When community development financial institutions were introduced by the U.S. government in 1994, the concept was considered to be innovative (aside from pushback from banks).
Rather than directly investing in community development projects, the government could fund intermediary financial institutions to do the work more efficiently. As community needs changed and adapted, those institutions could change and adapt to meet those needs faster than government could.
But here’s the problem with innovation — it doesn’t stay innovative for very long.
“It’s the classic innovators dilemma, which is, ‘How do you disrupt yourself?'” said Mark Pinsky, CEO of Opportunity Finance Network, a CDFI-heavy members network of investors financing social reform.
New-money investors, Pinsky said, see CDFIs as “old government.” And that’s just not sexy.
“A new generation of investors are going to pave a new path, without a doubt,” he said. “That’s exciting, because you need new ideas, you need new ways of thinking. It’s very clear we’re reaching the end of something and the beginning of something else.”
That’s the takeaway from a new OFN study, CDFI Futures: An Industry At A Crossroads. Penned by former William Penn Foundation President Jeremy Nowak, who now heads up his own consulting firm J Nowak and Associates, the report comes to a few conclusions:
- CDFIs have made steady impact over the past years across the industries they finance, including affordable housing, small business and community facilities.
- The profitability of CDFIs in OFN’s network is comparable to the profitability of traditional banks, though the profitability of banks has been much more volatile.
- The reliability and measurable impact created by CDFIs has a greater appeal than standard risk investments.
That last piece is a sentiment Pinsky said CDFIs should try to capitalize on. Rather than talk about structure and impact metrics, CDFIs need to do a better job of crafting narratives with their data.
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“I think Reinvestment Fund has done an extraordinary job about telling stories with data about the impact they are having. Their PolicyMap platform is a tech tool people can relate to,” he said. “Part of it is the kind of impact they have. They all but invented this notion of food deserts and healthy foods. That connects to people.”
A new generation of investors who want to leverage their capital to make social impact and money — impact investors, in other words — don’t find the term “debt financing” attractive. CDFIs need to figure out how to bridge the gap between them and new capital.
One solution, the report says, might be through fintech, which Nowak writes should be a “wake-up call for CDFIs.”
Fintech should be a wake-up call for CDFIs.
“The increased integration of finance and technology is something all CDFIs have to be cognizant of to build market presence,” he writes.
That interaction between CDFIs and fintech can happen in a few ways: CDFIs can ignore it altogether, build their own tech platforms or distribute existing fintech. Regardless, Nowak writes, most OFN members he interviewed “still largely viewed technology in the manner of most nonprofit organizations: as the background utility for programs and services.”
Another solution might be jumping on the “impact investor” bandwagon and rebrand CDFIs as practitioners of such — which, while some might argue they already are, others might argue they don’t make the same equity investments as venture capitalists.
Still, something has to change.
“We have a brand problem in how people perceive us,” Pinsky said. “That’s a problem because [CDFIs and millennial investors] have a shared interest here trying to find a way to put good capital to work. Frankly, it’s on us to figure out how to make our capital relevant to some of that change.”-30-
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