as to how to acquire and retain customers as they mature,” she said.

Loan lessons

Paris-born Bayen got his first credit card while attending the University of Miami in 2000, and it only took a couple of late payments to leave a seven-year smudge on his credit report.

Regulators sought to protect young borrowers from such hard-learned lessons through the 2009 Credit Card Accountability Responsibility and Disclosure Act, but the law had a knock-on effect, said John Thompson, a senior vice president at Chicago nonprofit Center for Financial Services Innovation.

“It also changed the path that people might have typically followed to … build a score in ways done a generation before,” he said.

After working in business development in Los Angeles for French firm Allegorithmic, which makes software for video-game makers and film studios, Bayen founded a mobile app promotion network in 2007 called ICS Mobile Inc., which he said generated about $18 million in revenue over a three-year period leading up to 2013. But he closed ICS later that year after Apple Inc. changed app store rules, eliminating applications that promoted other apps. Bayen joined Santa Monica startup studio Science Inc. in 2014 and spent two years as an entrepreneur-in-residence consulting on mobile initiatives.

He came up with the idea for Lenny in fall 2014 after realizing millennial friends were using PayPal Inc. app Venmo to transfer money to each other. Bayen said he pulled together about $700,000 from savings, friends, and family and started building his team a year ago. Lenny now has 14 employees and advisers such as Science Chief Executive Mike Jones and Paul Spiller, former chief operating officer of Newport Beach investing app Acorns Grow Inc.

Building credit

The platform starts out users with a $100 loan, but can lend as much as $10,000 and tends to charge annual interest rates of about 9.8 percent, depending on a customer’s credit risk. No interest is due when a user repays the loan in full within 30 days, somewhat similar to charging purchases to a credit card.

Borrowers must link a bank account to access their loan and can also pay friends directly through the app. Any qualified borrower can use Lenny for a loan, though it’s mostly marketed to millennials through blog-based content marketing and Facebook ads. The firm reports users’ payment activity to credit bureaus while educating customers about how late payments negatively impact a credit score.

Lenny generates revenue from loan interest and $2 monthly fees charged to all users.

Bayen said the firm could self-finance operations for an extended period of time, but recently started approaching financial tech-oriented venture capital firms to close a Series-A round in order to accelerate nationwide growth.

“It’s a very narrow market that they’re trying to target but they’re doing it in a pretty unique way,” said Mercator’s Johnson, adding that one drawback might be the lack of an actual card to make online purchases.

Lenny could also face problems if popular financial technology services providers catering to millennials – such as online lender Social Finance Inc. or Venmo – decide to jump into the small-dollar loan or revolving-credit market, said Poynton, though she hasn’t heard of any plans.

Regardless, she said Lenny could help consumers who might otherwise be forced to overdraw their bank accounts and pay a heavy fee.

“If you don’t have access to a revolving credit instrument, and you’re living out of your checking account, it’s very easy for you to experience a mismatch in timing of cash flows,” Poynton said, noting this could be a pain point for an increasing number of millennials who’ve become freelancers. “Overdraft is effectively really expensive short-term credit.”

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