A nonprofit that works to improve financial services for the underbanked has launched a for-profit investment fund to finance companies that serve such people.
The Center for Financial Services Innovation, an affiliate of Chicago's ShoreBank Corp., will announce today that it has raised $1 million from KeyBank and the Ford Foundation for the fund, CFSI Catalyst Fund LP.
Arjan Schutte, the associate director who oversees investments for the nonprofit, said it will manage the fund but waive the fees investment managers normally charge.
However, the nonprofit will assess "success fees" from profitable companies in which the fund invests.
Michael B. Griffin, the senior vice president of community development banking at KeyBank, said the KeyCorp unit expects to earn Community Reinvestment Act credit for its $500,000 investment.
The fund is looking to invest in companies that offer products and services such as prepaid cards, alternative credit scoring, short-term loans, and remittances and that could turn a profit in three to five years. The money is to be invested during the next 18 months.
Mr. Schutte said the fund will act as a magnet to attract more substantial capital from other private investors. "Our purpose is not to just invest this money. … It is also our intent to engage the broader capital markets industry."
The fund will "act as bait" for investors who are interested in the underbanked but do not have insider knowledge about the most promising companies and technologies, he said.
"We really see ourselves as market makers," because the due diligence the center will conduct on companies receiving capital through the fund will give other venture capital and private-equity firms confidence to make investments themselves, Mr. Schutte said.
Mr. Griffin said KeyBank's interest in the fund was spurred by frustrations with the inefficient systems it used for processing checks. "We really realized the difference technology can make in serving this [underbanked] client" and that the sector needs investment, he said.
KeyBank conducted research and pilot tests aimed at providing low-cost financial services, including check-cashing, to the underbanked in its hometown of Cleveland and in cities such as Denver and Albany, N.Y.
Mr. Griffin said the fund will help KeyBank keep tabs on the business of providing services to the underbanked. "It's a way for us to keep our ear very close to the ground in terms of what is out there … that could not only make our business more effective, but also other companies."
Last month a handful of private-equity and venture capital firms attended a conference on products and services for the underbanked co-sponsored by the center and SourceMedia Inc., the parent of American Banker. Warburg Pincus LLC, a New York private-equity group, said last month that it was close to announcing a deal with a company that provides auto financing to prime and subprime customers, some of whom are underbanked.
Mr. Schutte said the pairing of KeyBank and the Ford Foundation matches the center's mission as a nonprofit working in the financial services industry.
They are "two partners that nicely represent both sides of our philosophy," he said.
However, Mr. Schutte said that even though his nonprofit is running a for-profit venture, it will maintain its tax-exempt status, because the fund's profits will be redirected to grants and other initiatives for low- and moderate-income people.