Ask a VC: How startups are turning away traffic from payday lenders

This is Ask a VC, where we quiz venture capitalists on the latest trends in the finance space. The name of the game in the financial industry right now is simplification. But the growing plethora of apps and startups claiming to simplify people's money game has created a crowded market. Core Innovation Capital is a San Francisco and Los Angeles-based venture capital firm that invests in companies that figure out how to cut down the red tape around personal finance. It's invested in companies including NerdWallet, Trim and CoverHound and a recent exit from the portfolio is bill payment company TIO Networks that was acquired by PayPal last month. Tearsheet spoke to managing partner Kathleen Utecht about the problems innovators are working to solve, what she looks for when deciding to invest in a company and what's coming next in the financial inclusion space. How can investors tell the difference between the next big fad versus the next big thing? Sometimes people say it [financial technology] is a fad, but it’s not. There’s major structural inefficiencies in financial services as a whole. For example, if I hand you a check and it takes three days to cash and if you don’t have enough money in your bank account, it costs you money. It's based on ACH technology which is really old, and in between banking systems that’s based on Swift technology and again that hasn’t been slowly updated. They’re not just fad businesses. There’s normally real unit economics and people are solving a need. We avoid things that are only small incremental improvements. We’re looking at things that are really going to cut costs, save time or create upward mobility for people and are not incremental -- a significant value proposition to their lives. Core Innovation Capital supports ideas that generate an attractive return on investment and aim for upward mobility for Americans -- can you do both of these, from day one? Our whole thesis is that you can do well and good at the same time. We’re on track for that. We also want to have a major impact on people’s lives. When you think about it, the best companies are the ones that bring true value to the end consumer. We look at how much money our companies put in people’s pockets or make them upwardly mobile, and we look at the revenues and what their profitability is -- those two things go hand in hand. What financial technology trend is most exciting to you right now? There are so many, but we love the stuff going on in the future of work and fintech. When you’re a W2 [full-time] worker, you get taxes taken out and you can save for your 401(k), but for part-time workers or 1099 workers, this isn’t done. A lot of companies are trying to get to this base -- it’s a third of the country right now. These startups can insert themselves in the payroll system and do what an employer would do for you -- they can take out money for your taxes, they can take out money for your savings and for your insurance. The second trend we see a ton of is insurance. We’ve made three investments in insurance and we expect to do more. Tech is hitting insurance and every insurance company is creating their own venture capital arm. Insurance companies see all these new startups coming to disrupt them and they want to be part of it. They want to partner with the [startup] companies rather than let new startups eat their lunch. Is there a trend that’s particularly overhyped to you or has lost your attention? It will be interesting to see if [financial technology] will be successful in the life insurance space. I like the concept of it, but it’s something the insurance companies might be able to just do themselves and copy. The economics are going to be hard to prove out. There are many funds that aim to help people who can’t access financial services, in the U.S. and in the developing world. Can startups offer something different than the banks? Banks have so much legacy infrastructure and so much overhead they can’t serve these smaller dollar accounts -- whether it’s investing, saving or lending -- as as much as startup can. They don’t have the technology or efficiency. Banks don’t want a lot of the less affluent customers, they don’t treat those customers well, and there’s all sorts of fees. So what can startups do to add value to the underserved market? When serving the underbanked, you just need to do better than the payday lender. Do you know how awful payday lenders are? These are terrible experiences. The places are dimly lit, and you wait in a really long line to spend 10 dollars to cash a fifty dollar check. I would be glad to see the payday lenders and check cashers go away. They're awful. Startups can create a better experience and responsibly underwrite people.