Google AI fund backs Chicago credit card startup Tandym

The company sees a market for companies with less than $1 billion in revenue to offer their own credit cards or lines of credit to customers.

“Private label cards are valuable but expensive to implement,” says Jennifer Glaspie-Ludstrom, who co-founded Tandym last year with David Anderson and Sairam Rangachari, who all worked at Capital One. “Merchants with less than $1 billion in revenue don’t really have access to it because banks are hunting whales.”

She says a big reason for this is that traditional banks have old technology systems and protocols that take a lot of time and money to onboard new customers. Tandym doesn’t just integrate with existing credit card processors. It provides credit to the end customer. In addition to equity to fund operations, the company raised $50 million in debt to fund end-user credit.

“It looks like they’re entering a very crowded space,” says Sucharita Kodali, e-commerce analyst at Forrester. “If and how they can differentiate remains to be seen.”

In addition to banks such as Capital One and Discover, there are card issuers such as Bread Financial – formerly Alliance Data – and new online consumer financial services such as Affirm and Klarna competing for retailers.

Glaspie-Ludstrom says Tandym has 14 e-commerce customers and processed its first transaction this week. It also plans to serve traditional brick-and-mortar retailers.

Like most startups trying to break into an established financial services market, Tandym plans to undercut the prices of existing players. The company says it charges its customers a processing fee of 0.5% of a transaction, compared to an industry average of 3%.

The company says the new software technology makes it faster and easier to onboard customers, reducing costs. It’s the same pitch as Chicago-based Braintree, which was acquired by PayPal when it moved into credit card processing.

Tandym may also charge less because it does not pay for loyalty programs, such as cash back and other discounts, offered by companies to their credit card users. These programs are usually funded by banks from fees paid to them by merchants.

Tandym collects all interest paid by end users. But by providing credit, rather than the technology needed to link retailers to banks, Tandym is taking financial risks. It relies on algorithms to assess the credit risk of customers and avoid being burned by default. It’s essentially the same bet Chicago startups Avant made in online consumer lending and Kin in consumer property insurance.

Tandym earned a vote of confidence from Gradient Ventures, which led its initial $2.2 million funding round last fall and returned for more with a seed round. Its technology is about to be tested in the real world by which is shaping up to be a tough market for consumers.