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In 2020, Varo Bank became the first all-digital bank in the US to win its own national bank charter. Within barely a year, the company doubled its customer accounts to four million and tripled its revenue.
One of Varo’s early major investors was TPG’s The Rise Fund (a former Bridgespan Group client), which invests in fintech companies like Varo because they offer bank accounts without checking consumers’ banking histories or assessing monthly fees and overdraft fees. They also offer low-cost advances for customers who might otherwise turn to predatory payday lenders. In making its investment in Varo, The Rise Fund cited “the support they offer people to help manage their finances and reduce financial stress really matters at a time when so many American families are struggling in a volatile economy.”
Varo’s story is an example of an impact investor playing an important role in the emergence of a financial services social enterprise. Indeed, the field of impact investing was essentially born in the financial service sector—in particular microfinance (more on that later). And financial services continues to be a popular sector among the hundreds of potential impact investments that we have evaluated at Bridgespan over the past several years.
Investments with Impact in the Financial Service Sector
Indeed, activity has been high across financial services in recent years. In 2020, $42 billion of venture capital went to fintech ventures globally, for example, along with another $3 billion in private equity, according to KPMG. But only a fraction of that could reasonably be expected to have social impact.
We believe that the investments with the highest potential impact in the sector will be initiatives that operate in areas with limited current access to financial services and that bring new people into contact with banking systems. The World Bank reported in 2018 that 1.7 billion people remain unbanked globally. There are big differences among countries and regions; in the Middle East and Africa, half the population is financially excluded. Being excluded from the finance system makes it hard for people to save, borrow, invest, or run a business.
Investments in financial inclusion can help democratize access to finance. A 2020 report from the Global Impact Investing Network (GIIN) reports “noteworthy evidence of real-world impacts [including] increased spending on basic services, accelerated business expansion, and improved clients’ financial resilience.”
Mobile money—financial activities transacted by cell phone—provides tremendous potential to include more people. Mobile money continues to grow at an impressive rate. In 2020, mobile money accounts in sub-Saharan Africa accounted for nearly half of all new accounts globally. The introduction of mobile money can help lift households out of poverty, increase savings, and facilitate the movement of jobs from agriculture to nonfarm businesses. Because women in low income countries without access to bank accounts are often dependent on male relatives for access to formal financial institutions, the benefits of mobile money are often most dramatic for women.
There is also a need in developed markets where, as with Varo, companies can find new ways to serve consumers who were previously left out of the financial system. A lack of financial access is also a significant contributor to poverty and lack of economic mobility within the United States. Data from the Federal Deposit Insurance Corporation (FDIC) show that nearly half of Black families in the United States have no access to a bank account or lack vital financial services such as credit and interest-bearing savings. Being left out of the financial system can add extra fees to cash checks and borrow money. Aside from foregone interest, this can add up to nearly $40,000 over a person’s lifetime.
Read the full article about the future of impact investing by Kate Collins, Michael Etzel, and Sebastian Gonzalez at The Center for Effective Philanthropy.