The reason I pose this question is because I work for a nonprofit CDFI in South Los Angeles that for years has been offering a micro-business program Capital Partners based off the micro lending platform originated by Muhammad Yunus of Grameen Bank. Our program starts participants off with a loan of $500 at the first level. Once that loan is paid in full one can receive a loan amount of $1,000. It continues this way till a max out at $5,000. Participants must work in a group of three to five and attend mandatory workshops, in addition to other activities. We don’t check credit history and only require that the participant have a photo ID and proof of address.Though very popular in our communities and among our partners we’ve always suffered from high loan defaults. My role in the organization is with financial literacy, but recently I’ve taken up an interest in this program and addressing those challenges.

To the best of my knowledge we are the only organization on the West Coast offering a graduated loan, peer-orientated program. There is an “expansion initiative” in San Francisco and some other cities scattered across the east coast, according to GrameenAmerica.com. There are several organizations offering programs for first-time business owners, but none that I’ve seen (in California) rely on the element of social collateral as the sole determiner in a borrower’s pledge to pay back the loan. I’ve read of the successes worldwide of this model used in other countries and with Grameen Bank in New York, which is what prompted me to look at how our program’s performance pales in comparison.

The first thing I did was visit the Grameen Bank, USA website and worked through their listed requirements for the program and two things stood out: 1.) “Participants must be a permanent resident of the community” and 2.) “Live close to your group members”. I looked through our organization’s requirements for the program and these two concepts were missing completely.

Social collateral in developing countries, in my opinion, make sense for a variety of reasons. First, having the opportunity to switch out ‘hard’ collateral for something abstract benefits those who don’t own property, have cash or any other thing of value to secure an obligation.

Second, social collateral is a concept that is probably more everyday in the lives of the extreme poor. In fact, informal financial arrangements that are made daily between neighbors, family members, and small businesses are all effective because there is this general notion that the ‘social cost’ of not meeting one’s obligations is greater then the monetary one.

Third, it seems in many places of the world the social connect is much more intimate then, say, the U.S. I live in a building downtown and have several neighbors on my floor yet we barely see each other in passing because each one has their own work schedule (a stronger economy, better/more job options). Our area is also served by several businesses. I have yet to bump into a neighbor at our local grocery store. And some of us own cars, so we’re not sitting next to each other on public transportation. These are small examples, and I’ve overlooked things, but what I hint at is that developing countries are better at creating the space for social connections like these to exist. Lack of infrastructure can isolate a town or village converting it into an island where very few manage to leave. Some communities even thrive on the mutual participation of its residents – there is a shared investment. And culturally, the “every man for himself, even if they’re blood” mentality would not bode well like in the U.S. where it seems at least marginally acceptable.

Fourth, because the poor of developed countries are on average do better financially then the poor of developing countries there exist an opportunity to follow market norms or social norms. Essentially, if something that usually carries a market cost (a price of a parking ticket) has an alternative social cost (your tires are painted yellow for a parking violation – embarrassment) you give a person a choice to opt out of one and choose the other. In our case and in the Grameen model the market cost has been replaced with a social one. You don’t pay your loan you must face the embarrassment from your peers AND know that you are directly impeding the members in your group from obtaining loans.

In our case we attempt to create the same environment but lack the “infrastructure” to enforce it. As a born and raised Los Angelino I can echo the sentiments that we are not necessarily a community-orientated city. Our participants probably spend more time driving to our offices then they do to their grocery store. There is a disconnect. And since our loans may end up going to people in neighboring cities or neighborhoods instead of those on our street we rarely, if ever, feel/see the social impact.

My suggestion is that instead of taking our program city or county-wide, we instead focus on a specific community (either ours or through a satellite center). As much I would love for us to offer this program to everyone I just see us running into the same issues. Granted, we should also look at our screening process.

With so many people needing help saving is the internet poised to take it to the next level?

What’s interesting is the merger of social networking with financial tools to create, in theory, powerful methods to accumulate and/or accelerate assets. Social networking can turn an idea into a movement. It’s infectious, aggressive, and effective at spreading the word. That’s how you found this site, right? Sites such as SmartyPig and VestMatch are one such example. SmartyPig offers customers online savings accounts with a competitive interest rate.  They differentiate from other online banks because their accounts are designed for those who want to save for a specific goal or purpose, say for instance, a new car. The saver can then leverage Facebook, Twitter, email and good ol’ fashioned word of mouth to invite others to contribute towards their goal.  It’s a neat idea for a family, who for example, could set up a “Get $10,000 for Jamie to go to College” savings account. While Jamie promises to save a certain amount every month, each family member agrees to match her contribution $1 for every $1 saved. Jamie then gets an opportunity to accelerate her savings and the family feels like their charity is going towards a good cause. And then everyone can see the money grow; inching towards the goal.

Vestmatch takes the ‘community collaboration’ feel steps further by offering a platform, rather than an account, in which savers and interested parties come together towards reaching a financial goal. Just like SmartyPig, users and contributors are able to monitor the progress in real time. They are both attractive options because the interface is easy to navigate and the goal or purpose is clearly defined. Transparency is a cousin of trust and both sites market that element as benefits to both the saver and the “investor”.

Though both companies seem to be in their “beta” stages could this be a hint at what the future holds for alternative savings accounts? From the time of this entry several start ups have surfaced offering similar products.  Perhaps it will only be a matter of time until the ‘big banks’ see a lucrative opportunity for them to get involved. In the mean time the push for these great services are dependent on word of mouth and the advocacy of the companies themselves – mainly through social networking. And therein lies el problema; by introducing innovative products for the poor and financially-distressed are we creating yet another barrier via technology?

In order to max out the full utility of these services one needs to have access to a computer and the internet. Before that one needs to feel comfortable enough to navigate these systems. So now we’re uncovering two issues: that of computer literacy and computer/internet access. Without their resolution many will remain in the dark about opportunities that could bring light to their situation.

Individual Development Accounts (IDAs) are one of the more popular asset creation tools – in which participants receive a matching grant for every dollar saved. Usually, the funds the family receives must go towards the purchase of a home, small business, or continuing education. There are other IDAs that offer different savings goals, but these are less wide-spread and specific to local need. In Los Angeles we are seeing IDAs phasing out to be replaced by accelerated savings programs – such as Ramp-UP and micro-finance programs. Ramp-Up, essentially, has the same end product as any IDA; an awarded, guaranteed sum of money to the participant. How Ramp-UP differs is that funds are collected in a custodial savings account for 15 months. At the end of the term the participant receives an amount to add to their savings. Those funds can be withdrawn at any time with no penalty, for any purchase and use. Currently, Ramp-UP accounts in Los Angeles offer a grant equivalent of up to 22% APY.

Ramp-UP is designed specifically to demonstrate the benefits of savings (for the longer-term) with high interest that accelerates the rewards of consistent saving over time. The catch? Well, there is a maximum that you can receive in subsidized interest, regardless of how much you deposit monthly or initially. And there are income guidelines, to ensure the program can only be utilized by those it’s directed for. Beyond that Ramp-UP is a real opportunity to create savings for the LMI family. This will be the first investment many of our families will partake in, that will expose them to no built-in risk (but nothing can eliminate “natural risk” aka “life happens”) and guaranteed profit. It’s the perfect segue to government-backed bonds, high-yielding interest bank accounts, and even IRAs (Individual Retirement Accounts).

IDAs are a great tool but they are not the panacea to rise from poverty. Additionally, I am concerned about any program that encourages a LMI family to rest their future savings and impact their cash flow with the purchase of a home or in the investment of a small business. It’s an unconventional idea, but I cannot help but consider that if done incorrectly buying a house, launching a small business, and even a school tuition can disrupt a family’s finances even more – especially since the perceived payoff are realized (happen) at a later time. For example, one can say paying tuition for college will pay off with a higher-paying job in the future. First-time home buyers can argue their home will rise in price over time. Small business owners can anticipate a profit-turning operation. Though, nothing is guaranteed. These risks, I believe, can be alleviated with proper education and training as the participant saves. IDAs can remain asset specific. Additionally, the family could use Ramp-UP to create an emergency savings fund.

Despite the average American earning less income to their expenses and steady unemployment are we still better off then our generations past? One thing for sure is that today there are several more opportunities for the LMI family to save beyond financial services available to higher-income earning population. Community organizations have already brought IDAs and now Ramp-UP to their neighborhoods. President Barack Obama’s Savers Tax Credit is federal move to incentivize saving for retirement. And now, I believe, the internet is poised to be the next platform. It will just be a matter of finding an effective middleman to connect the resources with the family.

If we want to reach America’s ‘unsaved’ we need to create products that reflect LMI family challenges, cash flow risks, and needs. The buck can’t stop there (pun intended). These products need to be marketed effectively so that the people that need them the most can use them. IDA, Ramp-UP, and other programs that accelerate savings are a step in the right direction because they simply don’t offer free money but rather require the participant to invest their money for the long-term and then reap the rewards. Lastly, LMI families need to have access of an array of products and programs that can all be used simultaneously.

IDAs, for instance, ensure a participant can use accumulated savings for a specific person. They must commit to their selected asset goal in order to receive the benefits. Until then, their funds remain “locked up”. Ramp-UP accounts are flexible for the LMI since the participant can withdraw at any time without penalty and funds can be used for whatever purpose. They are also “low-touch” products for the participant since there is no required classes or meetings to attend. Both programs are useful for the ‘unsaved’ since they expose financially-strapped, but capable families with opportunities to amass savings and wealth.

My concern is not the numbers – for I know they do not in fact tell the whole story. Numbers offer straight-to-the-point answers, but what happens if the approach is wrong? Bank on LA serves as a city-wide project to target the “unbanked” communities of Los Angeles. The campaign assumes that the “unbanked” remain without banking accounts because of lack of information and access to financial institutions. This is partly true, yet at the same time dangerously incorrect.

Financial institutions aren’t giving the people enough credit. Yes, some truly aren’t familiar with banking, period. Others are completely aware and opt out of “the system” for specific reasons. Where the banks slipped up is hoping that by furnishing the community with fancy literature outlining generic benefits of low cost checking and savings accounts the ‘unbanked’ would suddenly abandon their usually more convenient and practical fringe financial services.

Sure, on paper it looks great. The banks collaborate with community organizations – who have the trust and history with under-served communities. Through them banks can reach populations that historically were ignored. The bank earns new clients, which leads to more deposits, and now more revenue potential. On top of all that they get to boast and brag about their strides in dis-invested neighborhoods. Comes off as a mini stimulus package.

But, what the banks don’t understand is that community organizations are not banks. We cannot do the work for them, but since their expectations are framed with that assumption it is unlikely they will get the results they desire. The first flaw with the campaign is that many bankers (not all) do not know the profile of the very demographic they would like to target. Research would do a body a good to tell them ‘unbanked’ people typically live in areas severely underserved by financial institutions – which in fact is why we call them “dis-invested” communities. Imagine the scenario of promoting free checking and basic savings accounts to a person when the closest branch of any kind is miles away. The second flaw is that the banks are underestimating their competition. Alternative financial products such as check cashing vendors, payday loan lenders and cash advance services are better at marketing to these communities and offer attractive products. Banks haven’t fully adjusted and there really was no need to. However, if their aim to attract the untapped audience they must come up with something to rival what’s preventing them from getting the business in the first place. And since the creation of any new product must be justified and thoroughly supported by proof of feasibility and profitability i.e. results a more appropriate product will never reach the counter. Instead, it places us in an incessant loop of catch 22; to get better products for the poor and low income banks must be convinced they would realize a profit. The way they measure this is by piloting a program, without making any changes to the existing model, that will generate some kind of result. The results will fall short of their expectations and in their view deemed a failure. Thus, prematurely preventing any innovation. The ‘unbanked’ remain shut out from the banking system. The community misses out and the banks are only reaffirmed of their assumptions. To make the campaign more effective banks must understand their audience.

Without numbers, here is a typical profile of the ‘unbanked’:

• Two-parent household with one income earner
• Usually four member household with at least younger children
• Likely to be foreign-born
• Residents of under-served neighborhoods – many times in the eastern and southern regions of Los Angeles county
• Are considered by City standards to be from low-income households
• Have little to no savings/low disposable income
• Prone to cash outflow and inflow issues
• Frequent public transportation
• Typically work longer hours in any day

There are other barriers to opening a bank account asides from lack of information. I mentioned convenience, earlier, as being a factor. For many the hassle of spending time + money to go to their closest bank branch, which is not even close, outweighs any benefits the bank could offer. The second barrier I described was the competing cash advance/payday loan vendors. You can find several of these businesses occupying corners and mini-strip malls in lower income neighborhoods. An existing bank customer might find them predatory but they do fill a need. These vendors are able to offer specific services (cash advances, check cashing, payday loans) that are attractive to customers for their convenience (many have later open hours, some are 24/7) and transparency (rates are upfront). Check cashing businesses are even better staffed – many have bilingual employees. And there’s no membership required to utilize services.

What needs to be understood is that some people will never open up a bank account, for whatever reason. For that slice of the ‘ubanked’ population financial institutions should develop direct competition to the Nix Check Cashing and similar vendors, if they want in on some of the untapped profit. Union Bank of California has already responded with their Cash and Save services available at specific branches. Even Wal-Mart has caught on with the best rate of $3 flat fee.

For other ‘unbanked’ a process must occur before they can be ready to open up bank accounts. Bank on LA is a great campaign, but it should not spearhead the initiative to turn people to the financial system. Participants must want to open up a bank account because they realize the benefits and weighed them in comparison to the alternatives. Before this realization to happen one must go through some sort of financial education “training” that teaches that person how to empower themselves. And on top of that, other issues must be addressed, simultaneously to “rehabilitate” the person completely. We find that with the ‘unbanked’ it is not just lack of a formal banking relationship that is an issue, but also unemployment, citizenship issues, childcare, credit issues, and essentially anything that threatens the stability of an otherwise healthy household. We can show clients how storing our cash in bank accounts, CDs, and bonds can help combat inflation with competitive interest rates but for a household with rapid cash flows (meaning anything that comes in the house is immediately consumed for immediate expenses, making it difficult to maintain even short-term savings) this long-term thinking doesn’t mesh well with the “day-by-day” lifestyle. I would even dare say that encouraging bank accounts to some participants might be predatory given certain circumstances.

Bankers could probably expect better results if the campaign was coupled with a long-term plan that included financial education as well as collaborative efforts with community organizations to help families resolve other issues with social services. It is possible that a person may not realize their problem is money-related and for this the empowerment must be comprehensive. And if banks truly want to take advantage of this market they should design markets that attract clients at all stages of this time line.