Improving Household Balance Sheets
The Stanford Social Innovation Review
By: Jack McCarthy
In 2008, Brandee McHale, the chief operating officer of Citi Foundation, was having second thoughts. McHaIe, who is responsible for developing the overall strategy, grant making, and operations of the foundation- which supports financial programs for low-income families- had begun to question the effectiveness of some of the organization's approaches. She and others at the Citi Foundation and in the nonprofit sector generally, were coming to the conclusion that classroom-based educational programs went only so far in helping families make positive financial changes. The recession was also exacerbating low-income families' difficulties. New methods were needed to help people improve their household balance sheets.
Citi Foundation's philanthropic efforts focus on several core areas: individual capability and asset building, microfinance, enterprise development, college success, neighborhood revitalization, and disaster response. The apparent ineffectiveness of financial education, which was at the heart of the financial capability and asset building mission, troubled McHale. In 2004, Citi Foundation had launched a 10-year, $200 million funding mission to improve global economic literacy by providing financial education programs. "We've been a leader in promoting financial literacy around the world, and our focus was on classroom instruction and financial education to teach consumers what they should do with their learning," McHale says. "We knew how much money we spent, how many participants were involved, but we didn't know whether these programs helped people change their financial behavior."
The foundation asked itself whether the people participating in its US and international programs had changed their financial outcomes by increasing savings, lowering debt, or accumulating financial assets. "After stepping back and realizing that we couldn't answer these questions, we realized we had to adjust the talk and chalk' approach of putting people in a classroom and writing on a blackboard," McHale says. "We decided to look for a new approach to support financial capability that taught people not only what they should do with their money but also how to put that plan into action- a learning-by-doing approach to give them the tools they need to make it easier for them."
The foundation went to work with several organizations focused on changing financial behavior, particularly the Chicago based Center for Financial Services Innovation (CFSI), a nonprofit that helps consumers achieve financial stability by providing financial products and services. Sarah Gordon, CFSI's vice president of advisory services and nonprofit investment, says her group also had concluded that emphasizing behavioral financial actions for consumers was more effective than classroom-based programs. "We found there was no shortage of efforts to improve financial knowledge, but at the end of the day, consumers were still struggling financially," Gordon says.
A 2008 CFSI study revealed that traditional approaches to financial education were no longer considered essential, in part because consumers needed more guidance to improve their financial management skills: to cover monthly expenses, track spending, and select and manage financial products and services. The study recommended that future programs change four things. The programs needed to be more relevant to the financial situations of participants; more timely, to coincide with life events; more practical, to help consumers put knowledge into action; and ongoing, to develop long-term relationships to give accountability and support.
FINANCIAL CAPABILITY INNOVATION FUND
To develop this new approach, in September 2010 Citi Foundation and CFSI created a grant-making entity, the Financial Capability Innovation Fund, and sent out a national request for proposals. A group of funding organizations, led by Citi Foundation and including Bank of America, Capital One, Morgan Stanley, Experian, U.S. Bank, and Visa, provided a total of $1.5 million in grant funding. Grants would be awarded in amounts of $200,000 to $300,000.
From 246 proposals, five organizations were selected for the first round of grants in March 2011. They included Clarifi, based in Philadelphia, which sought to help clients repay debts by giving them peer support and reminders to stick to budgets; Co-Opportunity, Inc., of Hartford, Conn., which aimed to enhance the effectiveness and scale of its budget-coaching program through a new online platform; Filene Research Institute, headquartered in Madison, Wis., which proposed using web-based tools to help consumers make on-time loan payments and improve credit scores; Piggymojo in New York City, which planned to employ goal visualization, social commitments, and mobile and online technology to help people make "impulse" savings; and Mission Asset Fund in San Francisco, which wanted to create lending circles to issue loans and create credit histories for low-income and unbanked Latinos.
Each project focused on improving financial capabilities and employing new technologies. The fund also would track and evaluate the degree to which each program succeeded in improving the financial condition of its clients. "Every program must have a significant testing element determining what its financial impact is, whether consumer credit is improving, whether savings are increasing, and whether there are improved household balance sheets," explains Gordon. "So far, we are seeing promising results."
BUMP AND SCALE
At the Mission Asset Fund, members of the peer lending circles, called Cestas Populares, meet regularly to offer financial support to one another and to lend to each other. Loans are used for projects such as making down payments on apartments, starting small businesses, or saving for college tuition. Cestas Populares participants sign promissory notes to make payments on their peer loans, and the Mission Asset Fund in turn reports payments to credit bureaus, building participants' credit history- a previously elusive goal for many in the program.
Early results from the Mission Asset Fund's evaluator, the Cesar E. Chavez Institute at San Francisco State University, show improved credit scores and higher savings. "We have lending circles where community members come together in small groups, say 10 people, and they decide how much money they will save," says Joel Lacayo, the fund's program manager. "They each contribute a little money, and it gets distributed."
One former lending circle member, Micaela Nabor, with her husband, Bruno Rivas, used lending circle loans to start a small business. Mexican immigrants with no credit scores or savings history, the couple joined the Mission Asset Fund and set up an Individual Development Account, or matched savings account, offered by the Mission Asset Fund. By joining a lending circle, they were able to build a credit history. And with matched savings totaling $12,600, in October 2010 they started Our Mission Graphics, a San Francisco custom T-shirt and graphic design store.
"First, the lending circle got me thinking about saving, and then about how I was going to be using my money. That's when I got the idea to start my own business," says Nabor. The first two years in business were tough. "Bruno thought we might have to close," says Nabor. "But we've been able to get more shirts and more supplies, so we've been able to sell more and do more advertising." Eventually, the couple would like to apply for a small business loan to expand inventory, move to a larger store, and hire an employee.
Over the past five years, the Mission Asset Fund has provided $1.2 million in social loans for 933 lending circle participants. The average loan size has amounted to $1,200, and the participants have achieved an average credit score increase of 30 points. Meanwhile, the lending circles designed by Mission Asset Fund have expanded to more than 10 counties in California and to partnerships with more than 10 nonprofit organizations in Nevada, Oregon, Utah, and Massachusetts.
Several other programs receiving support from the Financial Capability Innovation Fund are making gains. Piggymojo is testing its impulse savings program to have clients transfer funds from their checking to saving accounts, with more than 80 trial participants averaging 2.4 impulse saves a week at an average save of $14. Piggymojo also has joined with OneWestBank and NBA great Magic Johnson to create the MAGIC card, a reloadable, prepaid MasterCard with a linked savings account.
Clarifi reports that more than 175 participants have signed up to receive text alerts with reminders to stick to budgets, and more than 30 of those participants received additional peer support. Co-Opportunity Inc. has trained more than 60 budget coaches and launched a website to provide support to clients. And Filene Research Institute has recruited six credit unions to work with its incentives program to encourage on-time loan repayments to improve credit scores and has booked 850 loans.
These initial successes of the Financial Capability Innovation Fund recipients have convinced the Citi Foundation to increase its support of financial behavioral change programs- from 39 percent of the foundation's investments in its financial capability and asset-building portfolio in 2011 to 49 percent in 2012. Meanwhile, funding for programs focused solely on financial education were reduced from 37 percent to 17 percent in 2012. (Citi. Foundation's funding for all programs in 2011 was $78 million, of which more than $25 million was invested in financial capability and asset building initiatives.)
The Center for Financial Services Innovation is also moving forward with its support of financial behavioral change programs. In September 2012, CFSI called for a second round of proposals for the Financial Capability Innovation Fund and will award a total of $2.5 million to seven to ten programs with grants of $250,000 to $350,000 each.
Gordon at CFGI says fund recipients have experienced setbacks along with achievements. Piggymojo switched financial partners twice, slowing down the testing of its programs; and Filene Research Institute's technology solutions have not scaled up as hoped. But Gordon says valuable lessons have been learned. "None of this activity goes exactly as planned, but that's just part of being innovative," she says. "We think we succeeded in raising awareness and calling out new ideas. It was the fund's first time around, and we think it's worthwhile to go out and do it again."
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