Ben Magan, CEO of EARN

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 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, 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.

Ben:  Yes!  It’s important to understand microfinance as a true capital market, not just one dimension: debt.

About Kirsten Weiss

Integrating marketing and strategy to develop profitable, demand-driven institutions.