In the spectrum of places to put your money, Community Development Financial Institutions—CDFI’s—are not exactly the most exciting asset.
They don’t hold the potential sky-high returns of a new tech stock, and they don’t have the publicity of mutual funds. Even among the cash alternatives, CDFI’s don’t exactly sit at the popular table with CD’s, Money Market Funds, and U.S. Treasury Bills.
Put simply, CDFI’s aren’t cool.
But that could also be because they’ve historically been very restrictive. Up until recently CDFI’s—instruments that allow investors to lend money to underserved communities or demographics—have only been available to accredited institutional investors. This is great for them (CDFI’s are quitepopular among organizations looking to grow their funds) but not so great for everybody else.
One company is determined to change that by bringing CDFI’s to the masses: CNote. In fact they just got regulatory approval from the SEC in September to do just that.
Benzinga caught up with Co-Founder and CEO Catherine Berman to learn more.
Benzinga: First of all, explain a CDFI. Why should anybody unfamiliar consider it as a place to put their money?
Berman: It really was born out of a demand to see a better place to park your cash, just in terms of cash sitting on the sidelines. So this is not emergency funds. If you look at passive savings, it’s over $300 billion in the U.S. alone. So having $300 billion making between 0-1%, when inflation is over 1%, makes no sense. And I think many of us sitting on that cash understand that, but what are our options?
Finding a better place to park your cash that makes you much better returns, is simple to use, and comes with security, was opportunity number one. That’s kind of the first reason why. Nobody wants to be losing money given the rate of inflation.
Benzinga: So if I were to put some money in CNote, what exactly does that get me?
Berman: You’re getting an estimated 2.5% annual return. The comparison we often make is with your CD. If you’re going to set your 1-year or 3-year CD and make a little over 1%, why not put it in a vehicle that gives you a much better return, as well as no fees, no minimums, and a social impact component?
Benzinga: How exactly is a CDFI a low-risk investment?
Berman: Someone asked me about online lending vs CDFI’s the other day and I gave this comment, which is, “If I put my dollars in an online lender, I could be fueling an entrepreneur’s dream, or I could be fueling an entrepreneur’s demise.” And not putting the blame on the online lender, but we don’t really know what’s going to happen to that entrepreneur, because the entrepreneur is going to take that money and use it wisely or unwisely.
There is such a wonderful support network that CDFI’s offer to those that borrow from them that sets everybody up for success. The difference it makes is you have institutions that are out to see these small businesses succeed. And that creates a very different incentive. It creates an incentive to give the right amount of capital at the right time to the right amount of borrowers, not encourage defaults.
Benzinga: How did the idea to offer CDFI’s to the masses come about?
Berman: I was at Charles Schwab before I was at CNote, and I recognized there was this opportunity around areas that are perhaps not as sexy as some of the trading platforms or enhancements we’re seeing, and that’s really around non-equities starting with cash. If you think about the cash business in our brokerage account, there are very few options today that come with a semblance of security or competitive returns. I thought that was a great place to start in terms of redesigning the next generation of financial products.
So we put pen to paper and asked “If we could design a new cash alternative from scratch, what would that look like?” For us it looked like 1) competitive returns, I want to be making a lot more on my dollar than I’m making today; 2) I want to feel safe and secure around where I’m putting those dollars; 3) I want it to be incredibly simple, I don’t want this to be a complicated process.
Benzinga: Where does the money that CNote collects from lenders go?
Berman: What we do at CNote is we put those dollars to work to invest in underserved segments, like women entrepreneurs, minority entrepreneurs, and low-income communities. Interestingly enough when many people, while very well-intentioned, hear me talking about women or minorities or low income communities, their mind usually jumps to risk: “Oh, this must be risky.” What’s fascinating about the asset class we’re working with is it’s actually incredibly low-risk. In fact, it outperformed FDIC institutions in the last recession. So there’s a wonderful secret sauce we get to work with to deliver 100% impact products in very low-risk environments.
Benzinga: You said yourself that CDFI’s are not sexy. So how do you compete with other asset classes?
Berman: When folks ask me that, it’s typically about an individual’s use case. We have some individuals that come to CNote because they love the idea of parking their cash in a way that they can feel really proud of. Not a way that’s making another institution tons of money off their money. But in a way, they go “Wow, that’s cool that you put my money to work in an interesting way.” So we certainly have folks coming to us for that.
And we also have folks coming to us for very specific savings needs. We’ve had quite a few customers come with needs of, “I’m saving for my wedding” or, “I’m saving for my next startup.” Having the ability to have something that feels very secure and comes with a proven track record is exciting as well.