Firm Puts Money on Poor People

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Wipit Chief Executive Richard Kang.

It might sound crass, but A. Arjan Schütte wants to make lots of money from poor people who don’t have bank accounts. Of course, he wants to save them money, too.

Those are the ideas behind his Core Innovation Capital, a Hollywood venture firm that invests in tech companies offering financial services to consumers who today rely on payday lenders and street-corner check cashers.

Those consumers, most of them poor, spend nearly $80 billion annually on basic financial services. To Core, that number represents both social problem and financial opportunity: If its portfolio companies can make services cheaper and take market share away from higher-cost providers, Core can make big returns.

“That number was the a-ha for us,” Schütte said. “We started with an interest in using the private sector to reach an unserved customer and we stumbled into a big commercial opportunity.”

Core is a so-called impact investment fund that seeks profit and social benefits. The firm moved to Hollywood from New York this summer, in part because the L.A. area is home to a growing number of the types of financial tech companies Schütte is interested in.

Many of them have ties to prepaid debit card pioneer Green Dot Corp. in Pasadena. That includes Core’s first local investment, Wipit Inc., also in Pasadena.

Wipit offers basic financial services, such as check-cashing and international money transfers, tied to prepaid cell phone accounts. Details of Core’s investment, announced earlier this month, were not disclosed, but the firm’s initial investments typically range between $1 million and $3 million.

Core invests across the country, but executives at Wipit and other local firms say Core’s move to Los Angeles shows the growing clout of the local tech scene.

Core’s $50 million fund is small compared with those run by other local venture capital firms, but it’s backed by anchor investor Goldman Sachs. Also, Core works closely with the non-profit Center for Financial Services Innovation, a Chicago think tank supported by the likes of Wells Fargo & Co. and Morgan Stanley.

Richard Kang, Wipit’s chief executive, said he’s been pursuing Core almost since it was founded and believes the firm’s connections will be as useful as its cash.

“For so long, it seemed like Core was the girl that got away,” Kang said. “I’m just convinced their network and their relationships are going to be incredibly valuable to us.”

Double duty

Schütte spent more than a decade working for venture-backed tech companies, most of them focused on educational tools. In 2004, he joined the Center for Financial Services Innovation, or CFSI, and later ran a small angel investment fund managed by the center.

He founded Core in 2010 with the goal of making life more affordable for millions of Americans who use check cashers and payday lenders. Many don’t have bank accounts; others do but might still use such services if, for instance, they need cash quickly and can’t wait a day or two for a deposited check to clear.

These unbanked and underbanked consumers pay fees to have checks cashed and buy money orders to pay bills. If they can borrow money, they pay high interest rates because they often lack a typical credit history.

All those fees and interest added up to $78 billion in 2011, according to a report from CFSI and Morgan Stanley. Spread across an estimated 68 million underbanked consumers, that’s more than $1,000 per person.

“It’s expensive to be poor,” said Schütte, a rail-thin, half-Iranian Dutchman educated in the United States who says he has the zeal of a convert when it comes to capitalism.

“If we had our druthers, we’d take that $78 billion down to more like $40 billion or $50 billion and be marginally more profitable at the same time,” he said.

Core has invested in companies that offer new data-intensive ways to judge a potential borrower’s credit risk, potentially opening up lower-cost lending to consumers without typical credit histories. It’s also put money into companies that make services more efficient and, therefore, cheaper.

Check-cashing, Schütte said, is a prime example of a service that costs a lot because of inefficiency.

A local check-cashing shop has to lease a storefront, hire employees and cover losses from any bad checks it accepts. That helps explain why it can cost as much as 3 percent of face value to cash a payroll check and more than 10 percent to cash a personal check.

Among its other services, Wipit, the company Core funded this month, offers check-cashing for a flat fee of $4 for any check of up to $2,000.

Customers make deposits by taking pictures of their checks with a smartphone and can access their money right away – no waiting for a check to clear. Money is deposited into an account linked to a prepaid debit card and to a smartphone app that customers can use to pay bills, send money overseas and transfer money to other people.

The company doesn’t need storefronts or employees to accept checks, and it uses risk-modeling programs that Wipit’s Kang said keep losses on bad checks lower than at retail check cashers.

“Taking anything out of retail and going online or mobile is supposed to come with cost savings,” he said. “We don’t pay for electricity; we don’t pay for all the people, the location, etc. It’s all the value propositions of the Internet.”


‘Prepaid town’

Other companies that serve underbanked customers often use prepaid debit cards to connect consumers to their money. The cards have proved to be a vital product, giving people without bank accounts or credit cards access to online payments while giving tech companies access to customers who would otherwise rely on cash and on brick-and-mortar businesses.

Prepaid cards are part of why Los Angeles is home to so many of the companies on Core’s radar. The prepaid debit card was essentially invented by Steven Streit, chief executive of Green Dot, and executives and employees who have left that company over the years have gone on to found various financial technology firms of their own.

“It makes sense that if you started at Green Dot and wanted to break off, you’d stay around here,” Streit said. “In the same way Nashville’s a music town, I guess L.A.’s a prepaid town.”

Wipit’s chief operating officer, John Janes, is a Green Dot alumnus; so are Matthew Goldman, founder of Pasadena’s Wallaby Financial Inc., which helps consumers boost their credit card rewards; Ted Tekippe, chief executive of Pasadena merchant services tech firm DoubleBeam Inc.; and Ben Katz, founder of Santa Monica prepaid card issuer Card Corp.

Wonga.com, a London online payday lender, is also setting up shop in Los Angeles and has hired Green Dot alumni to run U.S. operations.

Core isn’t necessarily interested in investing in those firms, but the number of local tech companies working on consumer financial tools helped draw Schütte to the West Coast.

In New York, he said that financial technology companies were almost exclusively focused on equity markets and corporate finance, not on consumer services.

Once he opted to leave New York, Schütte said he chose Los Angeles over the Bay Area partly because there are fewer venture capital firms here.

Local tech companies have lamented the relative lack of venture capital in the area, which makes Schütte’s arrival noteworthy.

“Los Angeles has only maybe two or three tier-A venture capital firms,” said Card Corp.’s Katz. “Having one more person who’s a specialist in my industry move here is pretty amazing.”

Because there are fewer venture firms here, Schütte said there’s less competition and potentially lower valuations for companies he funds. He hopes that will help Core maximize its returns.

He said investors usually assume – often correctly – that an impact investment firm will post lackluster returns, favoring social benefit over profit. But with Core, he’s out to prove that he can improve people’s lives at full market value.

“When people hear we’re impact oriented, the assumption is there’s a do-good discount,” he said. “I hope our contribution to impact investing is to make a lot of money. As crass as that sounds, I think that’s the best thing we could do to advance that industry.”