Guest Post, Part 1: Muna Idriss, Coaching Fellow

Muna Idriss is a Financial Coaching Fellow at CGF and a Senior at Brown University studying Africana and Slavic Studies

My Name Is Muna Idriss, And I’m A Smoker

So, I have an interesting quirk. While I’m relatively inattentive to most aspects of my surroundings, there’s one thing I always notice: smoking. I can smell stale smoke on the clothes of smokers, I eye cigarettes in the hands of students as they walk to classes, I see advertisement collages wallpapered on the windows of convenience stores, and I always find a pack or two around on weekend nights when people are having a good time. I notice these things because I am a smoker.

I am also a Financial Coaching Fellow here at Capital Good Fund (CGF), providing one-on-one Financial and Health Coaching to low-income Rhode Islanders.  One of the things I’ve observed is that while what we cover may seem elementary to some, it is revelatory to many, and the strategies we use to work with our clients are so effective that I have yet to meet a fellow Coach who hasn’t personally put at least a few of them into practice.

Cynicism, Get Thee Gone!

I’ve been in the “social change business” for over five (5) years now, and one thing has become eminently clear: it’s hard work. Neither changing lives, nor raising the funds to do so, is easy.  In fact, these two facets of my business represent the greatest challenges to the success of Capital Good Fund in particular, and the social change sector, in general.  Hardly a month goes by without a grant denial, or an instance of a client whose life has taken a turn for the worse, or a failure of a system, policy or procedure.  And because it is so easy for the human mind to focus on the 1 out of 10 negative cases, instead of on the 9 positive ones, a pernicious pall of cynicism can begin to infect the attitudes of those doing this work.

We Musn't Let It Happen!
Unfortunately, I am starting to feel the tug, the allure of negativity and defeatism creeping up on me, which is why I am writing this post to announce to the world that it is time to banish cynicism from our hearts!  We must do so for several reasons:

Sharks in the Water: The Wild West Of Online Payday Lending

From 'Brick-and-Mortar' To 'Zeros and Ones'
Last week we launched a 'micro branch' in Woonsocket, RI out of which we will be offering an alternative to payday lending (you can see photos here and read, listen to or view some of the press we got from the ribbon cutting).  The reason?  In Rhode Island, payday loan branches can charge up to 260%, trapping low-income Rhode Islanders in a debt cycle from which it can take months or even years to escape.  Funded by United Way of Rhode Island, the goal of the new branch is to divert customers from the predatory lenders to us by:

• Offering a loan with a far lower interest rate
• Reporting loan payments to credit bureaus so that borrowers build their credit
• Delivering free financial coaching to further empower clients
• Offer a customer service experience--quick, convenient and friendly--comparable to that of the payday lenders

We are confident that the program will be a success: we did five (5) loans in our first week!  Obviously, we have a ways to go (the volume of payday lending in RI is around $70 million--an astronomical number for a small state), but as a recent NPR story makes clear, the predatory loan problem runs far deeper than the Brick-and-Mortar payday loan presence.

Would You Buy A Share In Capital Good Fund?

Here are are the lessons I've learned after 5 years of running a non-profit, illustrated in a simple formula:

 X(scale + innovation + implementation + luck) = social change, where X = money

Here are those lessons put another way: the math of social change should be algebraic but rather resembles a calculus problem

Why So Hard?

Let's consider the non-profit paradigm.  Non-profit begs for money from individuals, foundations, corporations and government.  Money dribbles in.  Money is predominantly spent on programs, because funders don't like their donations to go toward "overhead" (read that: infrastructure, personnel, marketing, etc.).  Programs result in some good stories that touch the hearstrings of funders.  Money dribbles in again.  Rinse and repeat.

Notice that scale and social impact were left out of that equation.  Now consider the for-profit paradigm. For-profit pitches the investment opportunity to investors.  For-profit knows how much it need to become profitable.  Investors evaluate for-profit for profit potential.  For-profit makes necessary investments: it probably loses money for several years as it builds up back-end systems, refines the business model, markets its products and services and grows its market share.  For-profit seeks new investment as needed.  Some for-profits return profit to investors; others go under.  Those that are profitable continue to grow and either go public or are purchased by a larger company.  

Notice that social impact is left out of the equation.

The Wrong Kind Of Budget?

What if one of our most fundamental assumptions--that the first step to financial stability is the creation of a personal budget--misses the point?  A recent article in FastCompany, 'Poverty Drains Mental Energy,' seems to imply just that.  Let's put it bluntly: being poor is exhausting and stressful.  You have to constantly make difficult decisions: Do I fall behind on the utilities so that I can buy school supplies for my daughter?  Who will babysit her while I spend 2.5 hours traveling by bus to and from an appointment to apply for food stamps?

If you look at the totality of these myriad decisions and trade offs that are made month after month, you start to realize that you are dealing with a budget--only instead of a financial one, it's a balance sheet that accounts for inflows and outflows of mental and physical energy.  And according to Sendhil Mullainathan and Eldar Shafir, this budget is the one that really counts.  In their new book, 'Scarcity: Why Having Too Little Means So Much,' they argue that when thinking about social programs, "We never ask, is this how we want poor people to use their bandwidth?...When we design poverty programs, we recognize that the poor are short on cash...But we do not think of bandwidth as being scarce as well."  At first, this sounds absurd: shouldn't the poor be thankful for the free and low-cost programs we offer them?  But if you step back for a moment, the answer becomes clear: of course they're thankful for them, but that doesn't mean they fit into their budget!

Event At The College Crusade

Through the Financial Coaching Corps (FCC), a program we run in partnership with Rhode Island General Treasurer Gina Raimondo, we are building some powerful partnerships.  As a case in point, we are working with The College Crusade--whose mission is to reduce high school dropout rates and increase educational and career success for low-income urban youth--to provide one-on-one Financial Coaching to the families they serve.  Last night we presented our products and services, as well as an overview of how credit works, to 80 families, of which 25 have signed up for free Coaching!

We are very excited to continue financially empowering low-income families by working with great leaders in the government, non-profit and for-profit sectors.  Special thanks to Lisa Gallant, who manages the FCC, The College Crusade, and to Treasurer Raimondo for having the vision to work with us to create and grow this program.

Treasurer Raimondo speaking to the families

A group photo of paricipating families

Girding For A Fight

As a financial services non-profit, it is natural for us to define our enemy--and more importantly, the enemy of the poor families we serve--as the predatory service companes that, taken together, represent a $100 billion / year industry (and growing).  This industry consists of payday lenders, check cashers, pawn shops, rent-to-own stores, refund anticipation lenders, and auto title lenders.  Before getting to the meat of this post, I'd like to quickly lay out why these companies are so damaging to our clients and the economy as a whole.  Let's take payday lenders, which are, according to a report by the Center for Community Economic Development (CCED), "...small, short-term, very expensive consumer loans...which [average] $375, plus the fee--which is typically in excess of 300% APR...the high fees and short-term lump-sum payment create a debt trap that causes consumer harm."  CCED found that, in 2011 alone, "The payday lending industry had a negative impact of $774 million...resulting in the estimated loss of more than 14,000 jobs.  U.S. households lost an additional $169 million as a result of an increase in Chapter 13 bankruptcies...bringing the total loss to nearly $1 billion."

I could continue to outline why the other services are equally damaging, but you get the point.  Now comes the question: what to do about it?  From our perspective, the answer lies in a three-pronged strategy: legislation to ban abusive practices; financial coaching to obviate the need for the services to begin with; and offering a more afordable and equitable product that out-competes what predatory companies can offer.  On the legislative side, for instance, we are part of a coalition that has been trying--unsuccessfully--in Rhode Island to cap at 36% APR the interest rate that payday lenders can charge (they can currently charge up to 260% APR).  Were that legislation to pass, the consumer would immediately be better protected from the most abusive practices.  On the financial coaching side, we are working one-on-one with hundreds of families to help them budget and build savings so that, when emergencies arise, they don't need a loan at all.  And finally, recognizing that access to credit is essential in our economy, we offer payday loan alternatives of up to $500 at 36% APR, and loans of $501 to $2,000 at 20% APR.