In 2007, a not-for-profit Chicago outfit called the Center for Financial Services Innovation launched a private equity fund to support tech startups with innovative financial products. The fund, says its New York-based manager Arjan Schutte, specifically sought out companies serving the “underbanked,” or as he explains it, “consumers who either don’t have a bank, or they do have a bank, but don’t use it on a day-to-day basis.” This also includes the 50 million consumers who have thin or non-existent files at the credit bureaus, he says. “We think that there’s a tremendous amount of opportunity amongst people who are good credit risks but who just don’t know it,” Schutte says.
That first fund, called Catalyst, was so successful that in 2010, the Center for Financial Services Innovation (CFSI) set up a separate venture capital company in New York called Core Innovation Capital. On March 21, Core Innovation announced that it has closed its first fund, which will devote $45 million to funding startups in the underbanked space.
Schutte believes there are vast opportunities for creative technology entrepreneurs who want to serve a segment of the market that’s typically neglected by the broad financial industry. “Basically any household making less than $40,000 a year is underbanked,” he says. “That amounts to one in four wallets walking down the street.” Schutte says he’s looking to invest in companies with new solutions for bill payment, pre-paid credit, check cashing, and international money transfer, to name a few.
CFSI established quite a track record for spotting opportunities in fin-tech with its flagship fund. One of its most successful investments was iSend, a Middlebury, CT-based company that facilitates international bill payments. “So someone in the U.S. can pay their phone bill and then flip a screen to pay Mom’s bills in Costa Rica,” Schutte says. “It’s a way to disintermediate Western Union,” the service most commonly used to send cash overseas, he says. Schutte says iSend has grown at twice the rate of its original projections.
Core Innovation Capital’s new fund, which operates independently of CFSI, has already made two investments. In February, it funded Plastyc, a New York-based company with a mobile banking platform for people who cannot afford to pay the fees that come with a standard checking account. Customers can use their smartphones to make deposits and pay their bills through Plastyc. “It’s really a checkless checking account, with no overdraft,” Schutte says. “Overdraft is an especially difficult feature for people who live paycheck to paycheck. I think Plastyc is really carving out a big consumer space among people for whom a bank is just too expensive.”
The fund is also an investor in SavvyMoney, a San Francisco-based company that Schutte refers to as “the Weight Watchers for debt.” SavvyMoney helps its members establish plans to eliminate their debt and track their progress online. It also offers online support communities and educational courses, which are run by Jean Chatzky, the TV commentator and author of seven books about money management. SavvyMoney was founded by the people who built FreeCreditReport.com, which they sold to Experian for $130 million in 2002. “An incredible team is running this company,” Schutte says. “They really understand consumer finance.”
Core Innovation Capital is about to announce the new fund’s third investment, Schutte says. He says he sees plenty more opportunities, and because of the size of the fund, he’s hoping to be able to take on “larger positions, governance roles, and follow-on investments” that the CFSI fund wasn’t large enough to take.
Core Innovation Capital, adds Schutte, is pursuing a “double bottom line” in all its investments. “That means we’re looking for excellent financial returns to compete with any venture fund, but we’re also looking for companies that provide great, positive value to the lives of low-income consumers,” he says. “We’re looking for entrepreneurs who share our vision that this is a market opportunity that should be filled with both profitable and responsible products.”
