Just as prepaid cards helped sell bank-like services to the underbanked, an investment manager is planning to use similar cards to sell to the underinvested.
Gratio Capital's GoalPack works like a gift card: It can be purchased for any amount starting from $25 and "redeemed" at the company's website by allocating the cash into one of three mutual funds or a savings account. (Money can later be added to the account by direct deposit.) By focusing on small starting amounts, the company hopes to get the business of consumers usually overlooked by bigger brokerages.
Gratio set out to "create a new type of gift card and do what prepaid did for the transactional space," says Rimmy Malhotra, the company's co-founder and chief investment officer. "How do we do that with mutual funds and asset-building products?"
The process resembles the way the prepaid card marketer Green Dot allows users to fund their accounts by purchasing MoneyPak cards in stores.
Currently, GoalPacks can be bought only online, through certain credit unions or at the flagship Austin, Texas, store of Mango Financial. Mango Financial was founded by Bertrand and Roy Sosa, who, along with their venture capital fund MPower Ventures, invested in Gratio. The Sosa brothers also founded the prepaid provider NetSpend, a Green Dot rival. But Gratio is in talks with a "number of national retailers" to put GoalPacks on the racks in their stores, Malhotra says.
Small Is Beautiful
Rather than courting a relatively small pool of investors with a lot of cash, Gratio seeks a lot of users with relatively small investments. Its fees include a $1 withdrawal fee and a 2% penalty for withdrawing money less than 180 days after it's deposited. Gratio mutual funds' expense ratios range from 1% to 1.4%. It doesn't charge commissions.
"If you are Morgan Stanley or Merrill Lynch the economics of your business says that targeting somebody who can only open up an account with $25, $50, just takes too long to make money," says Ron Shevlin, a senior analyst at Aite Group. But "there may be some great long-term potential here."
But those fund managers might take notice of Gratio's model.
"It's one that we will probably see more of from some of the mainstream mutual fund companies if it takes off," says Aaron McPherson, a research manager for payments at IDC Financial Insights. "It could be a good way, I guess, to focus on young people who don't have much savings."
Malhotra would not say how many accounts Gratio has opened, how much money is in them or what the most popular investment options are.
At the company's website, GoalMine.com, users can set personal goals for saving and investing money. Since the site launched in November, Gratio's customers have collectively set a target of $7 million, Malhotra says.
Gratio's platform also lends itself to social networks. Users can post their goals on their Facebook pages, and encourage relatives and friends to donate to their account.
That's a step in the right direction, says John Grund, a partner at First Annapolis Consulting in Linthicum, Md. "Savings-based products that encourage financial security have a lot of social value," he says.
Gratio faces some obstacles, though. One of the largest is reaching the target audience. Often, startups just don't know how to sell their products, analysts say. "A younger person, aged 25 to maybe 44, on the upper end, that's particularly the sweet spot for prepaid cards or payroll cards," says James Van Dyke, the president and founder of Javelin Strategy and Research. "The thing that they have to do effectively is move a rewards message—which is typically about immediate return or consumerism—to a long-term message, which is about investment or retirement."
Education could also be an issue, he says; Gratio has to explain the risks of a mutual fund to someone who may not be financially savvy.
Gratio, which took about two years to get off the ground, raised about $4 million of capital in two rounds of investing. Eventually Gratio plans to partner with prepaid card providers and load returns on a card. Today it sends users a paper check or deposits money into a bank account. "The end goal is to open up the world of investing for the 100 million Americans who are left out [and] who stick their money under a mattress," Malhotra says.