Community Development Financial Institutions (CDFI) are financial institutions focusing on channeling the savings of investors in community development projects including development of women entrepreneurs, affordable housing, helping underserved communities in wealth creation, and small & mid-sized businesses. Funds in such institutions are structured through investment from government, banks, non-banking financial institutions, foundations, and individuals.
Though CDFIs are profitable, they are more focused on the community they serve. So the only aim is not to please shareholders by profit maximization. The four sectors of the CDFI Industry are Community Development Banks, Community Development Credit Unions, Community Development Loan Funds, and Community Development VC Funds. The industry has been a backwater for individual savings due to multiple legal and technical reasons till now. This has led to a gap in the market with no options for individuals looking to invest and generate decent fixed income returns and simultaneously positively impacting local communities with their investments.
CNote is the bridge that is looking to transform the savings space by offering “smart savings technology” and new savings products to earn good savers 40x more.
The company invests in CDFI lenders for fixed yields and offers attractive returns (as compared to a saving account) to its investors. Co-founders Catherine Berman and Yuliya Tarasava launched CNote in 2015 with the aim solving the pain points that individual investors have, and to better serve the community.
Berman is a serial entrepreneur. CNote is her third venture. Her previous startup, Global Brigades, is the largest student development firm in the world. She was also a managing director at Charles Schwab and has experience at marque names like Deloitte.
Yuliya has over a decade of Wall Street experience, and in creating financial products. At Charles Schwab, she oversaw a $30 trillion wealth transfer from baby boomers to the next generation, and saw that financial and saving products have not evolved to serve today’s market. This is what led to her to design CNote.
CNote started as a bootstrapped company and recently raised $60,000 from Pipeline Angels. The company is also in discussions with investors for a future round.
CNote’s Business Model
CNote positions itself as an alternative savings product. It shipped out the first product in 2016 with the aim to reinvent boring financial savings products. It interviewed over 200 persons in its target market to get the right product market fit. They opened to the mass market by getting SEC qualification in 2017. This allowed retail investors to trust the company with its savings products and ensures that all compliance is met to the most stringent level. The company charges no fees but pockets any difference above returns starting at 2.5%.
The savings alternative offered by the company is different from that offered by traditional institutions and banks. Cash locked in traditional savings accounts offer a nominal interest, normally at a rate below 1%. This is not enough to even keep up with inflation. On the other hand, CNote’s savings offer draws interest at an estimated 2.5% (compounded) without the need to incur any upfront cost or minimum account balance. The user-friendly website provides an easy online access for investors helping them to register in just three minutes.
The revenue model and operating cycle of CNote is just like that of a financial lender or a bank. They charge interest for lending out money to community lenders and providing a return in the form of interest to individual investors.
The company’s platform has over $12 million already committed. In addition to earning a competitive return, CNote tracks the usage of funds lent to the community lenders so that it can measure the impact on society at large. According to Berman, the company has helped in creating over 1,000 jobs in the United States.
CNote’s platform attracts both retail and institutional investors. Women under the age of 45 are its typical individual investor whereas institutional customers include wealth management platforms and wealth managers. Investors consider CNotes a cash alternative, impact investment, and/or a competitive fixed income instrument.
The CDFI Opportunity
CDFIs are not new to the market and have a history of over 20 years. They are well established and certified by the US Treasury. Though CDFIs are not federally insured, the last recession saw CDFIs outperforming FDICs (Federal Deposit Insurance Corporation). Still, 99% of Americans have never heard of them.
There are multiple reasons for this lack of awareness. Absence of standardized due diligence techniques for accessing the financial position of lenders is a hurdle faced by many CDFIs. Investors also find it difficult to compare the financial products offered by different institutions. Most of the products offered by these institutions are not geared for non-accredited investors because of a high investment amount threshold.
CNote savings provides access to this high performance asset class services to ordinary Americans. CNote broke all these barriers by introducing scalable products, which are designed specifically according to the needs of individual investors.
CNote has identified a gap in the $100 billion impact investment industry by offering a product that is suitable for retail investors looking to earn positive fixed returns. The upside is that the investment is also doing social good by investing in backward communities, minority and women entrepreneurs, and other underserved markets. The company has no visible peer in the industry that is leveraging CDFIs as a retail investment opportunity. With strategic funding, the company can quickly capture major market share in this multi-billion dollar industry.
Written by Heena Dhir.