In the past year, the Omidyar Network has invested heavily in challenger banks: the mobile-only Chime and Aspiration in the U.S., Tandem in the U.K., and one each in India, Brazil and Pakistan.
In 2019, the nonprofit venture capital firm, launched and financed by Pierre Omidyar, the founder of eBay, plans to take a look at more solutions for gig economy workers and underserved populations, as well as new ventures in artificial intelligence and regtech. (Overall investments by the firm since its launch in 2004 have surpassed $1.3 billion to date, and nearly 25% of investments have been in financial services.)
For example, it invested in Infidi Technologies, a fintech providing Indian small businesses with access to alternative credit, and Steady, an app for U.S. gig workers that helps them find work and manages their finances.
There are growing similarities in the challenges faced by independent workers in both countries, such as access to loans, said Tilman Ehrbeck, partner at Omidyar Network, where he co-manages the Financial Inclusion initiative.
“All of this became clearer to us as we observed the evolution in these two markets,” he said. “To some degree, the fact that platforms like Uber exist globally did help us in that discovery process.”
What follows is our interview, which has been edited for length and clarity.
What's driving your investment thesis this year?
TILMAN EHRBECK: At the highest level, we are at a very interesting and unique inflection point where technology, behavioral economic insights and human-centered design are coming together to bring new financial services to people that were previously just not feasible. Now they are delivering existing services at a much lower cost. We think we are at a unique time where very different business and revenue models are feasible.
Behind that there are couple of things we are excited about. One is the concept of neobanks or challenger banks. Two in the U.S. that we invested in this year are Aspiration and Chime.
Aspiration comes from the environmental, social and governance investing side. It attracts people who want to invest their personal savings and retirement account in a way that is consistent with their values. The other, Chime, is a free account that incorporates behavioral economic features. Chime figured out a way to earn money from the interchange fee on the debit card, which pays for the current account offering. We like having a free checking account very much as a starting point for any consumer to improve their financial-health outcomes.
Another segment I would call the overlooked consumer segment. One is a company called Fresh EBT. The shift to a benefit card for food stamps that can be swiped happened a long time ago, and people can swipe their card in the supermarket but don’t know what the balance is. That can be very unsettling when you try to buy groceries and you don’t know if you have a positive balance on your card.
Fresh EBT developed an app that basically scrapes the balance information for the user and consolidates all the information in the app. They have had great vitality and they have built new users at a very low cost because of word-of-mouth referrals. They have a share up to 1.5 million active monthly users.
The SNAP program can surpass $60 billion, which Fresh EBT taps into, so there’s a real potential to help 40 million Americans with their grocery shopping and ultimately with basic financial services, which is why we got excited about them and invested in them.
Where else are financial needs overlooked?
The retirement space. All of these wealth management startups that were created a few years ago, they all went after the millennials. They are tech savvy but don’t have assets. When you move into retirement, you used to get a paycheck and now you have this problem of how to best draw down your assets in retirement.
We invested in a company called United Income. They say to the near-retiree: "Give us your information and then we optimize this decumulation problem for you. We give you instructions and advise as to what to do when. We even consolidate this and give you the equivalent of a paycheck for your monthly expenses." Hence the name.
Another big theme is the entire notion of underwriting credit on the basis of alternative data. That can be either in the consumer space with cellphone data, behavior at the point of sale.
In emerging markets, a lot of businesses operate in the informal economy, but increasingly they are going online, they have relationships with their distributors in the consumer goods or are part of the supply chain or manufacturing. So there is a lot of data online that could be used to proxy cash flows and proxy cash-flow data.
We do a lot of that in emerging markets. We could imagine this happening in the gig economy in the U.S., too. We like the idea of helping them not only better manage today’s finances but actually increase their earnings.
Two companies in India, one is called Indifi. It finds small businesses via distribution channels. They go to a fast-moving goods company and say, “You have all these mom-and-pop stores in the country, you are providing them with goods, you have a payment relationship and data with them; can we use you as a distribution channel and use your data?”
This is in the interest of the distributor and mom and pop. The distributor wants a mom-and-pop store with working capital. The store wants to stock well and with variety and have a cheaper source of working capital.
Are there parallel opportunities in the U.S.?
In the U.S., the gig economy is growing. That is leading to specific needs of gig economy workers, including having separate accounting mechanisms on the financial side because they need to file for taxes.
We very much like the idea of helping gig economy workers manage today’s finances better, and in actually increasing their earnings power and helping them discover their earnings power to begin with. So we invested in a company in Atlanta called Steady.
What Steady does is they are creating what the venture capital community would call a two-sided marketplace. On one side they are aggregating gig economy workers, on the other side they are signing up gig economy platforms such as Uber and Lyft. The type of organizations that are looking for people on the flexible and part-time basis.
It’s helpful to the employers at the end because they get a steady flow of prequalified candidates for their jobs, and what’s helpful to the gig economy work is a steady optimizing their time and earnings. It goes beyond, helping people manage their existing finances better.
Where in your thinking came this idea of connecting finding alternative sources of credit in the emerging market to servicing gig economy workers?
It was more our observation that with the evolution in the U.S. and other highly developed countries, that it was similar to the reality of self-employed small-business entrepreneurs in the emerging markets.
We realized we could help people optimize their time and consolidate their earnings, and show them that despite all the differences in income that you actually have a predictable earnings stream. If credit underwriting was done differently, it should qualify you to more credit.
We realize that while it’s two different countries, the general notion of an independent worker who might need access to capital that that is quite similar.
Is Steady the only company you’ve invested in around the gig economy?
So far, yes. We are looking at others, and this is a theme we are looking at more closely. Gigs used to be something people would do on the side or a complement to their job. You have a lot of full-time gig workers that only do these types of jobs and they continue to have a healthy financial life.
What other themes are you interested in?
We started to realize that technology could both create concerns among regulators but also could be helpful to them as they supervise the financial system. There are areas that are hugely important but are today conducted in an out-of-date way. This is still often paper-based and manual and extremely costly.
Artificial intelligence-powered algorithms can help financial institutions with SARs and do it much more effectively at a far lower cost. We invested in a company that does that called Hummingbird. We are interested in regtech. We made a first investment in Hummingbird last year and we could imagine for there to be more to happen.
We’ll continue our interest in neobanks, in insurtech and in overlooked and underserved segments. Those are areas where we have made several investments. We are supporting our portfolio companies. The reason we like the challenger banks is because a lot of them can process large amounts of data and come up with recommendations for each person, so we think that there are companies now that are taking this a step further into the AI space and we are about to announce an investment there, too.
We’re interested in this entire area of using data better from different sources, embedded in the conversation of customers to dramatically improve customer service and engagement.
We made an early investment in Juntos, which helps financial services firms improve the SMS-based interactions with customers. Their first pilot was in Latin America and they did it so well that at the end of the year 42% of the consumers sent the machine a Happy New Year message and thank-you messages.
We believe that we are now at a point where smartphone technology will allow for voice-based capabilities that could make for much, much better AI-powered customer engagement tools that improve customer retention, increase customer relationships and decrease costs for the financial services provider.
