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Mission-driven US investors doubling down on financial health value propositions

Mission-driven US investors doubling down on financial health value propositions

Supporting financially stressed customers has become problematic as more and more people experience uncertain income reduction, triggered by the coronavirus pandemic. Emmalyn Shaw, managing partner at Flourish Ventures, a $500 million mission-driven and fintech-focused venture capital firm, highlights to Finextra Research that despite prolonged economic prosperity in the lead up to 2020, the majority of Americans were living month to month and only 29% of US consumers were financially healthy.

Focused on investing in fintech companies that leverage technology that directly or indirectly advance financial health and wellbeing, Flourish Ventures makes direct-to-consumer investments that explicitly address the financial needs of low-to-middle income consumers and SMEs around the world.

In addition to this, Shaw explains that they are also driving investment into financial infrastructure companies whose innovations bolster API integration, enable embedded finance across platforms and accelerate performance, visibility, compliance and security, all of significance amid Covid-19.

A holistic approach to sources of stress

Shaw references the FHN Pulse report and states that financial health is an issue for over 200 million and the economic impact has worsened the situation in the US. “It can be a large source of stress for consumers and it can create a negative impact on mental health more broadly.

“Achieving financial health starts by addressing multiple important societal issues, including housing and education ($1.5 trillion of student debt) while at the same time, helping vulnerable populations build resilience to unanticipated shocks such as the current economic crisis.”

Taking a holistic approach to considering how consumers spend, save, borrow and plan is of paramount importance when measuring financial health and as a mission-driven investor, Shaw reveals that “compelling businesses with sizeable market opportunities that target this large customer segment” must be prioritised.

She adds: “Even though there is more than $175 billion spent on financial services, there still remains an abundance of unaddressed pain points. We’re focused on powering fintech companies to serve as bridges and help vulnerable populations.”

Disrupting payday lending with technology

Despite the fintech industry’s attempts to remedy risky methods of lending, increasing levels of demand for payday lending in the coming months is expected as a result of Covid-19. Shaw explores how federal stimulus programmes like the CARES Act and PUA have helped but soon, when they wind down, low-income consumers will look to source income from alternative methods.

Further to this, she adds that the US savings rate has hit a record high of 33% as the fallout from the pandemic has caused Americans to stockpile cash.

“Many fintechs are taking advantage of this increased savings behaviour to reduce the reliance on predatory lenders, such as payday players. Fintechs who help consumers access incremental income are particularly important during this time.

“Companies like Steady which provides hourly gig work opportunities across the US to maximise incremental income or challenger banks like Chime with its SpotMe no-overdraft fee feature are increasingly important in today’s economic environment. We are encouraged that large tech players like Google and Facebook have actively banned payday companies to advertise on their platforms, thereby eliminating one of the largest acquisition channels,” Shaw says.

Portfolio, problem, population

For Flourish Ventures, portfolio companies that address issues that are real problems for the population deserve the most investment. In addition to entrepreneurs who are passionate about financial health, Shaw also states that she continues to focus on tech-driven solutions that can “scale well, especially now when countercyclical solutions like those from high-growth startups Propel, Steady and Chime are seeing more demand than ever before and need to make sure they can handle it.”

She continues to say that for mission-driven investors, it is also important to consider “business models that are well-aligned with positive financial health outcomes but are financially sustainable in the long run.” To take these startups as an example, Shaw explains that:

• Propel, maker of the Fresh EBT app for managing food stamps, partnered with GiveDirectly on Project100 to raise $100M for direct cash donations to low-income families (99% funded).
• Steady, an app that brings together gig and other part-time work opportunities, launched the Steady Together initiative, offering cash grants to workers in partnership with the Workers Lab and providing telemedicine access to Steady app users.
• Chime, a mobile and online banking app, launched its SpotMe offering, providing cash advances to consumers who were eligible to receive stimulus payments.
• StrongArm, a safety science company for the industrial worker, is using sensor data to help ensure workers are following social distancing guidelines at warehouses and distribution centres.

Updating the antiquated

While fintech startups and scaleups have made progress in serving lower income families in light of the coronavirus pandemic, further changes need to be made to fintech infrastructure to ensure that US citizens who are in need of stronger financial health are and remain a priority. In order to do this, Shaw believes that financial infrastructure needs to undergo digital transformation to relieve current pain points.

For example, community banks and credit unions that smaller communities and businesses relied on are not stuck because the core software that is used is outdated, “making it hard to adapt to modern times by quickly executing digital banking offerings or providing innovative new products,” Shaw explicates.

“The payments system in the US is antiquated. For example, the majority of payments still take two business days to process and while real-time payments have been gaining momentum, we need more innovation. There is still potential for ‘middleware’ that allows new fintechs to quickly launch offerings that could help mass-market consumers.”

Shaw concludes by saying that Covid-19 has only shown how important investments in financial health are today. “We continue to carefully evaluate opportunities, as we did before Covid-19, but are even more focused and energised about ensuring that our management teams and business models have what it takes to weather what looks like an extensive downturn.

“We also strongly believe that it’s more important than ever to make sure diversity is represented in our portfolio. We stand in solidarity with the calls for change around us and are energized to push for meaningful transformation, beyond words and talk.”

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