Boost for payments and fintech as 500 Startups launches $25m new early-stage fund

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It’s not news that payments and other financial services have historically served many demographics in the world poorly. Today however, with the falling cost of technology, the proliferation of smartphones and growing demand for something better, there’s arguably never been a better time for startups looking to change the status quo. Interest has been steadily growing in the space, with fintech investment climbing around the world and a growing number of programmes aimed purely at accelerating fintech startups.

Now, one of the planet’s most prolific investors, 500 Startups, is throwing the weight of its company-building powerhouse behind fintech with the launch of a (targeted) $25m new fund for early-stage companies. It will focus on teams trying to build what it’s describing as “finance for the rest of us” – that is, services for underserved demographics like minorities, women, millennials and emerging economies.

“Tech is fundamentally changing the way we do business especially in emerging markets,” 500 partner Sheel Mohnot, who is heading up the fund, tells PaymentEye. “I started in micro-finance a dozen years ago and to serve one loan to one person I was getting on a bus and then a motorbike to get out to a particular village.

“Today they can do it on a phone, imagine what that does to your costs of doing businesses with these borrowers. You’re able to bring all these people into the formal banking system at an unprecedentedly low cost. “

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New fund, new business models

500 Fintech comprises a dedicated fund which it’s in the process of raising and will be aimed at backing 100 companies globally, an accelerator programme for 20 companies per year out in San Francisco and a corporate venture programme. The first fintech cohort is already in action as part of 500 Startups’ batch 16, its biggest ever single intake of startups.

500 Startups is already a busy investor in the space of course, with nearly 80 investments under its belt in the past six years. They include credit scoring service Credit Karma, international P2P money transfer firm Flywire, loan comparison site iMoney and real estate crowdfunding firm RealtyShares. Then there’s exits including digital bank Simple which BBVA bought and FeeFighters, a credit card comparison site, which Groupon bought and was founded by Mohmut.

By our count, four of the startups in the firm’s January fintech batch are in the payments space. That includes M-vendr, a UK startup focusing on helping more people benefit from prepaid schemes and Romit, a San Francisco-based team building ‘PayPal for underserved customers’. There’s also Qwil (also San Francisco), which is building a payroll platform designed for the complex payments requirements of the growing pool of on-demand workers and ArrowPass, an NFC closed loop payments/ticketing system for events. Others range from financial advice and lending to alternative investment.

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Why now?

“We’ve been doing a lot of fintech investment out of the main fund and we feel like it’s a great time now to launch a more specific fund,” Mohmut tells PaymentEye. “There’s a confluence of market opportunities, starting from the financial crisis in 2008 and then looking the way millennials are using banking services and financial institutions are not servicing millennials, women and minorities. Plus there’s investor interest so there are more follow on opportunities.”

He says the firm’s limited partners were also actively asking for more fintech in the portfolio, pointing to the excitement around the financial tech space right now. Asked whether fintech in Silicon Valley is feeling the impact of cooling in the wider tech startup investment space he says the size of the untapped opportunity means fintech is less impacted.

“Having been in this space since 2010 it definitely feels like valuations are down significantly in the last quarter,” says Mohnot. “The opportunity for fintech is so great and people realise that though, so it’s less impacted than other sectors. Still, it’s definitely true there’s less enthusiasm for funding startups than six months ago.”

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Finance for the rest of us

Mohmut has successfully exited two fintech companies himself – Innovative Auctions and FeeFighters – and he says he’s particularly excited about tech’s potential in financial inclusion. So how is the firm defining finance “for the rest of us”?

“Traditional finance services are good at serving old white men – taking deposits and being a safe place to hold onto your money,” he says. “They spent hundreds of years building that by having very fancy offices to make you feel they are a trusted party. What defines trust now for these different market segments is different to what defines trust for what I’ll call ‘old white men’.

“For millennials a fancy office building is not how they define trust and that’s especially true for younger people who would trust companies like Google or Facebook more than a bank. There is a big opportunity for tech companies to offer better services at better value and do it more profitably.”

Of course, fintech is a huge umbrella these days. 500 will be targeting lending, investment advisory, personal finance management, blockchain, money movement and insurance – all within the broader remit of delivering financial services to underserved groups.

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