MONTREAL — With rising housing prices making home ownership less affordable in Canada, a pair of new fintech startups are betting there’s untapped demand for loans and other financial services geared specifically to renters.

The companies, Chroma and Zenbase, are adapting the popular buy-now, pay-later model to rent payments, paying tenants’ rent upfront and letting them reimburse the startups over the following month. Both expect to announce seed fundraising rounds in the coming weeks, the startups told The Logic.

The companies are the first in Canada to offer so-called rent-now, pay-later services, which have already been available in the U.S. through companies like Jetty, a startup backed by investors including Citigroup, Khosla Ventures and Valar Ventures. While consumer-loan companies Klarna and Afterpay have expanded into Canada in recent months, neither currently offers loans for rent.

In going after the renters’ market, Calgary-based Chroma, and Zenbase, which is registered in Calgary and New York, say they are targeting a growing yet underserved demographic. According to Chroma co-founder and CEO Myles Shedden, there is opportunity in the fact that traditional lenders have written off renters as too risky a market—in his view, a mistake.

“Part of our whole thesis is that the market is mispricing that risk,” said Shedden, an early employee at SkipTheDishes who last served as the company’s vice-president of global fulfillment solutions. Chroma’s two other co-founders, Riley Pickerl and Yacine Bara, are also former SkipTheDishes employees.

One of the companies’ early challenges is figuring out what exactly that risk is. Chroma says it has limited data, having only launched its product in January. Still, it has lined up lenders willing to provide 90 per cent of the capital for each loan once its fundraising round closes, with Chroma providing the remaining 10 per cent—meaning the lenders don’t think the company will lose more than 10 per cent to defaults, Shedden said. The company has been speaking with banks, family offices and alternative lenders to provide that capital, he said.

Credit scores, a key metric for any lender, don’t accurately predict the risk of renting to someone, according to Koray Oztekin, Zenbase’s founder and CEO. More useful indicators, he believes, are affordability, which factors in a person’s income, and willingness to pay rent, as shown by a person’s rental history.

“What we’ve seen in data, which is interesting in Canada, is there’s no correlation between credit score and delinquency rates when it comes to rent payments,” Oztekin said.

Zenbase launched in 2021 and has been working with landlords to offer its product to their tenants. It is working on extending the loans to anyone who wants one, while Chroma’s product does not require landlords to be registered with the service. Chroma charges $15 per month and Zenbase charges $10, but waives the fee if users pay their rent by the third day of the month.

It’s still uncommon for renters to make their monthly payments on credit. The Landlord Credit Bureau, a consumer-reporting agency in the U.S. and Canada, advises against paying rent with credit cards because of the payment-processing fees, which can be as high as three per cent. Using a credit card for rent can also increase the holder’s credit-utilization ratio, which hurts their credit score.

But for people struggling to make payments on time, the services are one alternative to payday loans, which can carry interest rates as high as 600 per cent. At a cost of $15 per month, for example, a person with monthly rent of $1,500 would pay one per cent in fees to a lender. The products can also help renters avoid additional fees such as overdraft charges or penalties for late payments, which especially hurt those with lower incomes.

Both Chroma and Zenbase say they won’t charge customers late fees, instead cutting off their access to the service if they don’t make payments. Critics of BNPL plans have pointed to late fees as a potential risk with the products, but providers have said that only a small portion of users incur fees. Since early 2021, the federal government’s consumer-finance watchdog has been surveying provinces and territories about their oversight of the new loans.

Aside from its core financing offering, Chroma has launched a product that fronts customers money to pay their security deposits, and is planning another that allows customers to build credit by reporting their rent payments. 

Other Canadian companies have launched similar services recently for renters to report payments, including FrontLobby, which the Landlord Credit Bureau rolled out last fall. Zac Killam, FrontLobby’s co-founder, said the company’s users have reported increases to their credit scores of between 30 and 85 points after including their rent payments on their credit reports.

The lending products might be especially useful to Canadians at a time when more are being forced to rent housing due to rising costs, according to Shedden. Home prices in Canada have risen more than 50 per cent over the last two years, fuelled by low interest rates and demand for more space since the start of the pandemic.

Two other Canadian companies, Key and Requity, are experimenting with other ways to make housing more affordable as prices increase. Key, which recently raised an $11-million seed round, offers a co-ownership model that allows people to move into homes without obtaining a mortgage, while Requity buys homes on customers’ behalf and rents it back to them, giving them the option to buy it at a guaranteed price later on.

The Canada Mortgage and Housing Corporation said it hadn’t yet studied BNPL services for renters, but said it is committed to addressing housing affordability challenges, including challenges in the rental market.

“At CMHC, we aspire that by 2030, everyone in Canada has a home that they can afford and meets their needs,” spokesperson David Harris said.