NY Launch Pod: Welcome to the New York Launch Pod, the New York Press Club award-winning podcast highlighting the most interesting new startups, businesses and openings in the New York City area. I’m your host and New York attorney, Hal Coopersmith. And in this episode, we talk about the unbanked and underbanked populations of this country. Our guest Wole Coaxum, founder of the challenger bank MoCaFi, saw how harmful it was to be unbanked and underbanked and how it impacted the racial and socio-economical wealth gap in this country. In this episode, we talk about what MoCaFi is doing and how Wole is building a great company.
Wole Coaxum: Harvard Business School did a wonderful case study a couple years ago that has stuck with me ever since they said great companies do two things exceptionally well, there are three things you got to do and you got to pick two. If you do one of them you’re a good company. If you do two, that’d be a great company, you got to do two out of these three things. And you’ve got to make a conscious decision that you’re not going to do the third thing because you can’t do three things to a high quality level. The three items are customer intimacy, product innovation and operational excellence. And so we’ve decided to lean in on customer intimacy and operational excellence.
NY Launch Pod: But before we go to the interview, if you haven’t already remember to sign up for our monthly newsletter for unique content and insights @nylaunchpod.com and subscribe to the podcast on your favorite listening app, this episode is also sponsored by RezCue New York’s premier residential rental compliance platform. Have you rented out residential property in New York State? If so, odds are that you are not compliant with the Housing Stability and Tenant Protection Act enacted by New York State last year. And if you don’t follow the law, your tenant may be able to legally stay in the property beyond the length of a lease, you won’t be able to increase the rent by the amount you want to, or you may be forced to pay damages to the property out of your own pocket instead of out of the security deposit. RezCue is designed to solve all of that and more! Go to rezcueme.com and enter in some basic lease information and RezCue takes care of the rest so you can relax and be more profitable. That’s rezcueme.com And with that, let’s go to the interview.
NY Launch Pod: So let’s start here. What does unbanked mean?
Wole Coaxum: Yeah. So unbanked is really a phenomenon where people rely on the cash economy and you know, the numbers in this country are round numbers on the societal level. 10% of Americans are unbanked. And if you go to different communities, if you sort of break that down, particularly in communities of color, it can be as high as double that like 20%. And what people do is they get paid in cash, they pay their bills in cash. They also don’t have ways of building credit because all their transactions are in cash. And so just imagine a world where you’re living in a cash economy, that’s sort of outside of the mainstream, you rely on check cashers to get access to your money. So many of us just take for granted, you got a bank account, but there is a large swath of folks in this country who don’t operate that way.
NY Launch Pod: And in terms of people who are operating in the cash economy, you mentioned that it diverges by race, but I’ve seen a statistic that 50% of Hispanic, black and rural communities are unbanked.
Wole Coaxum: Are unbanked or underbanked. So if you add the two numbers together, so the unbanked, you know, full cash economy, the underbanked are people who may have a bank account, but they’re not taking advantage of quote unquote traditional banking services. So they are the ones, instead of going to Chase to get a credit card, they’ll get a pawn shop loan, or instead of going to a bank to cash a check they go to the check casher. So a third of Americans are unbanked or underbanked, but then due to your statistic, it gets to 50% if you dig into it. And why is that? A couple of reasons why that is. One 80% of the bank branches that have closed in this country have been in low and moderate income communities. So people who want to go to banks live in places that don’t have banks. I mean, there are counties in Los Angeles and counties in other major cities that don’t have even one bank branch, but people’s lives don’t stop financially if they don’t have a bank branch. So where do they go? They go to the liquor store to cash a check, right? The other issues, they may not have enough money to keep a bank account open and so they’ve got to, again, look for alternatives. So the underbanked are people who depend on the alternative financial services for their mainstream banking and the unbanked also do that, but they don’t even have a basic checking account to their name.
NY Launch Pod: So we’ve talked about unbanked, we’ve talked about underbanked, I’m setting you up for the problem here that even among people who do have bank accounts, I’ve seen that there’s a higher cost of banking. This is from the racialized costs of banking by Dr. Farber that the cost of banking varies by race as well. It can be, this was shocking to me, $190 higher on average for blacks, more than $25 higher for Asians and $262 higher for Latinx, when compared to white.
Wole Coaxum: Exactly. And so you put such a fine point on that. The statistic I use, which comes from that, it costs a black person 50% more than a white person to bank and it costs a Latinx person, a hundred percent more a month to bank. And you might ask yourself, why is that? I think there are two drivers for that one driver is the cost comes down if you leave more assets in those accounts, right? And so if you have excess balances, then you get free banking basically. But if you don’t have excess balances, you get, I’ll call it nickel and dimed in terms of fees. And if you, this was leading to my second point, you know, nickel and dimeed, like if you don’t have free ATM access or you don’t have free check cashing and you go to a bank branch, and the other thing is don’t get an overdraft, right? And because overdraft don’t be $5 short, because that’s going to turn into a $30 expense. And so those two components together cost people and unfortunately the black community and the Latinx community, I think it’s probably a different phenomenon, the Asian community overall. But I think actually the Asian community is a distribution as well. And I think there’s an assumption that, you know, people assume the Asian community is wealthy across the board. That’s not true. And it’s the same issues that are facing low to moderate income, black folks in low and moderate income Latinx with the same issues facing low and moderate income Asian community and rural white community because not having access or not having enough money to pay for the traditional bank account, using your balances to pay for the fees as a challenge for all those populations.
NY Launch Pod: And why are banks charging so many of these fees just overall?
Wole Coaxum: Because their business model doesn’t support serving this particular demographic, right? So banks are a brick and mortar branch based infrastructure. And the cost to do a teller transaction is 10 times the cost of doing an electronic transaction. So if somebody goes and I’ll never forget working at the bank at Chase, and, you know, they actually time how long it takes a teller to do certain transactions, always looking to find more efficiencies in terms of process. And at some point the efficiency meter within a human process reaches sort of a plateau unless there’s some sort of structural change, but deposits at a teller is $4 and 50 cents. Say if you do a deposit at the ATM machine or deposit on your phone for a check that for a $1.50 transaction actually becomes a 40 cents transaction or, or a 25 cent transaction. And if you don’t have somebody’s balances to offset that $4 and 50 cents, you need another way to create revenue. And so you create overdraft fees or you create out of network ATM fees, which are attacks quite frankly on poor people to get access to the banking system.
NY Launch Pod: So I’m surprised that banks actually time teller transactions, because I’ve been to my fair share of banks. And I would be surprised at how long that they took and that they’re actually timing this and trying to make it better, but we’ve taken a long time setting up the problem here, or a fair amount of time setting up the problem here. You’ve decided to try to conquer that and solve for these high costs of banking and the underbanked and unbanked.
Wole Coaxum: Yeah. And so we think that there’s an opportunity. That’s a large market as you’ve defined 50% plus in certain communities. So that’s half the country or half of a community who are not well served by traditional institutions. And it’s, oh, by the way, it doesn’t make the banks bad people. It just means their business model doesn’t support this customer. And so you need to bring in new models. And the beautiful thing about technology is it allows you to reimagine services. And I think it’s a real testament to why having diverse founders are so important because you have people solve the problems that they’re familiar with. And so, you know, growing up for me in a world where check cashers exist and pawn shops exist and payday lenders exist, you know. I’ll never forget when I graduated from college, I went to Williams College and one of my classmates told me, you know, when I got my first job out of Williams, my grandmother told me with my first check to go to the check casher to get my money. So that was a black African American woman. And it was just like, that’s so telling because our environment and our rituals and our families, they sort of put us on a path and the right answer for us, we got our first job go open a bank account and do direct deposit. They say over the course of the lifetime a black person spends $40,000 on excess fees. And if you invested that money at 5%, that could be $150-200,000 just doing that, which would close the wealth gap for many people. But anyway, we believe that if we come with a high quality product and we’d go after this market we can reimagine what banking means for low and moderate income communities that aren’t well served. And, quite frankly, I thought that was a more personally satisfying challenge to sort of solve that big, hairy problem. And that’s inspired me to leave and jump off the bridge and become an entrepreneur and see if we can make it better.
NY Launch Pod: So you said another surprising thing, that this alone doesn’t make banks bad people, but do you really expect banks if they are profiting so much off of these sorts of transactions to give up this form of market share?
Wole Coaxum: People don’t give up revenue willingly. Usually, sometimes they do, but oftentimes they don’t. I think it requires disruption, right? And if people move away from banks to MoCaFi’s platform, that may be a wake up call for banks and they say, oh geez, maybe we really want to service this customer. Or it allows banks to become more profitable because a less profitable customer is no longer in their ecosystem. So, you know, not all revenue is good revenue. And so a bank may decide that, you know, they’re okay losing these fees, but they’ve changed their books. And until there’s a viable alternative that people trust and are comfortable with, then the banks are the one party. I do think though, that banks have, I think we have to reimagine the partnership that can exist with banks because there’s one model that says to a bank, if I’m XYZ bank and I’m targeting a demographic, which is the mass affluent and above, I’d really rather actually find a partner like a MoCaFi and say, you know, any customer that doesn’t meet my profile, I’m just going to hand over to MoCaFi. And that could be a really profitable relationship for a bank and they can get CRA credits. So I think there are tools available to banks and partners like MoCaFi that could allow a bank to serve all customers. It’s not necessarily do it on their platform. And we’re open to having those discussions with banks all the time.
NY Launch Pod: So one obstacle you’re dealing with is banks, which is obviously a large industry. The other one, which I was surprised you talked about is pawn shops and check cashing. And the size of that shocked me. I have a statistic, $175 billion industry growing 5 to 10% per year.
Wole Coaxum: Yeah, that’s exactly right. So, you know, when they’re more check cashers than there are McDonald’s in the world or in the country, I should say, that’s a big business.
NY Launch Pod: Do you think they’re going to give up on this pretty easily?
Wole Coaxum: No, they’re not going to give up pretty easily, but I think in some levels they may not have a choice, right? If you got people sheltering in place they can’t go to check cashers. So it’s going to drive an unintended consequence of being responsible and staying at home means that people have to find other ways to conduct commerce. And there’s no amount of will in the world for the check cashers to stop that particular trend. And I think once people go digital, it may be hard for them to go back.
NY Launch Pod: So going digital, obviously acceleration maybe through COVID, but one item that you touched upon is obviously the ritual. And I feel like this often is not talked about with startups as often publicly, but it’s customer acquisition. So we talked about obviously the banks and maybe pawn shops, check cashers wanting to play defense, but now you’re on offense. And you’re trying to get people to use your platform. People who are skeptical about banks have the ritual of pawn shops and check cashing. What are you doing to get customers I’d say in the door, but it’s a digital platform?
Wole Coaxum: Yeah. So it’s on the platform through the door, you know, through the funnel. That’s how we like to talk about it. So I think we’re doing three ways. One, the power of social media, whether it’s Google’s platform, Facebook’s platform, Instagram is powerful and people are responding and are consuming, not only their news and their information, but new products that way. And we’ve got that down pretty well to a science and some of the bigger competitors that we have, and the challenge that they’re spending three, $5 million a month. We don’t have those kinds of resources, but we’re seeing with the amount of money that we do spend great effectiveness of that cashflow. So that’s one, direct to consumer. The second is there are a lot of organizations out there that are serving underserved people and they want to get dollars to them and they don’t have a platform to do it. Besides gift cards, we represent an option, an alternative to that. Our product is a demand deposit account. It’s FDIC insured. I’ve just got a text from one of my friends at MasterCard who says, you know, the technology and the card, the tapless is great. And most cards actually don’t operate that way, again, providing a high quality product. So we’ve partnered with organizations. I’m proud of the work that we’re doing. That’s our restoration corporation that they’ve been providing dollars to a vulnerable people in that community, and they’re using our platform to do it right. So we have those kinds of partnerships. And the third I’m really excited about is around cities. And we are creating public private partnerships, whereby a city or a large city or a small city, or a medium sized city can partner with us. And we can integrate with their infrastructure to provide banking services to the underserved in that particular city. And what’s beautiful about that strategy is it allows us to make it easier for individuals to engage with the city. And whether it’s getting CARES Act benefits, whether it’s getting tax refunds, whether it’s paying fines, whatever it is, there’s a reason. So if the utility actually gets people in onto our platform, and that may make it a little bit easier to get somebody to use a card, as opposed to just being a choice, like I got to switch from one provider to the other, it’s more like, oh, if I want to get this benefit or this dollar amount, I’ve got to actually use this product. And we see that, I call it the push and the pull of those two together, allows us to grow our customer base.
NY Launch Pod: So those three sources of revenue sound great. I just want to unpack a little bit in terms of everything that you said. Is the digital marketing enough to overcome what you’ve talked about, these rituals of unbanked people going to your platform? What are you doing? Because, you know, everyone talks about obviously digital marketing, digital reach, but how were you able to break through that noise?
Wole Coaxum: That’s a great question. So we’re taking a page out of the Rush Card, which was Russell Simmons. There’s some things about the Rush Card that we’re not copying, but there are some things from the Rush Card that we are copying. And one of the things that we are copying is how they were able to use his brand to connect with the community, right. And they did it with commercials and on television and radio. And, you know, that’s just sort of the 20th century version of 21st century social media. And they were able to get 750,000 people on their platform through those channels, right. Building that trust and that celebrity. And so we are exploring how those kinds of partnerships, So two things that we focus on as a company. Harvard business school, did a wonderful case study a couple of years ago that has stuck with me ever since they said, great companies do two things exceptionally, there are three things you got to do and to do one of them well you’re a good company. To be a great company, you gotta do two out of these three things well. And you’ve got to make a conscious decision that you’re not going to do the third thing because you can’t do three things to a high quality level. And so the first, the three items are customer intimacy, product innovation and operational excellence. And so we’ve decided to lean in on customer intimacy and operational excellence. And if you can deliver a high quality product that works like the telephone, and if you can really know your customer, we think that’ll differentiate us over time. And so we’ve been spending a lot of time focused on those two things. We’ve developed our strategy around how we might want to use celebrities and other brand ambassadors. And we’ll be rolling that out in the next, probably 120 days with some people that are well known and the community will trust. And so coming from the community, being of the community, being intentional in terms of marketing the community, we think allows us to get over some of those hurdles.
NY Launch Pod: And in terms of customer intimacy, what are the factors that you’re doing? How are you getting, let’s say intimate with your customer?
Wole Coaxum: So customer intimacy is really around, how do you find your way to being responsive when customer issues come up. We’d love to be able to understand customer behavior and patterns, and then come back and recommend different things to that customer. We’ve spent a lot of time with content that’s relevant to the customer whether from blogs and posts to, hey, what’s your weekend playlist or here’s some of the issues that you should be thinking about. So we’re spending a lot of time on the content side, developing, having a conversation. We have interactive customer service. So those are what we’re doing. But over time we want to get to see purchasing behaviors. We’d love to become a recommendation engine and help customers decrease their cost of banking broadly, not just on our platform. So that’s our strategy.
NY Launch Pod: And the other channel that I found very interesting. You talked about government partnerships working on a city basis and acquiring customers that way. I imagine, correct me if I’m wrong, you can’t necessarily walk into city hall and say, I have an online banking platform and I’d love to give money away for the city. How are you able to get those partnerships going?
Wole Coaxum: Yeah, that’s a great question. It’s a longer sales cycle. And I think there’s some, I think part of it is like anything, you do your homework and you find out, you know, who are the innovative mayors. And there are a lot of mayors who really want to push the envelope if you will, in terms of solving some of these issues and you begin a conversation with them, and there are lots of different forums for the mayors and also true for governors, but we’ve been leaning in on the mayoral level. They want to leave a legacy. And if you can bring in an idea that allows them to reduce the extractive nature that some people are experiencing or poor people in their community, which we present that could be a game changer and they’ll want to lean in on that. So we’ve had 20, 25 conversations ongoing with different cities and we’re getting a very positive response. And I hope next time we get together, I’ll have a chance to be able to share with you several cities that are on our platform and how they’re using it. But we’re very close to being able to bring this concept to life.
NY Launch Pod: Well, as the New York Launch Pod, we certainly hope one of those cities is New York. Now we talked about how there’s a large segment of unbanked and underbanked and the cost of banking, as well as how digital transactions costs less than teller transactions. But there are also a large number of online banks just searching through online only banks. You’re not the first one to come up with this. So why aren’t these online banks targeting the unbanked, the underbanked, your market share, how come they’re not knocking on city hall?
Wole Coaxum: Yeah. So I think we’re new to the party. And so we were able to go where they haven’t gone before. I think we have a lot of, you know, you just look at how a lot of the banks of these challenger banks started. They weren’t going after that market. Right. They were going after the millennials, they were going after the Stanford University student who wants to refinance his or her student loans. Right. So part of it is just a part of the origin story, right? And I think the other part is there aren’t a lot of founders of color who are starting challenger banks. And like my earlier point, you can’t just show up on a Tuesday and start a bank or a challenger bank. You have to have the right credibility. You have to have the network, you have to have the experience. And then to say, I want to go where no person has really gone before, which is why there’s a $200 billion alternative financial services industry. And it’s a big risk and a lot of people, and there’s nothing wrong with this, do pattern matching. And I haven’t seen this pattern before. And so it’s an untapped opportunity. And I think that if we’re successful, when we’re successful, there’ll be lots of people who will be trying to get this done. I think innovation comes sometimes it’s a timing issue, right? The timing has to be right in terms of the cost to distribute the technology. And what we’re talking about is not a new idea. It just hasn’t been executed well before. And so people look at it and say, we’re not going to do it. They tried to do in Oakland and it didn’t work four or five years ago. I think we’re at a different time with a different team. And I think we have what it takes. And if we pull this off, there’s going to be a lot of people running to the various cities, trying to recreate what we do. The hope, my hope is that we’ve got a far enough lead that it allows us to grow and be successful and get the first mover advantage. But I actually welcome competition because I think it makes you stronger, faster, more bionic and forces you to run up a high quality business. And that’s good for everybody.
NY Launch Pod: And if more people or more companies are trying to bank the underbanked, what’s, what’s wrong with that.
Wole Coaxum: There’s enough sunshine for everybody, my man.
NY Launch Pod: Let’s take a break for a moment to discuss startups. And if you enjoy hearing Wole Coaxum talking about his New York startup MoCaFi perhaps you’ll enjoy taking a trip down I-95 to hear startups about startups in Washington D.C. D.C. Entrepreneur Is a show produced and hosted by George Mocharko, a longtime local, who enjoys covering the stories of early to mid-stage founders, whose voices are often overlooked by other business media. Investors, business leaders, venture capitalists, and aspiring creators learn what drives these intrepid professionals and why they have chosen a path different than others. Best of all, you don’t even have to go to D.C. Just check out the show on Apple Podcasts, Spotify, or your favorite podcast listening app, or go to dcentrepreneur.com. And with that let’s return to our interview with Wole Coaxum.
NY Launch Pod: So you’re a bank and I understand you’re venture backed and you’re a former banker. So I can’t imagine that you’ve left all your banker proclivities behind. How is MoCaFi going to make money?
Wole Coaxum: For us having a sustainable business model is critical, right? Because if you don’t have a sustainable business model, then you’re not able to provide what I’ve talked about earlier in terms of operational excellence or customer intimacy. If someone’s getting something of value they’re willing to pay for it, then you should be a sustainable business. So that’s always been a tenant of ours, sustainable business model. So we make money through interchange, quite frankly. And you know, every time somebody swipes that generates a certain amount of revenue that the merchant pays. And out of that payment, we have the ability to pay our bills and cover the cost of transactions. And that’s why scale becomes more important or so important because we get great leverage if you’ve got large numbers of people using it. So that’s how we make money. I think over time, you know, we will be able to further generate revenue. If we have a customer base that is a recurring one, that’s a solid one. And we start to see other products that may make sense for them, that we don’t have to manufacture. We can be a source of referrals for other companies and we can make money that way. So I think there are actually a lot of different ways to generate revenue within our platform.
NY Launch Pod: And you’re still a bank…
Wole Coaxum: We’re not actually a bank. So just to be clear, we are people use the term challenger bank, but actually what we are is the front end sales organization and the customer service. So we’re actually called a program manager and the program manager, it’s customer service engagement, that’s the brand. We use a processor, our processor’s called Galileo, and they call the balls and strikes on the transactions that are swipes. And then you’ve got the sponsor bank actually, which is extending their regulatory framework and it also has the assets. So all of our customers have FDIC insured accounts, but they’re the actual sponsor bank. And then we’ve got MasterCard as the network. Now, what you see in American Express is they’re the network, the sponsor bank, the processor, and the program manager. Chase is the network as either MasterCard or Visa they’re the processor, the sponsor bank and the program manager, but a place like Capital One is the sponsor bank and the program manager and MoCaFi we’re just the program manager, but to the customer, they see MoCaFi, and then we have these other pieces. So they call it challenger banks, but many of the challenger banks, that’s changing, are actually partnering with a sponsor bank. So just want to make that clarification.
NY Launch Pod: Well, that does lead to my next question, which is what about the regulatory framework that makes all of this difficult? Because I imagine with all the requirements for banks that it’s harder to do exactly what you’re doing, and maybe that’s an obstacle for being a challenger bank or program manager.
Wole Coaxum: Yeah. So the regulatory environment that we live in is an interesting one and that in other countries, and I’m thinking a lot of different places in Africa, in particular, people were able to really move to mobile banking and mobile money movement. And the regulatory environment was sort of molded around those innovations to support the growth of a company like M-Pesa for example. In the United States, the regulatory framework tends to be more static. And then the innovation has to happen around the regulatory framework, as opposed to what you might see in other parts of the world. And so there’s an interesting piece that happened that actually made this customer less attractive to the larger banks that came out of the Great Recession and it’s called the Durbin Amendment and then not to get too technical. But the Durbin Amendment reduced the amount of interchange, which is the revenue we were talking about that large banks get versus smaller banks. And so banks under a certain size, which is $10 billion in assets, have the ability to collect sort of a hundred percent of the interchange that was available before the Great Recession to encourage more people to use smaller banks. The Durbin Amendment said, well, if you’re above $10 billion, we’re going to cut the amount of revenue that you can get in half with these products. And so as a result, it became instantaneously less profitable for the larger banks to serve lower end customers. And that helped accelerate it was an unintended consequence I think of the acceleration of banks exiting the lower end of the market. And so that’s just an example of how regulation can have an impact. I think actually regulation in many regards is good, responsible regulation I think allows for consumer protection. It allows for appropriate pricing. I think it’s the responsibility of the business to understand and work with the regulators to deliver a high quality product for the consumer.
NY Launch Pod: I was certainly thinking of the Durbin Amendment while asking that question, but one of the things that the people may be thinking of as we’re just kind of wrapping up is what’s next for MoCaFi? What is success for MoCaFi I mean, you’re obviously a business, but also looking to make a social impact. So how are you defining success?
Wole Coaxum: Success for us would be that we become the leading brand, the go to platform for people who want to have a high quality banking product. And the good news is actually that it doesn’t just have to be underserved people. It can be anybody, you know, we’ve been very intentional in terms of who we’re talking about and going after as a demographic. But I think, you know, at the end of the day, we can go pound for pound in terms of infrastructure with any of the traditional banks and any of the challenger banks. And, you know, I think success for us would be a brand of choice for all people, but particularly demographic that we want to serve as the bank that moves them from, you know, unbanked, underbanked to fully banked, but in a way that’s appropriate them. And if we had 25 30 cities that were our partners, in addition to our direct to consumer strategy, that would be a home run. And I think it’s doable.
NY Launch Pod: Well, that is a wonderful note to end things on. Wole Coaxum some thank you for stepping onto the New York Launch Pod. How do people find out more about you and MoCaFi?
Wole Coaxum: They can go to our website www.mocafi.com And read all about us. We’re active on Facebook. I’m active personally on LinkedIn. That’s my social media of choice. And, you know, reach out, you can send a note to info@mocafi.com or send me an email directly wole.coaxum@mocafi.com. And let’s get in touch. Let’s do some business together.
NY Launch Pod: And if you want to learn more about the New York Launch Pod, you can follow us on social media @nylaunchpod and for transcripts of every episode, visit nylaunchpod.com. And if you are a super fan of the show, Wole are you a super fan of the New York Launch Pod?
Wole Coaxum: I am now.
NY Launch Pod:
If you’re a super fan of the New York Launch Pod, like Wole, please leave a review on Apple Podcasts. It is greatly appreciated and does help people discover the show.
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