Market-Based Community Economic Development

Presented toPresented to

J. McDonald Williams InstituteJ. McDonald Williams InstituteBy By

Robert Weissbourd and Riccardo BodiniRobert Weissbourd and Riccardo Bodini

RW Ventures, LLCRW Ventures, LLC

October 23October 23rdrd, 2006, 2006

CONTENTSCONTENTS

Applying the Framework: Retail DevelopmentApplying the Framework: Retail Development

Market-Based Community Economic DevelopmentMarket-Based Community Economic Development

Applying the Framework: Urban Financial MarketsApplying the Framework: Urban Financial Markets

DiscussionDiscussion

Origins: From “Equity” to … “Equity”

Putting the Putting the EconomicsEconomics in Economic Development in Economic Development

Civil RightsCivil Rights

EmpowermentEmpowerment

Economic Development: Economic Development: AssetsAssets

Economic Development: Economic Development: MarketsMarkets

Why Markets?

• To address poverty, create wealth

• Wealth is created by investing in assets

• The economic mechanism for investing in assets is the market

• To create wealth in low income communities, expand market activities to the assets of those communities

Market Failure inLower Income Communities

• Employment networks• Entrepreneurial opportunities• Business, real estate investment• Expanded products and services• Competitive, healthy communities

• Distressed neighborhoods have undervalued assets, reflecting lack of specialized market Distressed neighborhoods have undervalued assets, reflecting lack of specialized market intelligence and poor economic networksintelligence and poor economic networks

• Investment is function of profitability, risk and transaction costsInvestment is function of profitability, risk and transaction costs• ““Seeing,” measuring, access Seeing,” measuring, access Valuing Valuing Market Activity and Opportunity Market Activity and Opportunity

• Undervalued, Undervalued, underutilized assetsunderutilized assets

PovertyPoverty ProductivityProductivity

ConnectednessConnectedness

IsolationIsolation

Overall Framework:Enhancing Markets to Include LICs

Goal:Goal:Align Market and CED Align Market and CED InterestsInterests

Strategy:Strategy:• Analyze MarketAnalyze Market• Target Market ComponentTarget Market Component• Identify Change LeversIdentify Change Levers

Products and Activities:Products and Activities: Choose operating activities Choose operating activities to move leversto move levers

Set Success Metrics; Evaluate

Progress

Set Success Metrics; Evaluate

Progress

Community Economic

Development Goals

Community Economic

Development Goals

Is There A Market Solution?

Is There A Market Solution?

Key Levers for Affecting Market

Behavior

Key Levers for Affecting Market

Behavior

Choose and Implement CED

Strategy

Choose and Implement CED

Strategy

Goals: Aligning Markets and Development

Low AlignmentLow Alignment

High AlignmentHigh Alignment

Market Market InterventionIntervention

Market solution Market solution possible if possible if market market operations and operations and environment environment changed changed through public through public policy and policy and advocacyadvocacy

Market Market RedefiningRedefining

Market solution Market solution possible if possible if market market operations and operations and market market environment environment changed changed through private through private activitiesactivities

Market RefiningMarket Refining

Market solution Market solution possible with possible with new information, new information, products or products or networksnetworks

Pure MarketPure Market

Market solution Market solution possible; market possible; market already already generates CED generates CED outcomesoutcomes

Non-MarketNon-Market

No market No market solution; market solution; market is not the is not the appropriate appropriate channelchannel

Market InterestsMarket Interests

CED GoalsCED Goals

Adapted from Kahane, Adapted from Kahane, Weissbourd and WeiserWeissbourd and Weiser

Goals: Aligning Markets and Development

Low AlignmentLow Alignment

High AlignmentHigh Alignment

Market Market InterventionIntervention

Market solution Market solution possible if possible if market market operations and operations and environment environment changed changed through public through public policy and policy and advocacyadvocacy

Market Market RedefiningRedefining

Market solution Market solution possible if possible if market market operations and operations and market market environment environment changed changed through private through private activitiesactivities

Market RefiningMarket Refining

Market solution Market solution possible with possible with new information, new information, products or products or networksnetworks

Pure MarketPure Market

Market solution Market solution possible; market possible; market already already generates CED generates CED outcomesoutcomes

Non-MarketNon-Market

No market No market solution; market solution; market is not the is not the appropriate appropriate channelchannel

Market InterestsMarket Interests

CED GoalsCED Goals

Adapted from Kahane, Adapted from Kahane, Weissbourd and WeiserWeissbourd and Weiser

This step helps determine whether a market based development This step helps determine whether a market based development strategy makes sense, and begins analysis of what level of market strategy makes sense, and begins analysis of what level of market activity to focus on…activity to focus on…

Make Market Make Market WorkWork

(Addressing (Addressing Internal Internal Imperfections)Imperfections)Change Market Change Market

ParametersParameters

(Using Market (Using Market Mechanisms)Mechanisms)

Change Market Change Market ParametersParameters

(Using Non-(Using Non-market market Mechanisms)Mechanisms)

Vital Work –Vital Work –

but not CII!but not CII!

Market Works:Market Works:

Company Company profits while profits while providing CED providing CED impact.impact.

Other ExogenousOther ExogenousInfluences:Influences:

InfrastructureInfrastructureFactors/ResourcesFactors/Resources

TechnologyTechnologyTastesTastes

Institutional Context:Institutional Context:

Enabling LawsEnabling LawsPrescriptive RegulationPrescriptive Regulation

Entry BarriersEntry Barriers

Strategies: Identifying Key Levels and Levers of Market Activity

ExchangeExchange

ProductionProduction ConsumptionConsumption

Level: Market EnvironmentLevel: Market Environment

ProductionProductionFunctionsFunctions

Levers:Levers:

ProductivityProductivityCostsCosts

ExchangeExchange

Levers:Levers:

Transaction Costs:Transaction Costs:Finding costsFinding costs

Measurement costsMeasurement costs

ExchangeExchangeFunctionsFunctions

Levers:Levers:

TasteTasteIncomeIncome

ConsumptionConsumptionFunctionsFunctions

Strategies: Identifying Key Levels and Levers of Market Activity

Level: Market OperationsLevel: Market Operations

Information Resources are the Modern Currency of Wealth Creation

• Who gets seen and servedWho gets seen and served -- --specialized market knowledge & specialized market knowledge & customer accesscustomer access

• Who gets employedWho gets employed -- employment -- employment networksnetworks

• What goods and services are What goods and services are producedproduced – product and process – product and process knowledge and controls, flexible knowledge and controls, flexible customization, financial risk and customization, financial risk and transaction costtransaction cost

• Value CreationValue Creation -- Fed Ex (tracking -- Fed Ex (tracking system); Sabre (reservations system); Sabre (reservations system)system)

Information Determines:

0%

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200%

300%

400%

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Gross Domestic Product% Growth over last 50 years

Greenspan: Fundamental change in the economy towards intangible assets

• Finance• Retail• Employment

Specialized Specialized products, products,

policypolicy

Specialized Specialized products, products,

policypolicy

More Efficient, More Efficient, Productive, Productive,

InclusiveInclusiveSystemsSystems

More Efficient, More Efficient, Productive, Productive,

InclusiveInclusiveSystemsSystems

Target specific Target specific market levels market levels

and leversand levers

Target specific Target specific market levels market levels

and leversand levers

Identify CED Identify CED goals and goals and relevant relevant marketsmarkets

Identify CED Identify CED goals and goals and relevant relevant marketsmarkets

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• Prod./Exchange Costs• Market Intelligence• Training, Transaction

Costs

• Payroll Cards• Specialized IC Models• Skills Certification,

Coordinated Networks

A Framework for Enhancing MarketsN

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GoalsGoals StrategiesStrategies ActivitiesActivities

Adapted from Living Cities/BrookingsAdapted from Living Cities/Brookings

Example: Retail

• Goal: Commercial Development

• Market Operation: Exchange function

• Strategy: Reduce retailers’ finding costs

• Activity: Develop better data and models to reveal demand and improve market access in IC neighborhoods

• Example: MetroEdge

Bexar County, Median Income

Darker blue shades represent areas with higher median income.

Bexar County, Concentrated Buying Power

Darker blue shades represent areas with higher concentrated spending power ($ per sq. mile).

Spending as a Percent of Income

1995 Consumer Expenditure Survey

252%

140%

109%87% 83%

66%

0%

100%

200%

300%

<$10K $10-20K $20-30K $40-50K $50-70K $70K+

Income Bracket

Income is NOT a GoodIndicator of Spending Power

Source: MetroEdgeSource: MetroEdge

1990 census data

0.00%

4.00%

8.00%

12.00%

16.00%

20.00%

< $

5000

$10

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to $

12,4

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$15

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17,4

99

$20

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22,4

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$25

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27,4

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$30

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32,4

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$35

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$40

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$45

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$50

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$60

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150,

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Household Income Category

% H

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Ca

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CHICAGO

SOUTH SHORE

South Shore median income = $25,100

South Shore has a lower proportion of the very wealthy and a higher proportion of the very poor, but its solid middle

class looks much like anywhere else in the city.

Central Cities are Diverse as well as Dense

Source: MetroEdgeSource: MetroEdge

Retail Float for Bexar County

New indicators were more significant than traditional ones in this location model created to predict sales for a grocery chain.

Validating a New Approach

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35

Percent African American

Percent Home Ownership

Median household Income

Private Co Data

Per Capita Exp on Dry Cleaning

Population Density

Concentrated Buying Power

Percent Using Credit Products

Median Housing Value

Avg Credit Balance

NOT STATISTICALLY SIGNIFICANT

NOT STATISTICALLY SIGNIFICANT

NOT STATISTICALLY SIGNIFICANT

Standardized Coefficients(Beta from LTS Multiple Regression on Sales Per Sq. Ft.)

New Data Predicts Sales Performance For Grocery Store Model

Source: MetroEdgeSource: MetroEdge

Example: Financial Services

• Goals– Enable IC residents to build ownership assets (by expanding

financial and insurance services)

• Market Operation– Production and Exchange functions

• Strategy– Reduce producer’s underwriting costs; improve risk assesment

• Activity– Reduce incompleteness and bias (esp. of credit scores) by

including additional information & improving models

• Example– UIPI, CFSI

Market Snapshot

• As many as 39 million people, including 11 million unregistered immigrants, are unbanked.

• Approximately 44.7 million people are underbanked -19.4% of all households.

• The combined un- and underbanked populations may be 40 million households and $1.1 trillion in income.

• The average underserved household receives $27,500 in income.

• Assuming the average household spends 1% of income on basic financial services, the overall market is $11 billion.

Source: BearingPoint and Visa study (not including last bullet)

• 35-50 million Americans have thin or no credit files.

• Many of these consumers are demonstrating responsible financial behavior but aren’t getting credit for it.– Rent

– Utility bills

• Credit bureaus and lenders are beginning to experiment with alternative data and scoring methods.– Experian

– PRBC

– CircleLending

Process Improvements: Alternative Credit Reporting/Scoring

– Remittances

– Payday loans

When viewed with a “lifetime value” lens, the needs of financial institutions and underbanked customers can be aligned

The Credit PathAlternatives Federal Credit Union

Financial institution viewCustomer view

•Investment products

•High margin lending

•Fee income

•Cheap deposits

•Consumer credit

•Savings

Closing the Gap: Creating Alignment

Market-Based Community Economic Development

Presented toPresented to

J. McDonald Williams InstituteJ. McDonald Williams InstituteBy By

Robert Weissbourd and Riccardo BodiniRobert Weissbourd and Riccardo Bodini

RW Ventures, LLCRW Ventures, LLC

October 23October 23rdrd, 2006, 2006

Example: Insurance Underwriting

• Goals:Goals: Enable IC residents to build ownership assets (e.g. by expanding insurance services)

• Market Operation:Market Operation: Exchange function

• Strategy:Strategy: Reduce producer’s measurement costs

• Activity:Activity: Reduce incompleteness and bias (esp. of credit scores) by including additional information & improving models

• Example:Example: Pattern Recognition Systems

Adjusted Float

Category Demand Float Adjusted Float

Demand Competition

Index*

Ranking Float

Ranking Adjusted

Float

Automotive and Miscellaneous Auto Dealers $274,815,581 $173,984,914 $60,539,235 65% 1 1

Department Stores $141,644,895 $109,663,674 $60,169,736 45% 2 2

Household Appliances, Radio & TV Stores $24,107,052 $19,945,792 $12,268,640 38% 7 3

Furniture & Home Furnishing Stores $22,152,100 $16,685,061 $5,059,416 70% 8 4

Hardware/Building Materials $39,246,300 $25,512,418 $4,292,609 83% 6 5

Apparel $60,813,309 $33,636,343 $1,201,263 96% 4 6

Gasoline Service Stores $76,555,832 $33,305,932 -$1,190,874 100% 5 7

General Merchandise Excl. Department Stores $20,368,519 $8,294,598 -$1,893,699 100% 9 8

Automotive & Home Supply Stores $21,013,710 $3,848,252 -$10,014,285 100% 10 9

Eating and Drinking $135,155,484 $40,390,315 -$11,437,379 100% 3 10

Drug and Proprietary Stores $34,633,528 $969,502 -$21,313,171 100% 11 11

Food Stores $187,368,947 -$39,025,055 -$132,727,262 n/a 12 12

Source: Claritas 2002-2003, MetroEdge Metrics*Near Float as Percentage of Total Float

All Things Considered …

Category Demand Float Adjusted Float

Demand Competition

Index*

Ranking Float

Ranking Adjusted

Float

Automotive and Miscellaneous Auto Dealers

$274,815,581 $173,984,914 $60,539,235 65% 1 1

Department Stores $141,644,895 $109,663,674 $60,169,736 45% 2 2

Household Appliances, Radio & TV Stores

$24,107,052 $19,945,792 $12,268,640 38% 7 3

Furniture & Home Furnishing Stores

$22,152,100 $16,685,061 $5,059,416 70% 8 4

Hardware/Building Materials $39,246,300 $25,512,418 $4,292,609 83% 6 5

Apparel $60,813,309 $33,636,343 $1,201,263 96% 4 6

Gasoline Service Stores $76,555,832 $33,305,932 -$1,190,874 100% 5 7

General Merchandise Excl. Department Stores

$20,368,519 $8,294,598 -$1,893,699 100% 9 8

Automotive & Home Supply Stores

$21,013,710 $3,848,252 -$10,014,285 100% 10 9

Eating and Drinking $135,155,484 $40,390,315 -$11,437,379 100% 3 10

Drug and Proprietary Stores $34,633,528 $969,502 -$21,313,171 100% 11 11

Food Stores $187,368,947 -$39,025,055 -$132,727,262 n/a 12 12

Source: Claritas 2002-2003, MetroEdge Metrics

2. Neighborhood Scan

Targeting Retail Hot SpotsTargeting Retail Hot Spots

3. Targeting Locations

What do we mean by“Enhancing Markets”?

“Changing the conditions of production, exchange or consumption

in ways that allow the expansion of market activity to new people or

places, or to provide new products.”

Hardware Hardware / Building / Building MaterialsMaterials

Float + Float + SitesSites

Hardware Hardware / Building / Building MaterialsMaterials

Float + Float + SitesSites

Looking at renovation activity can also be important for understanding the purchasing power related to home

improvement, furnishings and other household items.

Enhancing Model for National Retailer

Renovation LendingInner City Trade Area, 1995-97

21%

29%

41%

0%

10%

20%

30%

40%

50%

Housing Units Loan Volume ($) Loans (#)

100

110

120

130

140

150

160

170

180

190

1993 1994 1995 1996 1997 1998

Per

mit

s p

er 1

000

Ho

usi

ng

Un

its

Building ActivityPermits

Source: City of Chicago, Shorebank Analysis

The rate of building permit activity in the trade area has been higher than in the city

over the last 6 years, and has seen a general upward trend.

Source: MetroEdgeSource: MetroEdge

CONTENTSCONTENTS

Applying the FrameworkApplying the Framework

Market-Based Community Economic DevelopmentMarket-Based Community Economic Development

The Real Potential of IC Markets: The Shorebank ExperienceThe Real Potential of IC Markets: The Shorebank Experience

DiscussionDiscussion

Market Ranking: Factors

Potential revenue for specific products is simultaneously evaluated including such factors as:

• Relative Urban Growth

• Resident Turnover

• Concentrated Deposits

• Home Ownership

• Consumer Buying Power

• Number of Unbanked Households

Market Assessment

Industry Evolution PresentsOpportunities & Challenges

• Financial services industry is in flux– New players are emerging– Unconventional partnerships are developing– Access points are expanding

• Innovation is occurring but obstacles remain– Information is lacking– Volume is hard to find– Regulatory framework is out of date

Is This the Future?

• From transactions to mortgages

• In-store bank partnerships – some private labeled

• A bank charter on the horizon?

• Increases store visits

• Vcom self-service financial kiosks

• 1,000 stores & counting

• $20 million in R&D costs

• Promotes convenience• Tax prep + wrap-around

financial services

• IRAs, mortgages, checkless accounts

• Bank charter approved in 2006

• Increases loyalty

Non-Bank Companies Seize the Opportunity

Use banks Use banks almost almost

exclusively exclusively (36%)(36%)

Heavy user Heavy user of non-bank of non-bank

services services (64%)(64%)

Banked (70%)Banked (70%)

• 20% receive income in cash• 38% of those with checking accounts pay rent

with cash or by money order• 26% of those who cashed checks did so at a

non-bank

Unbanked (30%)Unbanked (30%)

• 48% have had a checking or savings account in the past

• 26% of those who cashed a check did so at a bank

Half of unbanked households were formerly banked

Two-thirds of banked households also use non-bank services

Having a bank account is not a reliable proxy for customer potential.

Banked/Unbanked Dichotomy Is Incomplete

Formerly Formerly Banked Banked (48%)(48%)

Never Never banked banked (52%)(52%)

The Supply Gap: A Lack of Alignment

Key success factors

Areas of poor alignment

Processes• ID requirements that overstate risk

• ChexSystems, credit checks

• Poorly designed delivery channels

Products• Lack of transparent pricing

• Failure to meet customer liquidity needs

Partnerships• Lack of cultural awareness

• Inappropriate marketing messages

Closing the Gap: Promising Innovations

Key success factors

Innovations

Processes• Second chance programs

• Alternative credit reporting/scoring

• ITIN, matricula acceptance

Products• Prepaid debit cards/checkless checking

• Remittances

• Short-term loans

Partnerships• Check casher partnerships

• Workplace-based outreach

• EITC programs

Process Improvements: Second Chance Accounts

• Most U.S. financial institutions use credit scores and/or databases of customer banking history to determine whether to open an account, effectively barring millions.– These tools are not adequately calibrated for the un/derbanked.

– Financial institutions don’t adequately tailor how they use the tools.

• In the last five years, hundreds of depositories have reengineered the use of these risk management tools and developed alternative pathways for re/entry.– Get Checking: eFunds-sponsored effort that offers a second

chance to customers with ChexSystems problems.

– Result: 10,000 graduates, 95% of whom have maintained accounts in good standing for a year.

Product Improvements: Checkless Checking

• Checking accounts are not well designed to meet the needs of un/derbanked consumers.– Lack of liquidity

– Lack of pricing transparency

• But banks and credit unions are tied to account-based systems, even for their new remittance platforms.

• The rise of debit cards has provided a range of new “checkless” solutions.– Account based

– Prepaid

Partnership Improvements: Tax Time

• Tax time is a potentially powerful moment for reaching underbanked consumers with financial services– In 2002, 70 million tax filers with incomes under $30,000 received

more than $82 billion in federal tax refunds

• Financial institutions and community groups have begun to take advantage of this, usually in partnership with both free and commercial tax preparers– H&R Block and city governments

– JP Morgan Chase and VITA sites

– Alternatives Federal Credit Union

• New refund splitting option (in 2007) raises the stakes