By: William Girardo
In November 2015, the CDFI Fund
announced that the Association for Enterprise Opportunity (AEO) had won its 2015 Innovation Challenge. The CDFI Fund created the Innovation Challenge to seek new ways to expand or increase investments in underserved communities across the country. AEO won the Challenge with a proposal to develop a screening and assessment tool to connect small businesses searching for loans with a CDFI that may be able to meet their needs when a bank or other lenders cannot.
The Innovation Challenge directly supports the first of the
CDFI Fund’s Guiding Principles: “Increase the impact of the CDFI Fund network by supporting the growth, reach, and performance of CDFIs and CDEs.” AEO proposed to design, build, and demonstrate a web-based solution that allows financial institutions and other lenders to direct small business credit applicants they can’t serve to CDFIs that can provide safe and affordable loans and financial education opportunities. If successful, the solution may expand the reach of CDFIs and provide more small businesses with a path to capital.
The one-year initiative is structured in three phases: solution design, proof of concept, and lessons learned. To date, AEO has completed the solution design phase and is moving into the proof of concept phase. More than a dozen banks, non-bank lenders, and industry experts shared insights in the design phase about their processes and what “pain points” need to be solved to allow AEO’s solution to work for them. Banks and non-bank lenders need the solution to avoid “double-declines,” wherein clients they refer to another lender are declined again: it’s an experience that frustrates clients and can affect how they feel about the lender. CDFIs need the solution to lower their costs of customer acquisition and support the scaling up of their own application processing: it reflects their goals of better meeting the needs of different customer segments in their target markets. All stakeholders expressed a need for more and better data to make investment and resource allocation decisions.
Now, as the project moves into the proof of concept phase, the AEO team has started working with four “early adopter” CDFIs to test the viability of a shared-services platform for CDFIs and other financial institutions. The participating CDFIs are Access to Capital for Entrepreneurs (Georgia), the Intersect Fund (New Jersey), Justine PETERSEN (Missouri), and LIFT Fund (Texas). The goal is to develop a platform that could be adopted or replicated as an industry-standard solution.
At the end of the project, AEO will share lessons-learned to strengthen future efforts to meet needs in low-wealth communities, mobilize investment, and make better use of scarce resources. If the developed platform proves to be viable, it will be made available to any certified CDFI who wants to use it, expanding access to capital for small businesses operating in economically distressed areas.
The CDFI Fund will provide another update on the Innovation Challenge later this year. In the meantime, follow along with AEO’s efforts (which they have named Connecting Underserved Entrepreneurs, or Project CUE) by reading their
William Girardo is a Portfolio Manager for the CDFI Fund’s Community Development Financial Institutions Program and Native Initiatives.