Intro: Investing in the Underbanked
(Republished From Forbes)
I recently had the unique honor of having a thought piece published in Forbes. I originally prepared the post as an investment thesis for a Venture Fellowship with Republic. I planned to write about Mobility and Proptech, two areas of focus at the Family Investment office that I support. During the process however, I wanted to focus my investment thesis on companies that are solving everyday problems for everyday people, leveling the playfield for the masses. The sentiment held especially true for startups creating solutions that support the underbanked and underinvested.
Socioeconomic conditions impact more than wallets. Approximately 30% of health outcomes can be traced to one’s financial well-being. Solving the underbanked problem has large, positive, downstream effects on neighborhoods like the areas I grew up in and outcomes of future generations of both millennials and gen-z as well as lower-income persons of color whose stories mirror that of my family.
My father is a blue-collar entrepreneur. Some of my fondest childhood memories are the times I spent at job sites with my father, helping him complete small construction projects inside new housing developments. Though he did not complete high school, my father was able to overcome the common view that traditional education is the only way to achieve socioeconomic mobility; he created his own opportunity through entrepreneurship. Despite building a business that generated enough income to support a solid middle-class lifestyle, his credit score did not reflect the success of his business.
He and my mother shared household expenses — my mother had a more stable income, albeit lesser on average, and therefore all loans in the house were taken out in her name. My father paid for the other expenses such as groceries, and utilities, and even covered the mortgage and car payment that were both under my mother’s name. Despite this repayment history, his credit score was still weak. These payments did not factor into his credit score at all. He eventually had to rely on my mother’s credit score to pursue larger contracts in his business that where substantial down payments for materials were requires. My childhood afforded me a front row seat to this experience and through it I learned how difficult it is to build credit and the importance of credit to a growing business or a growing family.
I was fortunate enough to have these lessons early. When I reached college I found employment at my university, which provided me with a steady income and the ability to take out my first line of credit. While I used this credit to help make ends meet, admittedly ends that involved many a 6–pack of warm beer, I was able to begin developing a credit history. I used this credit to buy my first used car. I would go on to use my early credit history to qualify for a home mortgage and purchase my first two investment properties before age 25.
I have seen the repayment habits of consumers with mid 500 credit scores and consumers with 800+ credit scores. A key difference in their profiles is whether or not their bill payments go toward repayment of loans or recurring living expenses (utilities, phone bill, gas, groceries etc…). The ability to demonstrate repayment history is biased towards those with assets and consistent income. Additionally, the consistent payment of rent, utilities, phone bills, gas, groceries, etc… are not factored into one’s ability to repay equally important expenses such as those related to a vehicle or home. The former expenses are unprivileged and familiar to every adult whereas the latter expenses typically require the prerequisite acceptable credit score. This disadvantage is massive.
I strongly believe that there are millions of people kept out of the banking system for these very same reasons. Those with low income and without the ability to rely on partners, relatives, or the “rich uncle” are both cash and credit poor. Furthermore, they are unable to seize an a opportunity to buy assets, attain long-term financial security, nor able to offer a head-start to the next generation.
Investment themes and verticals that will be important in capturing this opportunity include:
1. alternative decision-making models for underbanked
2. digitally native consumer first earned wage access low fee and low-interest payday loan and credit card providers
3. digital wealth management platforms which offer financial education
4. alternative paths to housing security and home ownership
5. rewards for credit-like behaviors such as paying rent and utilities
Highlighted Companies:
Tomo: Credit card with no fees, 0% APR, and no credit score requirement
Tomo is a credit card start-up that aims to disrupt the traditional credit card market. Tomo offers borrowers an alternative to the incumbent credit card providers. Customers of Tomo benefit from no fees, no interest, and no starting deposit while still earning points and rewards from spending. The underbanked stand to benefit immensely from products and services like Tomo as it unburdens them from the traditional restraints of having a low credit score and puts them between guardrails that discourage carrying large balances and removes the penalties typically accompanied by balances, allowing them to build early credit.
Wizest: Democratizing investing by offering real advisors to the masses
Wizest is an investment platform that aims to democratize access to investment advisors. The platform targets first-time and novice investors who want to learn to invest under the auspices of financial professionals rather than the YOLO approach popularized by Reddit traders during the meme stock craze. Rather than select stocks to invest in, users select from a roster of vetted professional financial advisors to follow and mimic their investment portfolio. Advisors on the platform are required to disclose each investment decision and their reasoning behind it, giving users a front-row seat to how advisors think about investing. Wizest recently announced a partnership with the Cleveland Cavaliers to offer its platform to the Cavaliers organization.
SoLo Funds: A community first, peer-to-peer financial marketplace
SoLo is a financial service provider enabling a marketplace where members can request and fund emergency needs. SoLo launched in 2018 with the goal of providing a lending alternative that was equitable, empowering, and community-driven. Since then, they’ve processed millions of transactions, and have launched banking, credit building and premium member services with a strong focus on community and financial autonomy for all.
