A Poor Investment? VC Firm Targets the “Underbanked”

There’s a lot of money in poor people. KPMG reports that America’s 88 million consumers who are “unbanked” (no bank account) or “underbanked” (no credit) earn $1.3 trillion a year. At least one venture capital firm is out to make money helping them out.

Despite the huge dollar amounts controlled by the underbanked, most financial institutions want nothing to do with them – too much hassle and not enough profit potential.

Core Innovation Capital has decided to help. The Minnesota-based VC firm has raised $45 million in funds it plans to use to back startups that give low-income consumers somewhere to go for financial services other than the local check-cashing shop.

“We operate as a ‘double-bottom line’ fund,” explains Core Innovation managing partner Mike Harris. “We seek excellent financial returns and a positive social impact on the lives of the underbanked.”

Emerging Middle Class

The market opportunity is real, Harris says, and so is the social need. “This is an important category to target. It’s the emerging middle class of the United States.”

There are more check-cashing outlets in the U.S. than there are McDonald’s and Starbucks combined. They target low-income people and charge very high fees. And in the eyes of many observers, they’re self-perpetuating: They grow their market as they serve it by making poor Americans even poorer.

“When someone who is underbanked goes to pay bills or cash a check, what happens to them? They have to pay a fee,” Harris says. “They don’t get air miles or cash rewards like you and me. They pay $2 to $15 in fees just to pay a bill. Or they pay 2% of their paycheck just to convert it to cash. Go to a payday lender and see what the interest rates are. It’s ridiculous. It’s a vicious cycle.”

Core Innovation has funded three startups so far:

SavvyMoney, a website with free tools where people who are in over their heads can start digging out of debt.

Plastyc, which offers prepaid, low-fee, FDIC-insured bank accounts in the cloud, accessible online or via smartphone.

L2C, a credit-scoring company that uses alternative data to identify responsible consumers who should get credit but don’t because they’re not on the banking radar.

“Companies we invest in help people go from a vicious cycle to a virtuous cycle – and still make money doing it,” Harris says. “These are tech-based companies, innovators that are providing real value to consumers and developing long-term relationships with customers.”

To find more companies like that, Harris and his Core Innovation partner, Arjan Schutte, have launched an annual competition, the Underbanked Innovators Challenge. This year’s four finalists are Helping Loans, Juntos Finanzas, TIO Networks and Sociogramics, a project of Match.com founder Gary Kremen that uses text messaging to bring personal finance tools to first-generation U.S. Latinos.

Putting their compensation where their mouth is, Harris and Schutte peg their pay as VCs to the social impact their investments make. They collect information from their portfolio companies and submit it to an independent audit committee, which then helps to determine the partners’ compensation.