Microfinance, long an international specialty, is starting to expand its sliver of the U.S. lending pie — and at the same time provide a scoop of opportunity for traditional banking institutions here that cannot afford to offer it directly.
This year, as mainstream sources of consumer and small-business credit have continued to contract, microfinance specialists like Accion Texas, Kiva Microfunds and Grameen America Inc. have entered or expanded their operations in the U.S. market. In doing so, they have opened up another point of contact between old-school depositories and the underserved consumers those companies cannot always reach on their own, or can no longer afford to keep.
"There's a long history of banks trying to understand how to make money in the underbanked or underserved community, and they've historically failed miserably at it. Perhaps microfinance is a road in," said Philip J. Philliou, a consultant and former payments executive who ran Grameen America when it first started operating.
Accion Texas, the nation's largest microlender, expanded its direct operations into Louisiana in March, to help the state's small businesses recover from the aftermath of Hurricane Katrina, and said Friday that it will start brokering deals between Citigroup Inc. and the partner organizations that use Accion Texas' back-room operations in seven other states. As a result, Citi has agreed to expand its original commitment to buy up to $30 million worth of loans from the San Antonio nonprofit over five years.
Smaller organizations with international pedigrees have also recently turned a greater focus to the United States: this month Kiva, an online microlending platform, started offering person-to-person loans from Opportunity Fund and Accion USA to U.S. consumers. And Grameen America, the microlender modeled after Grameen Bank of Bangladesh, which, along with its founder, Muhammad Yunus, won the Nobel Peace Prize in 2006, said in May that it intended to add a second branch, in Omaha, to its New York headquarters.
"Certainly when I'm in the United States, we have many, many more institutions asking about these models," said Robert A. Annibale, Citi's global director of microfinance. "I hope that many others join in and use the footprints that these institutions have. … There's a lot of room for the banking sector to work with the community development financial institutions, who can help in many ways to help direct financial services to groups who aren't getting them today."
Janie Barrera, the president and chief executive officer of Accion Texas, said that as a result of the financial crisis, applications for its small-business loans have increased almost 37% from a year earlier, to 393, for the first 26 days of this month. And the pool of potential applicants has expanded as traditional lenders have pulled back on credit: "The average credit score of one of our customers is 575, but the customers who are walking in the doors now have scores of 700," she said. "They're in need of working capital, and the institutions aren't willing as much now to provide that working capital. We are seeing now that we have a different clientele and our underwriting has to be a little different."
The small-business loans offered by Accion Texas range from $500 to $100,000, though it caps some loans for entrepreneurs with no credit history at $500; for Grameen America first-time loans are capped at $1500, with no minimum. Because the amounts are so small and because they often require intensive, "high touch" customer interaction, sustainability — let alone profitability — is hard to attain; Accion Texas, for example, is only 60% self-sufficient, after 15 years in the business.
As a result, few traditional banking companies that are not credit unions offer microloans directly in the United States, and bankers and industry experts say that day may never arrive. But they point to the funding and referral programs many banks, including Citi and Capital One Financial Corp., have set up with microfinance specialists as evidence that banks can work with these partners to acquire and retain underbanked consumers.
"The challenge for microfinance is to emulate the best practices of payday lenders in a business model that does not demand profit maximization," Philliou said.
In U.S. microfinance, banks have taken auxiliary roles. Capital One, for example, is another large institution that has funded Accion Texas; Barrera said that a grant from the McLean, Va., institution allowed it to open the New Orleans office.
And last year Capital One referred 500 to 700 customers who did not qualify for a direct loan to microfinance specialists through its Second Look program. Daniel Delehanty, a vice president and community development officer for the company, said in an interview Thursday that the program's goals were both customer retention and, sometimes, eventual acquisition.
"If it's an existing customer seeking small-business financing and we're unable to provide a loan, what we're trying to do is to add value to that customer" by having a branch refer the customer to an alternative lender, he said. "It's good community development, it's helping to spur access to credit, and it really is a 'win-win.' … It's trying to piece together a sort of broad continuum of services, where banks have to be involved."
Citi is another traditional banking institution that continues to play a significant supporting role in U.S. microfinance. Last August, it took what observers called an "exciting" and "amazing" step for the industry by agreeing to purchase up to $30 million worth of loans over a five-year period from Accion Texas. Now, Barrera said Friday, Citi has agreed to expand that commitment.
Accion Texas' board decided last week "to become a broker for Citi deals for organizations that use our back-room operations," including the six partners that operate in seven other states, she said. "Citi has agreed that since they are using our underwriting, we are going to be able to buy a loan … and then we will sell it to Citi under our agreement, so now the reach will be more than just Texas and Louisiana," according to Barrera. "Anyone who now or in the future uses our back-room operations will have access to this fund."
(She said Citi has "verbally stated that they will grow" their $30 million commitment but did not know the new amount. A Citi spokesman said Friday that it was "a bit premature to announce anything yet, but we are in discussion with Accion, which has proven to be a great partner.")
Philliou said by e-mail that Citi's expanded commitment is a "significant" step for it and Accion Texas, "but more importantly it demonstrates how traditional banking and microfinance can work together," he said.
"Citi's commitment to Accion is precisely what is needed to create a scalable and sustainable business model for lending to poor Americans," and the arrangement "is definitely something that should be monitored by other U.S. financial institutions."
Even as it expands its operations, Accion Texas' ultimate goal is to get its borrowers "graduated" into the mainstream banking system.
"Our customers take out two to three loans, it's 18, 24, 36 months that they're with us, but all the time we're reporting back to the credit bureaus, so over time their credit scores are going up and they're keeping financials now, which are the two requirements that banks are looking for … even graduating to a line of credit for the banks is a big success for us," Barrera said in Texas in early June during a joint interview with Annibale. "Obviously at a bank, they may be pricing differently, hopefully lower than ours," because Accion does need to use "risk-based pricing, so as the risk gets lower and the banks take you on, then we encourage the customer to go there."
But Citi's deal does not provide for it to directly acquire Accion Texas' "graduated" customers. "We cannot say to a customer, 'Go to Citi,' " Barrera said. "It is the customer's decision which banking financial institution they'll be using."
Annibale said in the joint interview that "with the way we work together, we don't have any cherry-picking" of Accion Texas' borrowers, because "we have done real due diligence on the whole portfolio."
The situation is slightly different with Grameen America, which requires its borrowers to set up a savings account with Citi. (Observers said that requiring borrowers to start savings or "individual development accounts" with a partner financial institution is a common requirement from microfinance institutions. Accion Texas does not require savings accounts or recommend a specific financial institution, but does require that the borrower have a bank account.)
Leslie Kane, Grameen America's vice president of strategy and finance, said at a panel discussion in New York this month that Citi has "agreed to not charge us any fees, and agreed to give a no-fee ATM card to all of our borrowers, which has proven to be very helpful because it immediately cuts out all of the check cashers" that many underbanked consumers rely on. "And they've been very helpful at restricting their solicitation of other products at Citigroup," she added, to some laughter in the crowded room.
Annibale would not discuss the specific pricing of Grameen America's products, but said that for its borrowers, "I think what's important for the person is not just [introducing them to] Citi, but building their credit history and giving them tools to approach a wider spectrum of financial products and services as they establish a financial history and become more knowledgeable" about the banking system. Eventually, "they will have an ability to choose," he said. "I hope as they grow that they'll think of us, but our intent was not just to reach new clients, it was about how do you reach a client base that you don't know very well and that may need more than just financial services?"
The partnership model, which Citi has also used abroad, makes the most sense when trying to reach the underbanked, he said. "It's still about bringing financial services to people who don't often conform to standard products or risk today," he said. "There are so many people who need the access that microfinance can give them, and then connecting providers can help bring scale to the sector. I just feel that collaboration between the Citi-type institutions and the microfinance institutions may help to ensure we're bringing as appropriate a product as possible to the client."