the jubilee initiative for financial inclusion spring 2012 evaluation meeting
TRANSCRIPT
Agenda
Presentation Poverty & Payday Loans Microfinance & Alternatives The JiFFi Solution? Further Questions & Challenges Immediate Plans
Critique & Discussion
Methodology
Existing Literature Center for Responsible Lending Filene Research Institute Reports and Papers
Conversations Professors Community leaders Community members
•Consideration of Poverty & PDLs•What is a PDL? Who uses PDLs?•How are PDLs beneficial?•Why might PDLs be problematic?
Poverty & Payday Loans (PDLs)
Is It Our Problem?
What does poverty mean for the community? Stints in human potential Wastes resources Hurts the economy
A sustainable community must work to break the cycle of poverty
Poverty Payday Loans
Poverty is not just an economic class, but a job in itself People have learned to manage poverty
The cycle of poverty cannot be broken if it is being managed! Using payday lenders to
Buy extra appliances Loan money to friends and family Pay off a bill
Payday Loans (PDL)
Cash advance against paycheck• $100-500 + fees due next payday• Features rollovers to extend loan
termMarketed for emergency use• Speedy application and
underwriting process• Short term focus• A safety net?
User Demographics
Average Age: 38 Median Income: $25,000 - $30,000 42% homeowners 84% high school graduates Minorities and the lower working-class
African-American neighborhoods have three times as many payday lending stores per capita…
5.5 per 10,000 households working-class neighborhoods vs. 3.4 per 10,000 in poor neighborhoods
Center for American Progress, Who Borrows from Payday Lenders?
Stores in South Bend
A.Check Into Cash
B.CashlandC.Advance
AmericaD.Cash PlusE.ChecksmartF. Personal
Finance Co.G.Check ‘n Go
Benefits
Responsive to emergency situations Accessible location and time Speedy underwriting process
Tolerates tarnished credit No credit check Does not show up on credit reports
Problems
The Hook “Convenience” Emergencies
Lack of alternatives The Juggle
Expensive balloon payment 391% APR
44% ultimately default 12 million Americans
trappedCenter for Responsible Lending; Interviews
Problems
Inability to repay bank payday loan and meet basic obligations$25,000 Salary $35,000 Salary
Before tax income for two-week pay period $ 962 $ 1,346 minus taxes (66) (105)After tax income 896 1,241
Payday loan balance and fee due (550) (550)
Money left over 346 691 Basic expenses per two-week period (housing, transportation, food healthcare)
(798) (895)
Surplus/(Deficit) $ (452) $ (204) Loan leads to dependence on more loans Average borrower has 9 repeat loans/yr
Center for Responsible Lending
Power Dynamics
How can we Recapture value
in the exchange? Be approachable
but professional? Locate ourselves
to allow privacy?
Borrower Lender
Time
Knowledge
Capital
No Alternative
s
Need
Interview
Impact Summary
Set-up
•Difficult macroeconomic environment
•Paycheck to paycheck lifestyle of poverty
•Emergency and/or unexpected spending
Burden
•Fees - $4.2 bill. in annual profits in a $50 bill. industry
•2.5% of possible family expenditures
•Strenuous loan terms - prominent debt trap
Result
•Wealth stripping – from low or fixed income families
•Effectively weakens purchasing power of working poor
•Breaks the economic backbone in the long run
Center for Responsible Lending, Bureau of Labor Statistics, US Census Bureau
•What is microfinance?•How and why does it work internationally?•Does it work domestically?•Is JiFFi a microfinance organization?
Microfinance
Microfinance
Umbrella term that incorporates many services
The provision of financial services to: Underprivileged Micro-entrepreneurs Small businesses
Lack access to traditional financial services Due to high transaction costs associated with
serving these client categories
International Example: Kiva
Non-profit organization
Connects people
through lending worldwide via the internet
Goal of alleviating poverty
International Example: Grameen Bank
Helps the world's poorest improve their lives and escape poverty Especially women
Provides the poor access to small loans essential information viable business
opportunities
International Example: ACCION
Provides management services, investment, and governance support to help build institutions worldwide that are sustainable Currently 62 in 31
countries Franchise model
Domestic Success & Failure
Success
• Working Capital• Based in Boston• Now part of the
ACCION International network
• Stand-alone peer lending organization
• Operated within existing social groups
• Worked with entrepreneurs
• Also offered a credit building product
Failure
• Good Faith Fund• Based in Pine Bluff,
Arkansas• Imported the Grameen
Bank model • Formed new social
groups• Rather than
working with existing groups
• Did not use groups as an accountability measure• No assumption of
lending responsibility by group
Demographics
Rural Arkansas is vastly different than Boston South Bend is somewhere in the middle
South Bend is home to diverse population 24.8% Black; 11.0% Hispanic, 2.3% Mixed
Can we harness the community to build a successful model like that of international organizations? SJC Bridges out of Poverty participants’
cohesion a great exampleCity-data.com
Is JiFFi a Microfinance Organization?
“Having the opportunity to
earn a little more cash by starting
some kind of business is
perceived by many of the poor as not worth the risk or effort.”
- Richard Taub
Not quite, but focus on: Trust-based
relationships rather than transactional ones
Financial education Building credit Investments for the
future Not just consumption
Future plans for micro-venturing arm
South Side Community Federal Credit Union
Payday Alternative Loans (+) $200 - $1000; 15% Terms from 1 to 6 months Free credit building &
financial education classes
Challenges Requires membership Low volume
Interview
GoodMoney
Collaboration between Prospera Credit Union & Goodwill stores
Short-term loans half the rates
payday lenders Other banking
services Referrals to the
Financial Information and Service Center (FISC)*
ZestCash
Founded by former CIO of Google
Features user tailored loans For-profit, very expensive
High fees Compound interest
Other
Banks & Credit Unions Option usually exhausted
Personal Finance Companies Similar steep fees
Family & Friends Potential negative social implications Only 5% consider this alternative
Caskey, Economics of Payday Lending
•What are the lessons?•What are the goals to achieve?•What should a JiFFi loan look like?
The JiFFi Solution?
The Necessity of Education
Individual Financial Success
Mentored DecisionsEducation
Poverty Stability
“You can’t tell them to be clean if they don’t know what clean is!”
Class Perspectives
Necessary to understand
Each social class has its own habits
Habits determine what drives actions: what is the motivation? The final goal?
Hidden Rules
PovertyMiddle Class
Wealth
FoodDid I have enough?Quantity
Did I like it?Quality
Did I like how it looked?
Presentation
TimeWhat do I need
now?Present
What do I need in the long-
term?Future
What have I done in the
past?Traditions &
History
Possessions
People Things Legacies
Money To be used! To be managed! To be invested!From Bridges Out of Poverty, Terie Dreussi
Smith, 2012
To break the cycle…
Understand the perspective of each individual
Value the dignity of everyone that comes in and maintain the relationship Treat every individual as an individual
Work towards getting out of a cycle instead of trying to temporarily manage it
Ingredients for Success
JiFFi
Appropriate Financial Tools
Long Term Relations
Education & Guidance
Emergencies happen Nudge factor
Vision of possibilities Trading “rules”
Clients’ long term success Client sets financial
goals Provide accountability
Comprehensive Service
-Custom tailored installment loans-Credit building repayments
-Demonstrative education-Financial crash course series
-Goal oriented, restricted savings & accountability services
Product Snapshot
• Statement of purpose required; amount co-determined with JiFFi
• 12% simple interest, custom tailored repayment plan
• Redeemable “In Your Own Interest” amount (33% of interest)
JiFFi Personal Loan
• Goal-oriented savings and matching program• Inaccessible unless pre-determined conditions are
met
Restricted Savings Program
• Platform for ND students and community entrepreneurs to meet
Consultation (Future)
Achieve Multiple Goals
Solve
Emergency
EstablishRelationship
Guide FinancialDecisions
Encourag
e Communication
JiFFi
Value Dignity
Busi
ness
Soci
al
•What are some social challenges?•What are some business problems?•We need your help!
Further Questions & Challenges
Social Challenges
“Invisible” target market
Root of the problem runs deep and wide
Complexity of poverty
Bridging the gap between ND students and rest of the community
Business Challenges
Complex business with heated competition Payday lenders advertise ferociously High risk
Difficulties in delivery Requires costly overhead & hours
Student pool talented but busy How to frame incentives?
Business Problem
Simplistic & optimistic estimate Overall loss of $(8,332) in the first year 2014 full capacity overall income of
$2,800
We Need Your Help!
Academic assistance Data collection & impact evaluation Legal support Business plan generation
Student & faculty involvement Human capital intensive – student groups Board of advisors – faculty and other leaders
Local cooperation Complex problems; help from local
organizations Input and support from local government
Plans
Summer Personal research and development
Summer programs & internships Acquaint with community
Fall Re-evaluate purpose, model, team McCloskey Business Plan Competition Test products