Launch HN: Atrato (YC W21) – Credit Card Alternative for Latin America

[rogereur]

Hi HN! Roger here, with Juan and Alex, co-founders of Atrato (https://www.atratopago.com), from the YC W21 batch. We're building a solution for consumers to pay on installments their big purchases without a credit card in Latin America. You can see it as "Affirm for LATAM".

When it comes to paying for a large purchase (let's say US$500) in LATAM, we have 2 options: paying upfront with cash or debit, or finance it using a credit card. The problem is that 80% of people here don't have a credit card, getting one is hard and even those like me that have one, credit cards are frustrating, expensive and complex to understand. They can make you overspend, the terms and fees are opaque and keeping track of your purchases and payments it's confusing.

This problem is pushing a lot of people to go to department stores with their own installment credit, but with incredibly expensive interest rates (+70% APR) or delaying important purchases for months or sometimes years! And merchants (like retailers or ecommerce) are losing potential sales and customers because they can't offer financing themselves or other payment alternatives.

We stumbled into this problem while in college because we ourselves had a lot of problems with our banks and we are so passionate about financial services that when we had so many negative experiences with our own credit cards, we were inspired to build a more fair, fast and transparent solution for the people in LATAM. We saw that in many developed countries these solutions were gaining popularity and technology was available, so it didn't make sense for us that there wasn't something like that available.

Our payment method lets merchants offer their customers up to 18 monthly installments to pay for purchases of up to US$5k. When they're in-store, consumers scan a QR code, apply in minutes with their phones, receive an instant offer and can enjoy their purchase! We then settle with the merchant upfront and collect the installments from consumers directly. For ecommerce, it works like any other payment method and we developed integrations with the major ecommerce platforms such as Shopify, WooCommerce, Magento and custom platforms. We make money by charging a discount fee to the merchant for each purchase and interest to the consumer (average ~40% APR, significantly lower than most credit cards in Mexico (~60% APR) and now launching 0% APR programs). Right now we're live with global brands like Specialized Bicycles and Echelon Fitness and ~110 merchants in Mexico.

It's been a crazy so far, we are first time founders and started the company while in college (Juan dropt out), learned from scratch how to underwrite credit, fraud, credit scoring and manage risk, built a complete platform (from the loan application, to the servicing software and all infrastructure), raise debt, sales, product design and a lot of other things!

[thesimon]

> This problem is pushing a lot of people to go to department stores with their own installment credit, but with incredibly expensive interest rates (+70% APR)

Surprising. At least in Brazil interest-free installment payments are extremely common, so much that prices in stores are often advertised with the installment amount.

One question: With all the problems with credit cards you mention, why didn't you build a better credit card?

[JuanCasian]

From feedback we received from our customers we realized that the credit card solution is not the best for them. Credit cards are hard to understand for what they said and it also pushes them to spend more money which cause them to fall easily into an debt they can no longer pay.

[sokoloff]

Both seem to allow people to pull forward purchases in anticipation of being able to afford them later.

How does Atrato prevent someone who would be prone to falling into debt if they used a credit card from not falling into debt using Atrato and its 40% APR rate?

[rogereur]

Yeah, the problem of credit cards it's all the confusing terms around payment dates, revolving balance, minimum payments. While this might sound trivial in countries with higher financial literacy. So with credit cards it is easy to just say, I'll leave some balance and pay it later. But that will start generating interest over interest, and really quick it can become a snowball trap where then your income only lets you pay the interest proportion of the debt and be looped in the vicious cycle. And on top of that, if you get a credit card, you have to deal with the risk of card fraud which might complicate things.

Our loans are time-defined, full amortizable, which means that every payment you do your debt will lower and are tied to specific purchases. So instead of easily finance anything you can't afford, people use us for specific things they need. It's just simpler, easier and will become even more affordable as we improve our terms

[leephillips]

Is the name related to atrasar, to postpone?

Not a criticism at all, because no doubt you are offering choices to people that currently don’t exist, but isn’t 40% APR still insane?

Sounds like you do some kind of quick, automated credit scoring. How does that work in Mexico and countries south? Do the big three scourges of the US reach into CA and SA?

[SamBam]

40% does seem extremely high. For reference, most states have usury laws that kick in around 20% APR.

I'm not saying there isn't a reason for such a high rate, and obviously it's better than a 60-70% rate, if that really is the only other alternative.

But for anyone with any credit rating at all, I would imagine they would probably be better off getting a credit card and dealing with the issues alluded to. Yes, it may be easy to overspend if you're not careful, but if you are careful, the rates are likely to be much better (capped by law), and you get additional benefits to paying by CC.

That said, I haven't seen the business plan, so maybe there's some other reason beyond "I might overspend" as to why someone who could potentially qualify for a CC would get this.

[alejandroChavez]

It's always surprising for foreigners, specially from more financially savvy/developed countries, to see how expensive consumer credit actually is in Mexico. An average APR for credit cards (classic average ones) here would be around 60%. For instance, a large american bank that operates in Mexico (one of the largest here in terms of the market), has an average APR of almost 80% for its "Clasic" credit card. On the other side, "Platinum" credit cards for prime users do not generally go below 35-40% APR

[SamBam]

Fair enough, then your does seem a lot more reasonable.

Follow up question: how can you afford to offer more reasonable rates if the credit card companies can't?

[rogereur]

Banks are tremendously inefficient and have to support huge fixed costs for branches. Credit cards also offer a 1 month grace period without interest, so the effective yield they get is lower, thus they have to charge higher.

The cost structure of banks is mainly about credit risk (defaults), fixed costs, origination and servicing costs, and funding costs. For startups the funding costs is the biggest problem because banks fund themselves at close to 0% out of deposits. We have to raise expensive debt. As we drive this cost down, we will have much better conditions for users and merchants

[alejandroChavez]

I guess we are just throwing technology at problems instead of people/brick and mortar branches

[rogereur]

Even if you are careful, I would argue that the cost with late fees (everyone forgets their payment at least by one day) + other fees will make it more expensive in the long run. Then try to cancel it and it will take you several calls and time invested.

As we drive our costs lower, we will be able to offer dramatically more low interest rates and now we are testing 0% APR programs with some of our merchants

[Gualdrapo]

I don't think the name is related to that. There's a river at the west of Colombia called Atrato.

[rogereur]

Yeah. Atrasar is a bad word. It's like saying "be late". Our name comes from the Atrato River, which is a river that connects central america with south america and provides a safe way for travelers while passing through the rough and dangerous terrain of the Darien Gap.

[bithavoc]

Is the card available in Colombia or Mexico?

[rogereur]

Mexico right now. After we get product market fit here, we will go for other countries

[lazyant]

Sounds more like "trato" ("treaty" or "treat") but speculating doesn't mean anything

[rogereur]

It is! And also the name comes from the Atrato river

[alroman]

Wow! Great job guys! I've often wondered how this could be solved in Mexico and you guys seem to have found a nice way to do it.

I'm curious, but would someone who has a small shop at the mercado be able to use your service? Would this let them compete against Coppel if a consumer want to buy cheaper electronics from the guy across the street? Are these the people you're targeting at all? Your aleados look very established.

[rogereur]

We do want to build for small businesses and merchants. We do actually have many of them, work with a lot of local bike dealers, auto shops, small electronics stores and they are happy they can offer financing to their customers. If they don't have an ecommerce or website we give them a magic link that they can send their customers through WhatsApp/Facebook.

[festinalente]

+1 to this question

I'd guess that the strategy is to start with specific vendors or purchases where it's easier to model origination + creditworthiness. I think the open question from my end is whether as a VC-backed business there's an incentive to go downmarket anytime soon or whether it makes more sense to expand across higher-end businesses for the next few years.

[rogereur]

Yeah. Something we've discovered is that merchant fraud is more common with smaller businesses, so that's a challenge. There's also a natural concentration of merchants. Like Affirm drives 30% of their revenue just from Peloton. We will see something similar.

[guillegette]

I was born in Argentina, I understand the pain. People that don't have credit cards is mostly because:

a. they are not in the financial system, meaning they get paid in cash, etc

b. they get paid too little or they have debt so their score is low and therefore they don't get access to a card

Your solution seems to be more suitable for people that can actually access a credit card but they find them "hard" so they can opt for something like your solution.

Curious to hear your take on this.

[rogereur]

In Mexico and other countries in LATAM, there are huge department stores that have built their own banks to give their customers credit to purchase on the store. Combined, these stores have ~20 million customers and are some of the largest banks in Mexico.

Our solution it's focused on these customers, who already have some sort of credit but find paying their purchases on installments easier, more affordable and transparent than getting with a credit card.

We are enabling other merchant that aren't as big or don't having the ability to offer financing to offer this option to the customers.

[SMAAART]

That's what SEARS did here in the US with what's now known as Discover Card.

[rogereur]

Yes, exactly. It’s just like that but think as if SEARS had built the bank itself. It’s crazy but here literally two of the largest banks were created this way

[thegginthesky]

When you say LATAM, which countries are currently supported?

This sounds awfully familiar to how credit cards work in Brazil, where merchants can let you divide payments in an arbitrary number of monthly installments. For example Amazon let's you divide up to 10 times, some brick and mortar stores let you parcel up even longer.

[rogereur]

We're currently in Mexico! And yeah, here you can do that as well. The problem is that not a lot of people have a credit card (90.5% to be exact) and even if they have, they have enough credit limit and deal with the opacity, late fees, and complexity of credit cards. Also, this is defered interest, not actual installments, that means that wen you miss a payment you get charged the interest rate of your card (60% APR on average in MX)

[thegginthesky]

Thanks for the reply! It seems the credit card system in Mexico is way more complicated than what I have experience with. Kudos to you guys for trying to disrupt the system!

[JuanCasian]

We are currently only supporting Mexico. As you mentioned in Brazil credit cards are really strong, but here in Mexico Credit Cards penetration is really low so there is a huge amount of people that are unable to divide their payment into monthly installments. Thats were Atrato comes in! We allow our customers to divide the payment without the need of a credit card

[_vn5r]

This is not for Latin America. This is for Mexico only.

[rogereur]

Will be in many LATAM countries soon. Starting with Mexico now.

[zorked]

To be fair when I read "for LATAM" I usually expect it to be "for one particular country but we want to pretend it's for LATAM". (Not picking on this launch specifically.)

The countries are just too different, it doesn't make sense to treat them as a block.

[rogereur]

They are different but they do have their similarities, specially financial services and solutions and alternatives that people use to pay for large purchases.

[atlasunshrugged]

I was actually just reading about 'the Tequila Crisis' which might explain a bit about some Mexico specific elements to why banks are unable or unwilling to really extend credit to many folks https://www.hbs.edu/faculty/Pages/item.aspx?num=29099

[atlasunshrugged]

Pretty cool - but why is it that so many people in LATAM don't have credit cards? Does the existence of neobanks (I'm thinking Revolut, N26, etc.) change much in your thinking about the market?

[whoisjuan]

Lack of financial literacy and no acquisitive power + informal economy. Banks in Latam invest a lot in Credit Card penetration but they only can offer credit to people who are already embeded into the financial system through formalized payroll.

Many people in Latam aren't part of a payroll and make their living from the informal economy. Even if those people have the acquisitive power, Banks will never extend them a credit line because they don't have anything to demonstate a steady income besides their word.

[atlasunshrugged]

Got it, that's interesting - also interesting to see Rappi, which definitely does have more data (for its users at least) on spending habits and earning, even in the informal economy launching a card. I wonder if there'll be more of that for companies like Uber/Taxify that specialize in informal labor but serve as a jobs market issuing their own local credit lines in partnership with financial institutions

[rogereur]

Theres a company called Heru. They do all kinds of services for gig workers. It is definitely an interesting data-set to underwrite, you can connect to the apps APIs and pull a lot of data of these people and potentially create better financial products for them

[rogereur]

There's a problem of access to credit, but also distrust for financial institutions. When we talk to users many don't even know that neobanks exist yet. A lot of users also don't like or don't understand credit cards because they are complex and they feel more in control with a time-defined installments program where everything is simple and clear.

[mmacvicarprett]

It should, in brasil there are around a dozen of them!

[rogereur]

There are some. Nubank just got here. Most of neobanks are doing debit or prepaid cards at this points. Rappi also just launched their credit card

[zero_kool]

Interesting idea, I have always wondered who could be supply side partner for startups that are trying to innovate in lending businesses.

Who is the supply side of the capital that's being lent out?

[rogereur]

We fund ourselves with credit lines from financial institutions and debt funds. They basically lend us money to lend it again.

This is really hard since there's chicken and egg problem, you have to demonstrate you know what you do before getting capital, but you need capital to prove it.

[e-clinton]

Great idea. I see the same problem in Dominican Republic where interest rates are crazy high and people don’t have credit card.

Love the name by the way. Como vas a pagar? A trato :)

[rogereur]

Thanks! It is a historical regional problem and we've seen that installments in the region are pretty popular.

The name comesfrom the Atrato River, which is a river that connects central america with south america and provides a safe way for travelers while passing through the rough and dangerous terrain of the Darien Gap. And yeah, also means that you pay "on deal" :)

[glsdfgkjsklfj]

> we have 2 options

hum. this is a telltale that you know very, very little about latin america.

There is actually 4 options. And you left the TOP TWO out.

1st is boleto. where you get a payment slip with the total bill split in monthly payments, with instructions to pay at the bank with special cases for late payment, etc.

The 2nd most used is to write pre-dated, pre-signed monthly checks. That work like an informal version of the boleto and gives more leverage to the seller.

[rogereur]

Thanks for the info. Those two options, at least in Mexico (second largest country in latam) don't exist. I presume that on those countries where they do exist aren't as popular as traditional payment methods. What countries do you use those two options?

[dyingkneepad]

Parent is most probably talking about Brazil, where we do have both "boleto" and "cheque pré-datado". Boleto is very convenient and I wish it existed here in the US. Can you make another startup to introduce Boletos in the US?

[happyconcepts]

I am in the US let's roll!

[bikamonki]

I like the name! A great idea since affiliation will happen at the moment of purchase. Can it work for online stores/services? How do you manage the legality of the operation, for example, down here in Ecuador you need to be an accredited financial institution in order to write loans or receive payments.

[rogereur]

Thanks! The name is two-sided, means "doing on a deal" on literal spanish and also comes from the Atrato River, which is a river that connects central america with south america and provides a safe way for travelers while passing through the rough and dangerous terrain of the Darien Gap.

We do work with online and offline merchants. Fortunately in Mexico regulation on credit is not restrictive on credit, the most important regulations are around AML and KYC.

[ndebruyn_]

Hi team great idea, I’ve worked with credit card processing companies before on marketing efforts so if I can be of any value let me know.

[29athrowaway]

It is a good idea, but you will encounter it is hard to collect money from people in Latinamerican countries.

[rogereur]

Did you have any personal experience on this? We get this a lot, specially from investors, but so far have very manageable levels of loan losses with $1.5m already lent. We haven’t seen that even during COVID-19

[29athrowaway]

Having a low credit score is the main reason people are not eligible for credit cards. One of the reasons people have low credit scores is because of not paying.

Now, why is it that they do not pay? not because they're bad people with bad intentions. It's because they gradualy accumulate debt until they cannot repay anymore.

Let's say you meet the requirements for a credit card, but you have a low salary. Then, you go to the supermarket, and pay your groceries in monthly installments because you cannot afford them. You know this will work only temporarily but the choice is to not have anything to eat. So many people just go ahead and do it. They trade a present problem with a future problem.

Eventually, they fail to pay for food they bought 6 months ago and their credit score goes to nothing, they get blacklisted, and their credit card gets killed.

In Latin America it is not rare at all to hear about people making $400 a month that are $40,000 in debt.

[29athrowaway]

There is also decision fatigue: Low income people are forced to make so many decisions that eventually they give up and make decisions that are bad.

[antihero]

So it's a loan?

[rogereur]

Yes. It's an installment program.

[unixhero]

Will it work in Brazil?

[rogereur]

We hope it will. At least we will try :) There are some specific things about Brazil that are materially different to our experience but will be exploring other countries

[unixhero]

Thats why I asked actually. I did some startup business in Brazil. The economy was very vibrant and responded really well to new services.* However their banking system and payment systems were antiquated and closet. So have your eyes set on disrupting PAGSEGURO.

* and also so many great people

[whoisjuan]

You didn’t share a URL to your website or anything.

[dang]

Added above. Thanks!

[rogereur]

www.atratopago.com :)