Averting Financial Catastrophe In America
Fifty-seven percent of Americans say that they are unable to cover an unexpected bill of $500. The financial insecurity of the average American has inspired thousands of entrepreneurs to build companies aimed at solving this problem, and our team at Village Capital has reviewed hundreds of them through our annual entrepreneur support programs in fintech (programs in which Access Ventures is a partner). This year, we noticed a new trend in the pipeline.
For years, the majority of companies in our pipeline focused on making it easier to plan, organize, and educate people about finances and savings. This subsector generated a huge amount of traction, headlined by companies like Mint.com and Nerdwallet. Established financial institutions followed suit and began to integrate financial planning and education tools into their offerings.
These companies rest on a basic assumption: if you give people the appropriate information and tools, they will make better financial decisions, including building their safety net.
We have, however, begun to notice a new trend. Many users are realizing that no matter how many times Mint tells them they overspent on eating out, they never seem to change their behavior. At the same time, investors and entrepreneurs are realizing that many saving and planning tools are failing to generate the kinds of revenues that were promised. Ultimately these technologies are failing to move the needle on behavior change, and are therefore struggling to obtain the kind of viral growth that is necessary for their business models, particularly those technologies targeted at lower income populations.
These new companies are founded on a different understanding of human nature.
Meanwhile, a new class of companies are garnering attention and popularity in the ecosystem. These new companies are founded on a different understanding of human nature, and of the realities of living paycheck to paycheck: saving and planning is hard, especially when the would-be saver is experiencing severe financial volatility. These companies, therefore, aim to either: 1) smooth a customer’s consumption by eliminating unnecessary spending and spreading out costs over time, or 2) smooth a customer’s income, thereby enabling them to better respond to financial emergencies.
Smoothing With Microinsurance
One example of a company focused on income smoothing is Hugo Insurance. Hugo offers a micro, pay-as-you-go car insurance solution to a customer base of non-standard drivers ( a class of driver that traditionally carries the most risk). Other insurance startups offer pay-as-you-go auto policies, but also require high monthly or quarterly premiums, which are impractical and unaffordable for low-income drivers. Hugo’s model allows drivers to text-to-start and text-to-stop their insurance policy. This not only saves costs for drivers who drive less frequently; it helps them fit insurance into their cash flow, preventing them from incurring high fees if they are caught driving uninsured.
The reason anyone buys insurance is to eliminate the huge financial cost of a catastrophic event. A new class of micro-insurers has also emerged to cover the small things in life (at a low cost), thereby providing an affordable way for customers to mitigate risk without the need for disciplined savings. Companies tackling this include Upsie, which takes aim at overpriced warranties, Trov which allows you to cover personal items, and VC darling Lemonade, which makes renter’s insurance more accessible.
Getting Paid Faster
More than 80% of Americans are paid through Automated Clearing House (ACH) direct deposits. These payments can take three days to process, and require a bank account. Finix Payments offers an alternative: the service allows businesses to deliver push payments to their employees over a debit card, effectively allowing for real-time disbursements to cards anywhere around the world.
What does this have to do with financial inclusion? Finix is part of a group of well-funded startups that understand that sometimes all you need is your money delivered a little bit faster in order to handle an emergency expense. A service like Finix allows an Uber driver with an upcoming electricity bill to work until they have made enough to pay the bill – and then get paid on the same day. It allows someone with a medical emergency to receive money from across the country during a weekend without a large money transfer fee. These things are all impossible with an ACH deposit, and they could be the difference that prevents users from taking out a high-interest emergency loan.
Finix is not alone in tackling this problem. Active Hours, which recently closed on a $39 million dollar round, allows hourly workers to get paid early and without fees or interest by simply taking a photo of their timesheet. Chime, which recently raised $18 million, is a web bank that eliminates traditional banking fees and allows users to get their paychecks three days faster than they would with ACH.
Technological and business model innovation around faster payments and microinsurance exemplify a much larger trend among startups in the financial services space. As these companies grow, it will be interesting to watch if this different approach can create a more substantial difference in the lives of Americans.