Innovating The Brick-and-Mortar Injustice Infrastructure

This week's post is by Andy Posner, Co-Founder & Executive Director of Capital Good Fund (CGF), a non-profit microfinance organization targeting the root causes of poverty through innovative micro-loans and personal financial coaching.  In a world filled with Pay-Day lenders that ruin lives, CGF is starting to making a difference by innovating the basic business model.  Maybe you can help! 

Go into any low-income neighborhood in America and you are almost certain to come face-to-face with a cabal of bright neon signs and welcoming storefronts proclaiming fast cash, no credit required.  This is the brick-and-mortar infrastructure of a $100 billion/year industry—check cashers, pawn shops, payday lenders, refund anticipation lenders, rent-to-own stores and other sub-prime lenders—that profits handsomely off the backs of the poor.  As the Co-Founder & Executive Director of Capital Good Fund (CGF), a non-profit based in Providence, RI that uses financial services to tackle poverty, I am all-to-aware of the damage these companies do to the fabric of communities and the families that reside therein.  Take, for instance, payday lenders: a study by the Insight Center for Community Economic Development found that in 2011 “the burden of repaying [payday loans] resulted in $774 million in lost consumer spending and 14,000 job losses.[1]

Traditional economic theory dictates that market forces should spawn more affordable alternatives, but they haven’t.  America’s poor are forced to choose between the 260% payday loan and mainstream financial products and services from which they are often excluded due to poor credit.  Few for-profit alternatives exist because small, risky loans aren’t highly profitable if they aren’t accompanied by high interest rates, and few non-profit alternatives have scaled because of the limits of philanthropic dollars. 

Recognizing that this paradigm is untenable, at CGF we are using business model and other innovation to scale a solution that is affordable and financially viable for us as an organization. From the outset we knew that our solution had to compete with existing options in terms of ease-of-use, customer service and turnaround time; we also knew that our model had to be about more than just making loans and collecting loan payments—we needed a way to obviate the need for expense financial products to begin with. 

In order to meet these requirements, it became clear that having a physical presence in the communities we serve would be critical, but expensive.  To solve that, we are partnering with a local non-profit, within whose office we will house a loan officer.  After running the numbers, we have a realistic target: the program will be self-sufficient if we can close 240 loans per loan officer per year while maintaining a repayment rate of 93% (and charging 36% APR).  Of course, we have to acknowledge two things: first, that people don’t wake up in the morning and say “Boy, I wonder if there’s a non-profit alternative to the local payday lender,” and second, that the established players have a lot of marketing clout.  With that in mind, we are running an aggressive advertising campaign, from billboard ads and bus shelters to flyers, community presentations and door-to-door visits.  In concert with that, we are working to ensure that it takes no more than two days to go from loan application to loan closing—slightly longer than with the predatory firms, but still within reason. Finally, we require that every borrower also avail him or herself of at least one session of individualized Financial Coaching, focusing on budgeting, managing debt and opening a bank account so that they have the tools the need to achieve financial success.  Already, our average clients saves $1,100 / year thanks to our program, and we have disbursed over 340 loans to low-income families.

Taken together, these program components—a community storefront, an affordable, customer friendly product and an aggressive marketing campaigned married to Financial Coaching—have the potential to, at scale, put the predatory financial services industry out of business.  Of course, lending and Coaching alone aren’t enough to cover all the costs of running each of these ‘micro-branches,’ so we need to explore alternative streams of revenue.  Grant funding, to be sure, is an option, but an unreliable one at that.  We don’t yet have all the answers, but we are considering a few possibilities.  For instance, suppose we were to partner with a forward-thinking, ethical grocery store chain and turn our micro-branches into micro grocery stores.  This would address several issues: healthy, affordable food is notoriously hard to come by in low-income neighborhoods; the more products and services sold at our branch, the more we come to be seen as a community hub; and we can earn a percentage of sales, thereby increasing our earned income.

What I want to emphasize is the importance of thinking out-of-the box, for on the one hand, the for-profit mentality says it isn’t worth doing if the profits won’t be large, and on the other, the non-profit mind doesn’t want to do it without grant funding.  By thinking hard about our customer’s needs, understanding our competition, and thinking creatively about how to solve an endemic problem that takes a drain on our country on both the macro and micro-economic scale, we are building something that can truly make a difference.  It’s time for us to finally put poverty out of business for good.