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					FEDERAL RESERVE SYSTEM                     THE ASPEN INSTITUTE

                    Achieving

          Sustainability,
             Scale, and
             Impact
in Community Development Finance

               Kirsten Moy and Greg Ratliff

                     The Aspen Institute
FEDERAL RESERVE SYSTEM                                  THE ASPEN INSTITUTE

                                 Supporters
          Conference Partner: The Federal Reserve System
          Research Partners
               The F.B. Heron Foundation
               GE Consumer Finance - Americas
               Deutsche Bank

                  GE Consumer Finance
                  Americas


          Past Supporters
               The John D. and Catherine T. MacArthur Foundation
               The Fannie Mae Foundation
          Forum Participants - you!


                                Thank you!
FEDERAL RESERVE SYSTEM                          THE ASPEN INSTITUTE

            Aspen Institute
     Economic Opportunities Program
          Practice Areas
         Workforce Development
         Microenterprise
         Access to Capital and Credit


          Goals
         Connect the poor and underemployed to the mainstream economy

         Facilitate learning

         Applied research to stimulate dialog and action
FEDERAL RESERVE SYSTEM                   THE ASPEN INSTITUTE

                        Contents

      Initial conception and framework for research
      Lessons across the case studies
      Three models for understanding scale
      Balancing scale and impact
      SRI Investors
      Objectives for the conference
FEDERAL RESERVE SYSTEM   THE ASPEN INSTITUTE
FEDERAL RESERVE SYSTEM    THE ASPEN INSTITUTE




                  Scale
FEDERAL RESERVE SYSTEM                  THE ASPEN INSTITUTE

                     Why Pursue Scale?
    To reach more people
    To provide access to credit to as many low income people
     and communities as possible on a permanent and
     sustainable basis
    To tap into economies of scale
    To become more sustainable
    To have greater impact in low income communities
FEDERAL RESERVE SYSTEM                    THE ASPEN INSTITUTE
       Model for Taking an Innovation to Scale


               Experiment-          Early
                  ation           Replication                Best
     Idea
                 (Innovation       (Innovation             Practice
                & Refinement)     & Refinement)


                       the fantasy short cut




                                                        Innovation
                                                         at Scale!



                                                  Source: Alan Okagaki & Associates
FEDERAL RESERVE SYSTEM                      THE ASPEN INSTITUTE
   A Better Model for Taking an Innovation to Scale


                   Experiment-        Early
                      ation         Replication                Best
      Idea
                     (Innovation     (Innovation             Practice
                    & Refinement)   & Refinement)




                   Infrastructure   Wide Scale            Innovation
 Standardization
                      Building       Roll Out              at Scale!



                                                    Source: Alan Okagaki & Associates
FEDERAL RESERVE SYSTEM                      THE ASPEN INSTITUTE




                   Experiment-        Early
                      ation         Replication                Best
      Idea
                     (Innovation     (Innovation             Practice
                    & Refinement)   & Refinement)



       the keys to scale

                   Infrastructure   Wide Scale        New Innovation
 Standardization
                      Building       Roll Out           at Scale!



                                                    Source: Alan Okagaki & Associates
FEDERAL RESERVE SYSTEM           THE ASPEN INSTITUTE



      Case             Banknorth Group
                          7-11 VCOM
    Studies                   Visa
 Conducted             Ace Cash Express
                         Allied Capital
                    The Reinvestment Fund
                     Fannie Mae Self Help
                           ACCION
                              Dell
                    Unified Western Grocers
FEDERAL RESERVE SYSTEM               THE ASPEN INSTITUTE

                   Selection Criteria

  Case           They are industry leaders
Studies          They successfully scaled up
                 We had personal contact who would
                  provide entrée and high quality
                  information
                 Emphasis on financial service delivery
                 Nonprofit, for profi,t and cooperative
                  models
                 Could serve as a model for CDFIs
FEDERAL RESERVE SYSTEM                      THE ASPEN INSTITUTE
Case Studies

                       Banknorth Group
       A bank that grew 10-fold in 10 years and maintained its
                           community focus.
FEDERAL RESERVE SYSTEM                                THE ASPEN INSTITUTE
Case Studies

                           7-11 Vcom Expansion
      Rollout of a new financial services delivery system utilizing technology.
FEDERAL RESERVE SYSTEM                            THE ASPEN INSTITUTE
Case Studies

                            VISA Credit Card
 The world’s most widely accepted payment system for consumers and businesses.
FEDERAL RESERVE SYSTEM                              THE ASPEN INSTITUTE
Case Studies

                            ACE Cash Express
      Growth of a nonbank financial institution with a broad retail presence.
FEDERAL RESERVE SYSTEM                               THE ASPEN INSTITUTE
Case Studies

                          Allied Capital and BLX
 A diversified financial services company focusing on small & emerging businesses.
FEDERAL RESERVE SYSTEM                            THE ASPEN INSTITUTE
Case Studies

                       The Reinvestment Fund
    Evolution of a CDFI into a regional community development organization.
FEDERAL RESERVE SYSTEM                           THE ASPEN INSTITUTE
Case Studies

                                Self-Help

        Creating a secondary market for HLTV single family mortgages.
FEDERAL RESERVE SYSTEM                             THE ASPEN INSTITUTE
Case Studies

        ACCION International/ACCION USA Retooling
   Evolution of one of the world’s premier microfinance organizations/network.
FEDERAL RESERVE SYSTEM                           THE ASPEN INSTITUTE
Case Studies

                            Dell Computer
               Built to order computer manufacturer and supplier.
FEDERAL RESERVE SYSTEM                              THE ASPEN INSTITUTE
Case Studies

                        Unified Western Grocers
     A California-based cooperative working to grow the size, sophistication,
                          and earnings of its members.
FEDERAL RESERVE SYSTEM   THE ASPEN INSTITUTE




            Lessons
            from the
              Case
             Studies
FEDERAL RESERVE SYSTEM                          THE ASPEN INSTITUTE

                              Lessons
1.   Profitability was the primary driver of product development. The
     ability to produce a diversified yet complementary set of products
     was critical to achieving scale.
FEDERAL RESERVE SYSTEM                          THE ASPEN INSTITUTE

                              Lessons
1.   Profitability was the primary driver of product development. The
     ability to produce a diversified yet complementary set of products
     was critical to achieving scale.
2.   Demand for services or a clear market gap were the primary drivers in
     determining which products and services to scale up.
FEDERAL RESERVE SYSTEM                          THE ASPEN INSTITUTE

                              Lessons
1.   Profitability was the primary driver of product development. The
     ability to produce a diversified yet complementary set of products
     was critical to achieving scale.
2.   Demand for services or a clear market gap were the primary drivers in
     determining which products and services to scale up.
3.   Geographic expansion was central to generating sufficient volume of
     transactions to reach scale.
FEDERAL RESERVE SYSTEM                            THE ASPEN INSTITUTE

                               Lessons
1.   Profitability was the primary driver of product development. The
     ability to produce a diversified yet complementary set of products
     was critical to achieving scale.
2.   Demand for services or a clear market gap were the primary drivers in
     determining which products and services to scale up.
3.   Geographic expansion was central to generating sufficient volume of
     transactions to reach scale.
4.   Infrastructure investments were crucial to growth. Investments often
     increased integration of operations and facilitated product development.
FEDERAL RESERVE SYSTEM                            THE ASPEN INSTITUTE

                               Lessons
1.   Profitability was the primary driver of product development. The
     ability to produce a diversified yet complementary set of products
     was critical to achieving scale.
2.   Demand for services or a clear market gap were the primary drivers in
     determining which products and services to scale up.
3.   Geographic expansion was central to generating sufficient volume of
     transactions to reach scale.
4.   Infrastructure investments were crucial to growth. Investments often
     increased integration of operations and facilitated product development.
5.   Technology investments often led to increased efficiency and cost
     savings.
FEDERAL RESERVE SYSTEM                        THE ASPEN INSTITUTE

                            Lessons
6.   Companies partnered to gain specific knowledge or expertise, or
     to access a needed component of the product or service.
FEDERAL RESERVE SYSTEM                         THE ASPEN INSTITUTE

                             Lessons
6.   Companies partnered to gain specific knowledge or expertise, or
     to access a needed component of the product or service.
7.   Capital was raised several times; the volume of capital raised was
     tens of millions in every instance.
FEDERAL RESERVE SYSTEM                         THE ASPEN INSTITUTE

                             Lessons
6.   Companies partnered to gain specific knowledge or expertise, or
     to access a needed component of the product or service.
7.   Capital was raised several times; the volume of capital raised was
     tens of millions in every instance.
8.   Several organizations changed their legal structure to
     accommodate growth.
FEDERAL RESERVE SYSTEM                         THE ASPEN INSTITUTE

                             Lessons
6.   Companies partnered to gain specific knowledge or expertise, or
     to access a needed component of the product or service.
7.   Capital was raised several times; the volume of capital raised was
     tens of millions in every instance.
8.   Several organizations changed their legal structure to
     accommodate growth.
9.   Regulatory changes often supported or enabled growth and
     expansion.
FEDERAL RESERVE SYSTEM                        THE ASPEN INSTITUTE

                             Lessons
6. Companies partnered to gain specific knowledge or expertise, or
    to access a needed component of the product or service.
7. Capital was raised several times; the volume of capital raised was
    tens of millions in every instance.
8. Several organizations changed their legal structure to
    accommodate growth.
9. Regulatory changes often supported or enabled growth and
    expansion.
10. Different management skills were needed at different points in
    the growth process.
FEDERAL RESERVE SYSTEM                        THE ASPEN INSTITUTE

                              Lessons
6. Companies partnered to gain specific knowledge or expertise, or
    to access a needed component of the product or service.
7. Capital was raised several times; the volume of capital raised was
    tens of millions in every instance.
8. Several organizations changed their legal structure to
    accommodate growth.
9. Regulatory changes often supported or enabled growth and
    expansion.
10. Different management skills were needed at different points in
    the growth process.
11. The ability to adapt to changing market conditions allowed
      organizations to continue growing.
FEDERAL RESERVE SYSTEM                                        THE ASPEN INSTITUTE

                             Model: Product Level

 Research         New Idea         Experiment         Pilot        Evaluate
                                           no go                       no go




                                                                    Doesn’t
                                                                     Work
                                                                       no go
Development       Refine                Pilot       Evaluate
                Standardize            Roll Out      System
                                                                   Completed
                             iterate                               Prototype




Full Roll-Out                                                                  •   Profitability
                     Build                          Evaluate                   •   ROI

                Infrastructure
                                   Full Roll Out
                                                   Profitability   Scale!      •
                                                                               •
                                                                                   Market Share
                                                                                   Brand Growth
                                                          no go                •   Other
FEDERAL RESERVE SYSTEM                                       THE ASPEN INSTITUTE

                   Model at Product Level Suggests

   Going to scale is not a linear, but an iterative process comprised of idea
    development/standardization/ infrastructure building/testing and
    evaluation at every stage.
   The process takes far longer and cost far more than any of us would like
    to think or can support.
   It is likely that many (most?) developing products will be rejected along
    the way.
   A full rollout cannot be staged until there is a perfected prototype –
    something we rarely achieve in the CD world.
   Implicit in the model is strong product demand (i.e., broad acceptance or
    desire for a product), if scale is the ultimate goal.
The private sector does not think in terms of “building scale,” but of reaching target levels of
   profitability, geography, market share, brand dominance, and they have far more
   resources to do so.
FEDERAL RESERVE SYSTEM                                                  THE ASPEN INSTITUTE

                          Model: Organization Level
 Driver:
Business
Concept
& Mission                                                                             •   Optimal Scale
                                                                                      •   Merge/Consolidate
                                                                                      •   Outsource
                                                                                      •   Restructure
              Early                                                                   •   Bankruptcy / Sell-off
 Start Up                  Evaluate        Reinvent       Expand        Evaluate          /Terminate
            Experiment



       Entrepreneurial Stage                     Growth & Expansion*                         Maturity

                                                      Standardization
                                                       Infrastructure
                                                       Capitalization




* Growth and Expansion (reinvention, expansion and evaluation) may occur along multiple product lines,
in growing or expanding markets or with greater penetration of a single product within the existing market.
FEDERAL RESERVE SYSTEM                              THE ASPEN INSTITUTE
    At the Organizational Level, the Model Suggests a Different Set of Findings


   Organizational scale cannot be achieved without one or more
    products/services that go to scale.
   Scale cannot occur w/o sufficient geographic or program scope for an
    organization to expand.
   Scale cannot be achieved w/o sustainability.
   Key investments in infrastructure can catapult an organization to a new
    level of activity and impact.
   Need for new organizational structures and new partnerships as the
    organization grows.
   Reaching scale can take a long time, a period possibly better measured
    in decades than in years.
   Scale is a characteristic associated with networks (or an industry), not
    an individual organization.
FEDERAL RESERVE SYSTEM                             THE ASPEN INSTITUTE

                     Basic Model of Key Players
Industry leaders play a powerful
role in setting standards and
                                    INVESTORS
creating standardization in the      & FUNDERS
industry.




                                                        TRADE ASSOCIATION
                                     INDUSTRY
        CUSTOMERS                                           INDUSTRY
                                      MEMBERS             INTERMEDIARY




                                   POLICY MAKERS
                                   & REGULATORS
FEDERAL RESERVE SYSTEM                       THE ASPEN INSTITUTE

Industry Structure 1: The Corporation -Customer Dynamic

     Industry Structure 1
                              INVESTORS
                               & FUNDERS




                                                  TRADE ASSOCIATION
                               INDUSTRY
       CUSTOMERS                                      INDUSTRY
                                MEMBERS             INTERMEDIARY




In most industries, direct
interaction between the
customer and the             POLICY MAKERS
industry member is a         & REGULATORS

primary factor.
FEDERAL RESERVE SYSTEM                     THE ASPEN INSTITUTE

    Industry Structure 2: The Small Players Dynamic


                            INVESTORS
                             & FUNDERS




    Industry Structure 2

                                                TRADE ASSOCIATION
                             INDUSTRY
      CUSTOMERS                                     INDUSTRY
                              MEMBERS             INTERMEDIARY




                           POLICY MAKERS
                           & REGULATORS
FEDERAL RESERVE SYSTEM                        THE ASPEN INSTITUTE

       In industries dominated by smaller players …
  … industry networks and other forms of affiliation become
  more important as agents for successful scale and growth.
                               INVESTORS
        Access to common infrastructure can enable
                                & FUNDERS

           networks of organizations to work cooperatively to
           deliver greater volumes of product with increased
           efficiency
    Industry Structure 2

                              development effortsTRADE ASSOCIATION
          Strong training and INDUSTRY             are
          necessary for growing management talent INDUSTRY
      CUSTOMERS
                               MEMBERS              INTERMEDIARY


         Sufficient industry clout can create a more
          supportive legal, regulatory and policy environment

                              POLICY MAKERS
                              & REGULATORS
FEDERAL RESERVE SYSTEM                            THE ASPEN INSTITUTE

                      Industry Structure 3: CDFI

In the CDFI Industry the most                          Industry Structure 3
direct interactions are between    INVESTORS
                                    & FUNDERS
the funder/investor group and
industry members, as well as
with regulators.


                                                        TRADE ASSOCIATION
                                    INDUSTRY
        CUSTOMERS                                           INDUSTRY
                                     MEMBERS              INTERMEDIARY




This happens because of the
disruptive effect of subsidy.
                                  POLICY MAKERS
                                  & REGULATORS
FEDERAL RESERVE SYSTEM                                                    THE ASPEN INSTITUTE
                                         Achieving Scale
     impact




              Product Innovation              Organizational                     Industry
                                                Innovation                      Innovation
   actions




               Design for scale (e.g.,           Infrastructure                Regulatory policy
                 standardization,                 Technology                  Strategic positioning
                 simplification &                    Capital                Industry intermediaries
                   refinements)                    Partnering                Industry infrastructure
                                                 Management                 New sources of capital
                                          New organizational structures
FEDERAL RESERVE SYSTEM                         THE ASPEN INSTITUTE
              Challenges of CDFI Industry Model
   Overcome the disruptive effect of subsidy and build a stronger
    connection to the customer (the ultimate issue is impact).
   Improve strategic positioning: A clearly defined value-added
    role for CDFIs within the financial services market place that
    builds a strong connection to mainstream institutions.
   The creation of a viable network that can take the industry to
    scale and entails at a minimum:
       Workable governance structure
       Effective industry branding and communications, clout
       Identification of new flexible sources of capital beyond
        traditional government and philanthropic dollars that can
        support growth at each level of development.
FEDERAL RESERVE SYSTEM   THE ASPEN INSTITUTE




          Balancing
         Impact and
            Scale
FEDERAL RESERVE SYSTEM                                 THE ASPEN INSTITUTE

                          Tension of Growth
   There is a fundamental tension between being community or place-based
    and going to scale.
   Scale is not a realistic goal for the majority of place-based development
    finance organizations.
   The CDFI product mix has been developed in response to community need
    not sustainability.
   We have it reversed. Sustainability is the path to scale. Scale is not always
    the path to sustainability.
   Funders and CDFIs have focused mostly at the product or organization level
    where scale in terms of numbers reached defines success.
   A viable business model that incorporates long term profitability will be
    required.
   Investing in Infrastructure is critical to future growth and successful scale.
   CDFIs have limited mechanisms for raising the amount of capital required to
    successfully scale up their operations.
FEDERAL RESERVE SYSTEM                              THE ASPEN INSTITUTE

                      To Grow or Not to Grow?
   We all want greater impact, but is increased product/service
    delivery the only way to have greater impact?
   Pursuing impact apart from direct product/service delivery can free
    us to explore alternative strategies: e.g.,
       Policy and regulation, which can affect far larger numbers of
        individuals or communities than the delivery of a financial product; or
       Becoming sufficiently connected, credible and resourced as an
        organization to affect an issue or a market. Demonstration effect.
FEDERAL RESERVE SYSTEM                     THE ASPEN INSTITUTE
                          Conclusions
 1.   To achieve scale, our thinking must shift from the current
      focus on product innovation to product delivery,
 2.   and from developing products to developing
      organizations and the industry.
 3.   The funding environment must parallel these shifts.
 4.   To achieve scale, we must first achieve sustainability; to
      achieve greater scale, we must optimize our use of
      subsidy.
 5.   Growth is perilous, and growth for growth’s sake can
      reduce the community development impact of our
      initiatives.
FEDERAL RESERVE SYSTEM                             THE ASPEN INSTITUTE
                        Conclusions 2
6.   Any strategies for achieving scale in the CDFI
     industry must address fundamental issues of industry
     structure; two emerging directions for the industry to
     investigate:
        Greater integration (or re-integration) of the field’s activities into
         those of mainstream financial institutions, focusing on the value-
         added and optimal roles of CDFIs,
        Development of stronger and more comprehensive
         infrastructure to support networks of CDFIs that will work
         cooperatively or collectively to deliver products and services to
         significantly larger numbers of people.
7. It’s ultimately about impact, and achieving scale is
     only one way to achieve impact.
FEDERAL RESERVE SYSTEM   THE ASPEN INSTITUTE




      Thoughts for
      SRI Investors
FEDERAL RESERVE SYSTEM              THE ASPEN INSTITUTE

         Capital for Getting to Scale
 Capital requirements for getting to scale increase as
  you move up from product to organization to
  industry levels of analysis.
 Reliance on government or philanthropic funders
  limits the ability of the industry to grow.
 Current amounts of capital are inadequate for scale-
  up and the types of capital available can be
  counterproductive to growth.
 Getting to scale will require products and services
  that provide a rate of return sufficient to attract
  investment capital.
FEDERAL RESERVE SYSTEM                 THE ASPEN INSTITUTE

       SRI Investors: A Critical Source of Capital



   Can we develop new approaches to the
    investment of capital that meet the emerging
    needs of CDFIs and the investment
    standards of socially responsible investors?
FEDERAL RESERVE SYSTEM           THE ASPEN INSTITUTE




 conservatives




   pragmatists
                         chasm
    visionaries

 early adopters
FEDERAL RESERVE SYSTEM             THE ASPEN INSTITUTE
                ….from the characteristics of
    CDFI              target investors.
   Target
Investors

                    … tend to be different …



    CDFI
                         Key characteristics of
 Existing
                         existing investors ….
Investors
                  market
FEDERAL RESERVE SYSTEM     attributes ASPEN INSTITUTE
                                    THE
                           •   Emphasize financial return
    CDFI                   •   Market rate or near market returns
                           •   Larger average investment
   Target                  •   Want mainstream vehicles
Investors                  •   Seek liquidity and prefer rated
                               offerings




    CDFI              • Emphasize social return
 Existing             • Accept below market returns
                      • Make direct investments in small
Investors               amounts
                      • Hold for longer term investments
                      Overview of Investors
 FEDERAL RESERVE SYSTEM                         THE ASPEN INSTITUTE
   Investor Type   Risk          Returns      Sensitive to Structure of
                  Profile        Desired      Social Value Investment
Foundations:
Program Dept.       High     0-10%            Yes        Grant, PRI
Investment Dept.:
   Type I           Low      5-7% (UST+100-   Maybe      AAA/AA Bonds
                             200bp)

   Type II          High     15-20%+          Maybe      Subordinated
                                                         Bonds/Equity
Banks/Insurance:
Community Dept.     Medium   5-10%            Yes        Debt or Equity
Investment Dept.:
   Type I           Low      5-7% (UST+100-   No         AAA/AA Bonds
                             200bp)

   Type II          High     15-30%+          No         Equity or Sub-
                                                         ordinated Bonds
Government:         High     0-10%            Yes        Grants/Loans
FEDERAL RESERVE SYSTEM                                                    THE ASPEN INSTITUTE
       Sources of Borrowed Capital, Shares, and Deposits

                                                          Investor Capital 1          Shares/Deposits
                                                            (loan funds)              (credit unions)

             Individuals                                         3.0%                     71.7%
             Religious Institutions                              5.4%                      2.9%
             Foundations                                        15.0%                      1.0%
             Corporations                                        1.8%                      2.0%
             Financial Institutions                             53.7%                      4.3%
             Government                                         12.8%                      0.5%
             National Intermediaries                             2.9%                      0.2%
             Other                                               5.4%                     17.4%

                  includes borrowed funds and equity equivalent investments; data excludes Self-Help Ventures
  1Investor capital

  Fund because it operates a very large secondary mortgage program unique in the industry.

  Source: NCCA publication “CDFIs Side by Side”
FEDERAL RESERVE SYSTEM                                                              THE ASPEN INSTITUTE




1. Social Investment Forum does not market specific a investment product, their 1% or More in Community Campaign encourages socially
   responsible investors to allocate 1% of total assets to community investing.
FEDERAL RESERVE SYSTEM                         THE ASPEN INSTITUTE

                         Conference Goals
    Introduce a new framework for scale and sustainability for the
     community development finance field
    Discuss new business models and practices with potential for
     promoting scale and sustainability in the field
    Provide a forum where socially responsible investors, bankers,
     community economic development professionals, foundation
     representatives, other funding entities, and those involved in related
     public policy areas can share ideas about the future of the
     CDFI/community development industry
    Encourage future dialogue and action on measuring the social and
     financial returns to investment in community development
     initiatives;
    Explore obstacles and challenges to SRI participation in community
     development investment.
FEDERAL RESERVE SYSTEM                    THE ASPEN INSTITUTE

                       Next Steps

             www.innovationlabs.com/aspen


        Additional research will be published by the
                 Federal Reserve System


                     Conference Series
               January 2006 - San Francisco
                   May 2006 - New York
                     Fall 2006 - Dallas
FEDERAL RESERVE SYSTEM                           THE ASPEN INSTITUTE

                        Achieving

          Sustainability,
             Scale, and
             Impact
 in Community Development Finance
                          Contact Information:
                      Kirsten Moy and Greg Ratliff
           Kirsten.moy@aspeninst.org and Gregratliff6@aol.com

                          The Aspen Institute

				
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