Financial Innovation for Poverty Alleviation
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About Your Organization
The Capital Good Fund
United States, RI, Providence, Providence County
Country where this project is creating social impact
United States, RI, Providence, Providence County
Is your organization a
Non‐profit/NGO/citizen sector organization
How long has your organization been operating?
Has the organization received awards or honors? Please tell us about them
2011 Hitachi Yoshiyama Social Entrepreneurship Award
2010: Providence Business News, 40 People to Watch in 2012
2011: Providence Monthly; 10 People to Watch in 2011
Citizen Citation: 2 Providence Mayors
Articles written in:
Providence Monthly, Providence Phoenix, Providence Business News, Providence Journal, Boston Journal, FDIC Reserve Bank of Boston Quarterly Publication and an appearance on CNN
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Select the stage that best applies to your solution
Established (past the previous stages and has demonstrated success)
How long have you been in operation?
Operating for 1‐5 years
Which of the following best describes the barrier(s) your innovation addresses? Choose up to two
The Need: What problem are you trying to solve?
Responsible financial service companies have yet to find a way of providing affordable financial services to the poor of America. As a result, payday lenders, rent-to-own centers, check-cashers, etc., reap $70 billion in profits per year. Equitable providers only serve 2% of the demand for financial services among the poor, and even then, those organizations a) have no plan for scale and self-sufficiency, b) use underwriting standards that exclude the poor and c) do not have a model for truly creating pathways out of poverty. Capital Good Fund has, over 3 years, discovered that ) a loan is not enough to get someone on a trajectory out of poverty, b) traditional lending criteria do not work for the poor, and c) interest income alone cannot make the organization self-sufficient.
The Solution: What is your solution? Be specific!
CGF has developed an unprecedented business model that a) increases social impact, b) increases earned income and c) allows the organization to lend to the very poor while maintaining a high repayment rate. The model works as follows: loan applications are process by phone during a free, 10 minute session and are then run through an algorithm in-house that pre-approved 15% of applicants. The other 85% are referred to Financial Coaching, which is a yearlong relationship between client and coach. After the first three, one-on-one sessions (covering Budgeting, Banking, Credit, Debt, Goal Setting, Savings, Taxes and Health), the client's info is run through a second algorithm, which scores clients based on outcomes achieved during coaching, attendance and the coach's opinion. We charge $120 for coaching, paid back in 12 installments of $10, increasing CGF's earned income and building the borrower's credit. 45 out of 100 applicants receive a service--loans, coaching or both--from CGF.
The Model: Walk us through a specific example of how your solution makes a difference; include your primary activities
Financial Coaching (FC) is the bedrock of everything we do. Because it is outcomes-based, it allows us to focus on the goals and needs of our clients (E.g., setting up a savings account, building credit, creating a resume, planning for retirement, managing debt, etc.). Also, by offering FC BEFORE making a loan, we can vet clients in a unique way, get to know them and give them the tools they need to succeed. The average FC client saves $1,000/year. We then offer FC graduates loans of up to $5,000 for an income generating activity and $2,000 for any consumer purpose (such as the purchase of a computer, application for citizenship or first and last month's rent on a new apartment). One client, Gretchen, came to us on the verge of homelessness; after FC and two loans, she now profits $2,300 from her eco-friendly catering/meal prep business. Another client, Magda, saved $9,600 in one year, bought a computer and is now launching her own food-based venture.
We also offer free tax prep, and have already returned $275,000 to the community. We have lent out $220,000 to our borrowers, 100% of whom are low-income, while maintaining a 90% repayment rate. Finally, we have graduated over 150 people from our FC program, built our own curriculum, and build two unique underwriting algorithms that allow us to serve the poorest of the poor.
The Marketplace: Who are your peers and competitors? Identify others also working to address the needs you are and what differentiates you from them. What challenges could these players pose to your success or growth?
Our competitors are non-profit lenders, bankers, sub-prime lenders and usurious actors such as payday lenders. We are unique because: 1) our pricing is much lower than many lenders, 2) we provide one-on-one, outcomes-based financial coaching in order to build the client's credit, increase earned income and underwrite, and 3) in addition to microbusiness loans, we are one of the few non-profit lenders that offers consumer loans of up to $2,000, and many of our loans, including our citizenship loan (which covers the $675 cost of applying) have gotten national attention.
This Entry is about (Issues)
Founding Story: We want to hear about your "Aha!" moment. Share the story of where and when the founder(s) saw this solution's potential to change the world.
When co-founder Andy Posner was getting his MA in Environmental Studies at Brown University, he was working on innovative models for financing energy-efficiency. Around the same time, he read Banker to the Poor by Muhammad Yunus and saw how microfinance could unlock the capacity of the poor to better their own lives. After two years of lending, Andy realized that loans are not enough to move someone out of poverty, that traditional underwriting criteria don't work for the poor and that interest income alone on small loans won't cover expenses. He then developed the financial coaching-as-underwriting model while he was on vacation at his parent's house, and has since refined, tweaked and implemented the model in a way that has turned it into a first-of-its kind engine for social change through innovative financial services.
Please describe the goal of your initiative; outline what you are trying to achieve
Broadly speaking, we seek to serve 1,000 people in FY 2013.
Specifically, we track the following outcomes in Financial Coaching and lending:
a. # Of people that open bank accounts or increase utilization of bank accounts
b. Dollars saved (in a savings account and through budgeting)
c. Average % increase in credit score
d. Average increase in monthly disposable income
e. # Of people whose debt situation has been improved (i.e., lower debt-to-income ratio, debt restructure or settlement.)
2. # & Dollar value of loans disbursed
a. Broken by loan type and purpose
b. Loan performance
i. Default rate
ii. Portfolio at risk (90+ days late)
iii. How many become citizens
iv. How many get computers
Which barrier(s) to financial inclusion does your solution seek to address? (select all applicable)
The lack of affordable financial products tailored to the needs of underserved and excluded communities,.
If you selected 'other' above, please specify which other barriers to financial inclusion you solution seeks to address:
For which underserved or excluded communities will your solution create access to valuable, affordable, secure and comprehensive financial services?
We focus on serving low-income (80% of area median income or below) families. 55% of clients are Latino, 30% African American and the remainder Caucasian. The majority of our clients lived in the Greater Providence area, and all are under or un-banked. Finally, 55% of clients are female, 45% male.
Could your solution work in other geographies or regions? If so, where?
We believe that once we prove our model in the 'petri dish' of Rhode Island, we will be able to scale it to many other states. Our model has several aspects that are replicable/scalable:
1) Our underwriting methodology is easy to tweak for other contexts
2) We use university students to provide financial coaching, thereby lowering costs; there are universities in all 50 states from which coaches can be recruited
3) Our financial coaching curriculum can easily be tweaked to be made relevant to other states.
If your solution is dramatically successful, how will things be different in 10 years?
Our goal is to serve 100,000 people in 10 years. In so doing, we will not only make a significant dent in poverty for those clients, but we will also have empowered a large number of people whose voice is not currently heard in local, state and federal policy discussion. Also, once we have such a large network of clients with whom we have a relationship, we can leverage that relationship to offer other products/services, such as health care and environmental services, that meet their needs in an equitable manner.
What will have had to have changed to make this happen?
Making this change requires that CGF acquire the requisite up-front capital to build our infrastructure and human capital so as to be able to scale. Also, policy changes will have to be made at the federal level, for instance restructuring unemployment and welfare so as to get rid of the current disincentive to increasing income because doing so eliminates the cash benefits. Finally, the federal and state governments will have to increase spending on job training, change regulations so that banks aren't too big to fail, expand access to food stamps and low-cost health insurance, and ensure a level playing field so that all can benefit from economic growth (which will most likely entail restructuring the tax code).
What has been the impact of your solution to date?
• 100% of clients that needed to open a checking account have done so
• the average amount of money automatically transferred to savings is $660; however if you just look at those that actually set up automatic transfer, the number is $1,100
• 90% of clients that were eligible to set up direct deposit of a paycheck into their checking account did so
• 82% of clients that needed to open a savings account did so and actively used it
• 75% of clients that needed to applied for a job and at least secured an interview after coaching
• 60% of clients that needed to do so disputed an error on their credit report and had it fixed
• 50% of graduates that wanted a loan were approved for one
• 81% of graduates reported that they were able to reduce expenses as a result of coaching
$220K lent to the community w/ a 90% repayment rate
$275K returned to the community through tax prep
150 financial coaching graduates
What is your projected impact over the next five years?
Serve 25,000 people with financial coaching, loans and tax prep. Achieve an average increase in credit score per client of 80 points, and an increase in savings of $2k. Maintain a 90% repayment rate. Expand financial coaching to include health outcomes. Enable 60% of clients to move out of poverty after 5 years with CGF.
What barriers might hinder the success of your project? How do you plan to overcome them?
The biggest barrier is the up-front cost of growth, which fundamentally requires an investment in data/technology systems and in human capital. Additionally, regulations designed to prevent banks from preying on the poor may hinder our ability to serve the poor. Finally, the prevalence of predatory lenders may make it hard for CGF to gain market share.
Winning entries present a strong plan for how they will achieve and track growth. Identify your six-month milestone for growing your impact
Identify three major tasks you will have to complete to reach your six-month milestone
Build data systems
Raise 200,000 in grant money.
Train 10 new financial coaches to handle more clients
Now think bigger! Identify your 12-month impact milestone
Identify three major tasks you will have to complete to reach your 12-month milestone
Continue building out our data systems
Do a regression analysis to refine and improve our underwriting algorithm
Tell us about your partnerships
We work with a wide array of social service agencies, the office of the general treasurer and broadband rhode island. Additionally, we partner with employers and local school districts so as to offer our suite of products and services to families and employees.
Are you currently targeting other specific populations, locations, or markets for your innovation? If so, where and why?
We focus exclusively on low-income families, and predominately on minorities and people of color. We also focus on the Greater Providence area, because the majority of low-income families in RI live in that area. Because people of color are the most likely to live in poverty and lack access to financial services, we have chosen to focus on them.
What type of operating environment and internal organizational factors make your innovation successful?
Capital Good Fund has a culture that we like to describe as what happens when silicon valley meets a soup kitchen. In other words, we combine a spirit of entrepreneurship and innovation with a deep seated dedication to social justice that allows us to innovate while staying true to our mission. Our youth and willingness to receive help from more experienced board members/advisors allows us to be bold and smart at the same time.
Please elaborate on any needs or offers you have mentioned above and/or suggest categories of support that aren't specified within the list
I believe that in order to achieve significant social change I must give my time to others looking foster change. In that vein, a spend a lot of time giving speeches, mentoring social entrepreneurs and sharing my ideas/thoughts/innovations with others.