Ben Magan, CEO of EARN

How often do you catch yourself saying “microfinance” when you really mean “microcredit?”  Let’s face it – in the world of microfinance, lending represents the lion’s share of financial activity, with savings and other services the poor second cousins.  However, in San Francisco, EARN has flipped that equation, with microsavings playing the leading role.   I interviewed EARN CEO, Ben Mangan, to learn about their program, savings and sustainability, and the role played by public policy.

Kirsten:  Why was EARN started?  What’s the mission?

Ben:  The original vision was to bring asset building products to scale.  Since the early 90s, the concept of matched savings accounts has been in play.  The first step was to prove poor people can save, which we’ve done.  The second step was to get government funding for matched accounts.  During the dot.com boom, when the concept of EARN was first developed, there was a window open for major government investment because budgets were flush.  Unfortunately, by the time the plan was finished, it was irrelevant.

Initially savings accounts for low-income earners may seem like a crazy proposition.  But if you study prosperity, it’s clearly tied to public policy.

K: What do you mean?

Ben:  Something as simple as the creation of the 30-year mortgage doubled home ownership in the US.  Even with the crisis today, home ownership is the greatest generator of wealth because it enables multi-generational prosperity.  The number one source of down payment assistance is parents because of the wealth built through their own homes.

Another example of asset building policy is the 401k.  These are pieces of the engine.  People who work in the asset building field argue policies should be expanded to low income workers.  We give by much larger multiples subsides through the tax code to middle to upper income earners.  For example, ninety percent of the home mortgage interest deduction subsidy goes to households above the income average.  Fifty percent goes to households that earn over $100,000/year.

Low income workers pay income, payroll, and sales tax yet they get a disproportionately small piece of the subsidies that create wealth through public policy – so small that it keeps them from entering the middle class.  This economy would be far more robust and sustainable if there were more opportunities to be entrepreneurs, to own homes and to have a greater civil stake.

EARN’s goal is to provide products and services that help low-income workers build wealth in a way that could be offered at true scale across the country.  We use our successes on the ground to advocate for policy changes that would realize scale.  Sometimes this push involves different models, for example a very successful pilot program called Bank of San Francisco.

K:  Can you tell me a bit about that?

Ben:  It’s an interesting pilot between the City of San Francisco, the Federal Reserve Bank of San Francisco, and EARN.  Together we compiled research that clarified the number of unbanked in San Francisco, who these people were, and through our primary research, why they were unbanked.  We then went to financial institutions and negotiated to provide products that appeal to the unbanked to open checking accounts.  The goal was to get people into mainstream banking and it’s been wildly successful.  Our initial goal was to get 10,000 people into the program.  We’ve had 40,000 in the past 24 months.  The program is being replicated in California (the Bank of California) and across the country.

K: What are they doing?

Ben: They’re creating coalitions of banks, non-profits, and the government.  I think, however, their success will depend on certain critical factors.  First, products must be demand-based.  There’s been this idea that if only we publicize checking accounts and bank services, the unbanked will join the banking system.  But we’ve found through our research and focus groups that it isn’t true.  The unbanked choose not to open bank accounts for very rational reasons.  Banks frequently have hidden fees that check cashing services don’t.  Many can’t get a bank account because of the bank credit rating system.  Or they think they don’t have the right ID.

When the Bank on SF steering committee negotiated with the financial institutions we ended up working with, we had a list of deal-breakers.  The product had to accept matricular IDs from Mexico and Guatemala, the check system [the banking credit rating system] could be waived for people who’d been on it for over six months and who weren’t on it for reasons of fraud, and there had to be some forgiveness for insufficient funds fees.

K:  Tell me about EARN’s savings product.

Ben:  We offer a matching savings account called the IDA – Individual Development Account.  We’re one of the biggest in the nation, alongside Opportunity Fund in San Jose.  We have more active accounts than anyone else, and Opportunity Fund has the most cumulative accounts.

K: What’s the match?

Ben: It’s a 2:1 match, up to $6,000.  So people can save up to $2,000 and are matched with an additional $4,000.  The main account is funded half by the government, and the other half through private donors.  For people who purchase homes, there is an additional subsidy we can access through the Federal Home Loan Bank of San Francisco.  But the majority of our savers use the account for education.  Small business is the second most popular use.

K: For their children’s education, or for their own?

Ben: For their own post-secondary education, though we are piloting a product allowing families to save for their kids’ education.  The redesigned version of this is expected to be offered in the third quarter of 2010, and our goal again is to be scalable.  This “Family Education Account” will be designed so EARN can open accounts anywhere in the state without having an office or staff there.  Ultimately, our vision is to be successful enough that we put ourselves out of the business of offering accounts as an intermediary. Once policy makes these accounts available at scale, people should be able to walk into any financial institution for some form of a Family Education Account, just as they would walk into Wells Fargo or Citibank to open a ROTH IRA.

K:  I come from the microfinance world, so I have to ask: is it sustainable?  Does it matter?

Ben:  I get a lot of argument from microfinance practitioners about this!  But I think it depends on how you define sustainability.  You can’t ignore the history of the public policy role in asset creation.  Would retirement savings be sustainable without the IRA or 401k?  There’s no way to fund these sorts of things without changes to public policy, and it doesn’t need to be overly expensive in the long term.

The UK, for example, has a program where every child born gets £300.  At age 18 they must repay the money, but they can keep the interest or capital gains earned on it, and use it for any purpose.  The British government believes that it will be used for education or entrepreneurship.  I’m frankly more skeptical that it might be used for a rave!  But I think an American version could restrict the use of the money for education or business, and with the repayment could be sustainable.

Some economists make a strong argument for sustainability through increased economic activity, for example, the Homestead Act.  Twenty five percent of the wealth in the US can be traced back to the Homestead Act.  Another example is the G.I. Bill.  Depending on which economist you talk to, that bill had an 11-1 or 7-1 return on investment.  The question of sustainability has to look beyond annual profit and loss and look at the long term economic impact of creating wealth for people.

K:  Financial literacy is something close to my heart, since so many of us grow up without basic financial skills.  In fact my current project is speaking to parent-teacher associations on the San Francisco Peninsula about techniques parents can use to develop strong financial habits in their kids.  So I was intrigued when I read that EARN has a financial education program.  Can you tell me about it?

Ben: There is a lot of evidence suggesting that financial education to adults, on its own without connection to a product, is ineffective.  So the education we provide is required for people who open IDAs.  Since they’re required to save monthly, we feel obligated to provide this education.

K: How does the program work?

Ben: It’s an eight hour program, over two sessions.  It’s very hands on and results in a budget, with a line-item on how much they’ll be saving per month in the IDA and a detailed exploration of how they’ll achieve that.

But another important part of our education has to do with our alumni association.  People have become so empowered by the IDAs that we wanted a space to channel the energy.  The alumni association provides a bundle of products and services, but the cornerstone is access to a financial coach, and we don’t use the word “coach” lightly.  Our coaches are highly trained professionals.  Everyone who goes through the coaching also gets financial planning, but the financial planning is separate in that coaching works on behavior, while the financial plan develops goals.

Within this, the EARN Alumni Leadership Group has networking events, such as expos for EARN alums.  We also have a microlending pilot to eliminate credit card and medical debt.  It’s focused on a very specific niche, where we feel we can add value.  We found that many of our saver alums still carried credit card or medical debt.  So we seeded the fund on prosper.com, a peer-to-peer lending platform.  We’re currently trying to create an EARN affinity group and to attract outside capital.

K: What question do you wish I would have asked?

Ben:  People often link us to microfinance and then can’t quite figure it out since we do so little lending.  I think the world of microfinance should increasingly expand to other types of financial products besides credit.

K: It’s interesting you bring that up, since the savings focus of EARN was what made me want to speak with you.  When I first started my career in microfinance overseas, I saw a tremendous focus on savings.  However, over time the savings component diminished and there were several reasons for this.  In some cases, restrictive legislation made savings problematic.  In others, inflation was so high that it really made no sense for borrowers to save money – it was much more rational to invest it or borrow at fixed rates.  Finally, some MFIs found that the savings was so successful that clients didn’t need to borrow as much; the MFIs (and I won’t name names) realized that they could be more profitable if they cut back on the savings and pushed people into taking more credit.  At any rate, I think this all goes back to the definition of microcredit – which is debt-specific – vs. microfinance, which really encompasses a range of financial services.

I recently returned from a fellowship with Esperanza International. This Microfinance institution serves over 18,000 clients in the Dominican Republic and Haiti.

I had been conducting interviews with loan recipients for a few weeks and had met many inspiring associates; one in particular stood out to me:

Armando was eight months old when his legs stopped functioning. His family was very poor and couldn’t access the high quality health care that he needed. As an adult, he was stigmatized for his disability and relied on the kindness of neighbors and fellow church members to provide for his needs. However, with the help of microloans from Esperanza, Armando was able to become self-sufficient. He opened an electronics repair shop out of his home and began repairing motorcycles and cell phones as well as selling refurbished parts. As his business grew, he took on three young apprentices. He showed me two textbooks that he used to teach the boys math and chemistry because he wanted them to succeed in case they decided to attend high school in the future.

Armando is a shining example of what a real hero is made of. He refused to let his disability define his life and with the help of microloans he used his skills and talents to provide for himself but also mentor and educate the youth in his community. Imagine how quickly the world would change if we all “pay it forward” the way Armando does every single day.

Me:  Thanks for letting me interview you on a Sunday, Elisabeth!

Elisabeth:  Thank you!

Me:  What inspired you to write this book?

Elisabeth:  The book really came out of the United Nation’s Year of Microcredit in 2005.  As a result of that, the UN formed a high level group called the UN Advisors Group on Inclusive Financial Sectors, headed by HRH Princess Maxima of the Netherlands, who’s an expert in this topic area.  It also had experts from governments and major banks, and ACCION was represented.  A group of private sector representatives said, “The private sector has a role here, so what can we do to attract the private sector to be more of a contributor to financial inclusion?”  We decided we needed some good examples, a kind of road map, and some information on how big the market is, and that’s the book.  I should also mention that Visa provided financial support for the book because they were also part of the UN advisors group.

Me:  Your book mentions the entry of some big local firms, like Visa and Sequoia Capital, into microfinance.  Can you tell us about a case that you won’t be discussing in your presentation to the SVMN this week?

Elisabeth:  In the Silicon Valley, a lot of companies have been interested in supporting the development of MIS, the information technology that goes into running microfinance, and have gotten involved in a lot of different experiments on that score.  It may seem a little mundane, but systems for financial services are typically designed for big banks, not microfinance institutions.

Me:  I should explain I used to work in microfinance, in the field, and MIS was my bête noir!  Everything felt jerry-rigged.

Elisabeth:  Right.  MFIs don’t have a lot of spending power so big companies tend not to move into that market.

Additionally, a lot of companies have been involved behind the scenes in microfinance, Microsoft for example.  You see things like the head of the board of Grameen foundation is ex-Microsoft and another ex-Microsoft person – Mike Murray – co-founded Unitus.  So a lot of people have gotten involved individually as entrepreneurs in this space.  I think that’s true on the investment side too.

Me:  What question should I have asked you?

Elisabeth:  About the takeaways for private businesses that want to get involved.  One, let’s acknowledge you need a deep market understanding of low-income people; that their special characteristics don’t make them unviable customers.  You need to understand how low-income people work in order to have good products that work for them.  Financial services support people’s fundamental needs and that’s why they are viable customers: they’re willing to pay for services that meet those basic needs like housing, shelter, education, etc.  So when you see an unmet need what you see is an emerging market opportunity.

Another message would be about partnering with MFIs, because MFIs can introduce private businesses to their market segments.

My final message is to absolutely approach entry to this market with a strong consumer protection awareness and a commitment to make social goals part of the overall goal of the business.

Want to learn more?  There are still spaces available to attend Elisabeth’s presentation at the SVMN on September 16^th in Santa Clara.  For more information, go here.

For anybody who will be traveling or is looking for a microfinance event to go to, here are some events in the upcoming months:

• Event: Los Angeles Microfinance Network (LAMN) event with Lee Tenny from IBM.
  Description: Lee Tenny is a Managing Consultant at IBM and he is leading a project for IBM’s innovation group in the development and deployment of new technologies for microfinance. Lee’s team has active projects in 5 regions around the world and have developed a global view of some of the key aspects, from both a technology / operations standpoint as well as a policy and macro-economic standpoint, that are critical for the successful scaling up of microfinance.
  When: September 21st 2009
  Where: USC Campus, Business Building at Room HOH1
  Registration

• Event: Pro Micro Health Insurance (MHI): Micro Health Insurance Conference 2009
  Description: The international Pro MHI Africa team will hold a final conference at the end of their two year project in December 2009 in Lilongwe. The project analyses the efficiency and sustainability of local micro health insurance units in Ghana, Botswana and Malawi. Common research results and general outcomes of the two year project will be presented at the conference and hence new information on the potential, efficiency and sustainability of Micro Health Insurance in Botswana, Ghana and Malawi will disseminated.
  When: December 2-3, 2009
  Where: Lilongwe, Malawi, Malawi Institute of Management
  Registration

• Event: C5’s Second Annual Microfinance Investment Forum
  Description: As the global liquidity crisis spreads to the developing world, the resilience of microfinance as an asset class is increasingly clear and has enhanced the industry’s appeal to investor’s eyes. Concurrently, as the demand for microfinance amongst end borrowers reaches unprecedented levels, the need for MFIs to draw investment into the industry has never been greater. C5’s Second Annual Microfinance Investment Summit will provide a unique international platform for genuine interaction between MFIs and many other key industry stakeholders.Our outstanding panel of more than 50 key industry speakers, will include more MFIs than any other investment conference.
  When: October 6-7 2009
  Where: Renaissance Chancery Court, London UK
  Registration

• Event: 3rd International Conference on Microfinance
  Description: To provide a forum of economists and socialists to address the issues relating to micro finance. To evolve strategies to eradicate poverty in India and at Globe. To collaborate with National and International Research centers on Micro Finance. To take education to the field and to promote people’s participation in eradicating the poverty through micro finance.  To involve the administrators, policy makers, NGO’s and the public concerned in the adoption of sound policies, this would create economically stable and financially healthy India.
  When: January 22-24 2010
  Where: Pondicherry University, Pondicherry, India
  Registration

• Event: UN Environment Program Finance Initiative Roundtable 2009
  UNEP FI invites you to join its vibrant global network of signatories and partner organisations across the banking, insurance and investment communities to discuss the latest developments and emerging issues on finance and sustainability during these challenging and changing times. With UNEP FI always on the cutting-edge of sustainable finance, the Cape Town Roundtable will offer interactive panel sessions, in-depth debates, and expert training on: responsible investment, sustainable banking, low-carbon economy, financing renewables, sustainable insurance, etc.
  When: October 22-23, 2009
  Where: Cape Town, South Africa
  Registration

Evan Carmichael, a journalist, entrepreneur, and consultant runs a blog that ranks number one for resources and information amongst small business owners and entrepreneurs. He has been interviewed by the NY Times, The Wall Street Journal, the National Post, etc, and has business owner showcases that include Henry Ford, Andrew Carnegie to present entrepreneurs like Calvin Klein, Oprah Winfrey, Michael Dell.  Recently Evan has put together a list of the top 50 Social Entrepreneur blogs that are making a huge impact in the world.  The Grameen Foundation, which combines the power of microfinance, technology and innovative solutions to defeat global poverty, has it’s own blog, Creating A World Without Poverty, which was chosen as one of Evan’s top 50.  Check out the other 49 blogs that made the list.

There are two positions available at Hope International:

- Managing Director, Democratic Republic of Congo

- Information Technology Administrator, Lancaster, Pennsylvania

HOPE International (HOPE) is a Christian faith-based, 501(c)(3) non-profit organization focused on alleviating physical and spiritual poverty through microenterprise development.

[via Joel Carlman on Kiva Stories from the Field]

After twelve years in the field, I found myself a bit behind the tech curve when I returned to my home in the Silicon Valley.  So after attending Stephen Goodman’s (from Sun Microsystems) presentation on Emerging Market Models to the SVMN, I decided to circle back and get some questions answered from a Luddite’s view.

Stephen Goodman

Me (Kirsten): Thanks for taking the time to chat with me Stephen.

Stephen: Of course!

Kirsten: I have to admit, when you said that back-end technological support was one of the key needs in microfinance, I felt like cheering.  Why is this so hard?

S: In my presentation, I’d brought this issue up in the context of the mobile platform.   Mobility is so powerful because it’s handheld, it’s simple for communities that haven’t grown up in the PC environment, and there are sophisticated and sleek applications being developed.  But a lot of the pressure to develop is focused on the front end – what’s on the screen.  What MFI professionals must not forget is that there’s a back end needed, many times a substantial and robust back end.  Let’s say you do have a smashing success and your client base grows – what are you going to do for, say, storage and security? Many times this aspect of technology deployment isn’t as well thought out as the user interface.  Mobility is happening, they’re reaping the successes, but they’re having growing pains.

K: Maybe I’m projecting, but it seems that one of the biggest barriers to technology in microfinance is intimidation.  Implementing new technologies like M-banking, or even a decent management information system, seem overwhelming.  What steps can microfinance managers take to move forward?

S: I have two answers.  One is that technology is getting simpler and more powerful at the same time. Simpler in that it’s amazing how you can engage in technology and not be a technologist.   Around the world there are legions of younger folks and smart entrepreneurs who have technology ingrained into their personal and professional skill set, and I think you’ll find there are a lot of people who are less intimidated with technology.  The technology wave, adoption, is getting more powerful so there are communities, like open source, that one can be a part of. And on the other side, solutions, like cloud computing, for those that would never think to set up a system themselves.

I also think that people in the microfinance space shouldn’t feel obligated to become technologists.  They have a business model to execute on and a need to focus on their enterprise, their customers and I think technology will be that enabler if applicable.  They won’t have to spend 40% of their time being a tech manager. Back to the concept of computing becoming more powerful while simpler: cloud computing, a perfect example. Instead of having to buy a bank of servers and hiring IT management, one could use utility computing.

K: Cloud computing sounds like an interesting option for small to mid-size MFIs.

S: It is!

K: Can you tell me a bit about it?

S: Cloud computing isn’t new. You have centralized computing power, a data center, and it’s shared.  But instead of the computing power being at your desk, it’s in a more centralized place, remote and in the “cloud.” Some of the characteristics of cloud are its service model – you’re not buying a product; you’re buying a service.  You don’t have to buy software.  It’s scalable and elastic – you can add more or reduce.  If all of the sudden your data or client needs expand, you can scale your cloud capacity.  There are different models of how cloud services are  paid for but many are metered according to usage – again, helpful in a scaleable SME environment. In the past, you’ll often find a small organization buying computers with huge computing capacity they don’t really use or need – using cloud computing you only pay for what you use.  It also uses the web and the technology tends to be fairly straight forward and developed. Finally, we can’t forget that the main interface is a web browser, mobile or not, thus increasing accessibility.  We’re finding that small and medium sized organizations can really take advantage of it.

K: Do you know of any examples in the microfinance realm of cloud computing?

S: We are just starting to hear about MFI teams using cloud computing. Just like open source, it wouldn’t surprise me that we’ll learn of more cases in the near future. Mifos, an open-source based MFI-centric information management system has received a lot of attention recently. We have yet to hear of the equivalent in the cloud space.  But with that said, I bet people are using cloud computing and don’t even realize it.  For example, I know international NGOs using Google docs for their organization as a new and better way of collaborating.

K: I worked with a microfinance bank in Pakistan that used open source software, and they raved about the flexibility and low cost.  But I was left feeling that it takes a large institution – such as a bank – to manage open source software.  Am I wrong?

S: Yes and no.  It’s not black or white; you don’t use all open source or not. And you’ll find open source in all sizes of organizations. For example, one of our executives had a meeting with a banker, who’s very regulated, and the banker said they don’t and couldn’t use open source because of perceived security concerns.  The sales representative in the meeting modestly raised his hand and said, “Actually, we know your team is using open source.  We’ve have multiple records of official downloads.”  So you’ll see banks use it in some areas and not in other areas. The same goes for MFIs or smaller enterprises. Open source should be part of a smart technology portfolio. Another misconception about open source is that you’d need a very advanced tech team.

K: That’s my concern!

S: If you’re creating and building on it, yes, you need good tech people.  But there are open source options out there you don’t have to build on, so it really depends.

K: You mentioned in your presentation to the SVMN that Africa is the technology “hotbed” these days.  Why do you think that is?

S: Because necessity drives innovation. There are some genuine problems.  I don’t say that cynically, but it does create a certain level of motivation.

Our research uncovered something that wouldn’t be a surprise to practitioners working on this geographically and demographically huge continent – there is a lot of new and innovative economic activity going on, now. Investment and commitment is growing. Along with that is growing technology uses and adoption.  There’s a wealth of opportunity – of smart, emerging and established universities, of thriving SME sectors, and so what we find is that there are a lot of really dynamic things going on there.

Though it’s not a completely blank canvas, Africa has an environment where you can leapfrog technology.  There are many cases where there is no legacy system of old infrastructure you have to overcome.  As a result, the newest technology, for example, mobility, is so successful.

You often hear about the hesitation regarding the economic payoff of Africa.  It may not fit with the US model of quarterly returns, but we’re starting to see long term investments from the past pay off.  You have to be part of that – to get in the game – to reap the benefits.  If you don’t invest, you won’t be able to contribute and share the rewards.

K: What question should I have asked you that I haven’t?

S: Around new engagement models. What are the new and savvy engagement models that corporations are employing?

We’ve learned that in the ICT (Information and Communication Technology) space we’re in enables change, and contributes to positive economic and social utility. It might not be selling product at the base of the pyramid but it will be in helping to build and sustain the ecosystem of these emerging communities.

If you want to be part of this growth of these emerging communities then it’s not always about working with the end consumer of the project, but maybe it’s about supporting the the vendors, policy leaders, MFIs, or municipalities, for example.  It’s not enough to focus on the top, bottom, or middle of the pyramid, but the innovators, incubators and influencers which support, which make up the economic growth.

Microenterprise, social enterprise, and, what I call, tech enterprise are the really interesting new business/marketing models.  If, as a corporate leader, you do not align your sales, marketing, thought leadership, product development, sales channels and other aspects of your business model to intersect at some level with these organizations and, leaders, than you will not evolve as they do. Microenterprise is a different scale, sometimes hard to connect with, but we see SMEs dominate so much of the economic growth in emerging markets it would be foolish not to consider some strategy of engagement.

I’m excited about the hybrid model of social enterprises because they’re about building both social and economic opportunities.  Finally tech enterprise – there are a lot of technologists out there building to solve problems, but who might not realize they’re also building a business.  Many are associated with universities and labs.  Better partnership or collaboration could lead to even more wonderful applications of their work.  A lot of people are talking about building the business, but there are pockets of people who just like building the technology and solving problems.

The point is that there are new and evolving business and marketing models that parallel technology and enterprise innovation, all happening outside western markets. Tap into these transformation and you’ll grow your opportunities, significantly.

Check out Stephen’s presentation to the Silicon Valley Microfinance Network on the SVMN website.

[via SoCap2009]