Why Would a Finance Firm Invest in Low-Income Communities?
The idea of merging social work with the private sector first came to Liz Luckett (pictured right) when, as a high school student, she was spending summers working at Manhattan Borough Hall fielding citizen inquiries about, as she puts it, “anything.”
“People would just walk into the municipal building, and say, ‘Hey, I’m not getting my husband’s social security,’ ‘My boyfriend’s abusing me’ or ‘The window in my car is broken’—really anything. And, you were given a green book, and it had basically all of the resources that were available to the city and that was it,” she recalls.
Having grown up in Manhattan surrounded by the world of business—her father is a former hedge fund manager, her mother was an AI pioneer and both of her grandfathers were small shopkeepers—Luckett thought there must be a way through the private sector to more equitably service those who need it the most. Now she is doing just that as the managing partner of The Social Entrepreneurs Fund, an early-stage venture fund that invests in software and services designed to help low-income communities and the organizations that serve them.
TSEF launched in 2010 with an initial investment from a handful of individuals including hedge fund manager Bill Ackman, the CEO of Pershing Square Capital Management who had previously hired Luckett to head up impact investing for his charity, the Pershing Square Foundation.
The fund’s portfolio companies help individuals avoid punitive overdraft fees, devise alternative credit scoring for those without assets and even show small cash-based businesses how to manage their inventories.
Luckett’s fund merges her long-held interests in both data and the public good—she received a master’s degree in political philosophy at Cambridge University, fundraised for an early campaign for New York Congressional candidate Nita Lowey and learned about technology as a young analyst for the Gartner Group.
Before joining Pershing Square, she had been a senior vice president at Citigroup, which was launching a project to mine its credit card database for behavioral trends in retailing. Given the power of Amazon and Facebook to peer into our lives, the project seems tame today, but it was so controversial at the time that it was shelved.
Luckett then began consulting for nonprofits, helping them lessen their dependence on philanthropy through impact investing, which eventually landed her a job with Ackman’s foundation.
Worth recently talked with Luckett about her views on impact investing and how the companies she invests in tackle the predatory behavior that widens financial inequality in the U.S.
Q: Is impact investing the same as ESG investing?
A: No. ESG, to me, is staying out of bad things. Don’t invest in tobacco or guns or oil. ESG tends to be a negative screening. Impact investing is a positive screening. You’re taking dollars and putting them into companies you believe are doing good.
Do you think there’s more interest in impact investing than opportunities to profit by impact investing?
When I started doing this, in the venture world there were very few impact investments that could provide a return that might be at the scale you need to pretty much compensate people for that illiquidity over time. Now there are a lot more. But impact is a suggestive word. People have very different definitions of impact.
What determines what is impactful? I’ve heard hotels that don’t wash the sheets every day considered an impact investment. That seems to be on the far end of what impact investing is.
I have many examples of that. There are times I just have my mouth open saying, “You think that’s an impact investment?” It’s crazy. But bad impact investing is still better than most investing.
What criteria do you use?
Our investment thesis is very specific. We’re looking at software- and data-oriented companies that focus on low-income communities. In financial services, we think about it as alternative credit scores. We think about it as lowering the costs of any kinds of transaction. Last year, $35 billion was spent on overdraft fees, for example.
That’s a lot.
That’s not affecting people with money. It’s affecting people without any money. It’s the people who get paid on the first, the rent’s due on the 30th. They have a day of overlap that happens twice a month. That’s $2,000 a year in overdraft fees. The $35 billion is off of people who are poor, and it’s predatory. So, we look at companies trying to step in and say, “That is not the right behavior.”
How do you fix that?
We’re looking at a company that has a bot that goes in and negotiates that fee on their behalf. If you call the bank about an overdraft fee, they’d probably just take it off. If you’ve messed up once and had an overdraft or some problem, you could call and be like, “I’m not paying $25 or whatever it is,” and they say, “Yeah, I’ll take it off.” You only need to call.
Who pays for that service?
In the case of the bot that renegotiates your overdraft fees, they take a small portion of what they save you, so some small cut of it to automate that.
So the company makes a profit, but it’s still a benefit for the individual?
The individual gets 80 percent. Another great example is remittances. Billions of dollars move through the country on the backs of immigrants, and 7.5 percent of the money is the average charge for remittance payments. So, you want to wire money, that’s what you’re paying. It’s a lot of money. And, there are all these interesting solutions where instead of sending cash, you just pay your family’s utility bills, pay their hospital bills. And the recipient of that bill payment will pay a transaction fee, not you.
Are all these tech solutions?
With technology you can take the burden off the people who can least afford it, who are just penalized and it’s endlessly punitive. We’re looking at little pockets of money that add up and are egregious. There are really interesting, elegant solutions of tech companies stepping in.
How do people even find out about this? How do you reach these people?
Some of it is through social media ads, and they start to build. We have an investment in a company called Petal that does credit cards that are based on cash-flow underwriting. So, they’ll go into your bank account and see what’s coming in and what’s going out. Your balance sheet, as a poor person, is just liability. You don’t have assets. It’s just an endless list of liabilities. They’re saying, “Let’s look at your P&L. Oh, look. You make this much money every month and you spend this much money on bills, and you’re always paying your rent and you always pay your mobile phone bill. That should go toward good behavior. That should accrue to you in a positive way instead of that time three years ago when you messed up or paid a hospital bill or didn’t pay your credit card.”
So it’s a new form of credit scoring?
Yeah. Before they launched, they had 100,000 people on their waitlist.
It turns out watching how much money you make and how much money you spend is a much better way of assessing your risk than a traditional credit score, which looks at your mortgage payments and all of these things that a lot of people don’t have.
You talk about the difference between big data and little data. What do you mean?
Big data in general is aggravating inequality. If you look at a traditional credit score, it’s just saying, “Oh, look. You have money. I’ll extend more credit to you.” So, it’s making the rich richer. “I’m just going to make this easy on you. Let’s get you a mortgage. Let’s get you more credit. What do you need?” And poor people can’t get out from under the designation of poor credit. They are not able to escape it because the demands are just too hard. So, there’s 80 million people with poor or no credit scores, and then you think about any kind of big data in general it’s taking historical data and using it to be predictive. A lot of these algorithms are not learning algorithms. They are static, and I think that is dangerous.
It is widening the gap. This is true for job searches. Once you submit your resume, if you have an ethnic-sounding name, you’re weeded out. Algorithms are created by people, and what you put in is what you get out.
So what is small data?
For example, we have an investment in a company in Mexico that looks at small shops. There are a million small shops in Mexico and about half of all food is sold through them. They are cash-based. None of them have inventory management systems. Basically, trucks drive to these shops, drop off products and then if you didn’t sell any, they drive back, they pick it up. That’s how it works. It’s an incredibly inefficient system. So, what they were doing is handing out iPads to people and saying, “Here, we’ve loaded all of your inventory onto this system. You can use this now to scan products in and out. Now, you’re going to actually understand your own business. You’ll look at your own P&L here and all of a sudden you see, Here’s what I ordered. Here’s what I need more of.”
How does this help poor people?
It allows people to understand their own cash flow and they earn more money. They can also take that information to get loans. They found that people are able to open a second or third store because they can monitor their inventory. And, meanwhile, the data is incredibly valuable. Consider a packaged goods company, they’re fascinated to see what people are paying, what else they’re buying at that time, which regions are selling more. They don’t have that data, and Mexico’s a big market. That’s who pays for the service.
Who else is interested?
In financial services, a lot of companies that would not call themselves impact funds are investing in a thesis that we’ve been investing in for the last eight years. And they’re doing it because a third of the population of this country can’t just be simply written off. You can’t keep opening a local bank in the Bronx and then closing it two years later. Nobody trusts that brand. Meanwhile, you can’t be predatory forever because you’re just ruining people.
There’s always another person to prey on.
I agree with you, but it’s gotten us into a real mess. Widening inequality is not going to work forever. It’s not going to end well, so we have to do something,
You’re talking a lot about predatory practices and entrepreneurs who have come up with market solutions to these things. Do you think this will become a bigger trend?
This job keeps me feeling positive. I feel the generation that’s coming up is full of desire to do good and do what they feel is right. Many of them could do anything and earn any amount of money, and they choose to do something else: to put off their own personal gain and figure out how to make things better for other people. And that’s what inspires me most.