Microfinance and Profits

June 15, 2011

As the business of microfinance matures and takes hold in the United States, two very distinct business models have emerged.

One targets the ultra-poor - inhabitants of the 9 million American households identified by the Federal Deposit Insurance Corporation (FDIC) as unbanked, and at least some of those living in 21 million other households that the FDIC deems to be underbanked.

Another engages individuals, many micro-entrpeneurs who have been squeezed out of traditional borrowing markets by tightened credit standards. Some are underbanked, and/or have thin credit files. Many are from immigrant families. Also, increasing numbers are tradesmen and others among the recently unemployed.

Serving this latter market are any number of financial services companies that offer the accessibility of check cashing facilities combined with the savvy of 21st Century banks. Companies like Progreso Financiero, OUR Microlending, Prosper.com, and even Sam's Club, the warehouse chain owned by the mega-retailer WalMart.

The FIELD program at the Aspen Institute has studied this trend and recently produced a report - A Newly Crowded Marketplace: How For-profit Lenders are Serving Microentrpreneurs - that examines this trend, the pros and cons of different business models employed, and broader market implications. It also provides a look inside the operations of leading for-profit micro-lenders.

A few highlights of the report follow:

• Nearly two out of three lenders surveyed following Q1 2010 reported increased loan demand.
• Yet, just 39% reported increased loan originations during the same period.
• "Old school" nonbank lenders - such as merchant cash advance, factoring and purchase order factoring - also saw an uptick in business
• For the most part, loan pricing is markedly higher than at not-for-profit MFIs
• Many for-profit providers offer an array of financial services and educational services

Copies of A Newly Crowded Marketplace: How For-Profit Lenders are Serving Microentrepreneurs can be downloaded here.

FIELD will hold a Webinar on Tuesday June 21 that explores the landscape of for-profit microlenders. Check out the FIELD Web site for more information and/to register.

50 million American households are considered "unbanked" - they have no relationships with federally insured financial institutions