1. Market-Based Community Economic Development Presented to J. McDonald Williams Institute By Robert Weissbourd and Riccardo Bodini RW Ventures, LLC October 23 rd, 2006

2. CONTENTS Applying the Framework: Retail Development Market-Based Community Economic Development Applying the Framework: Urban Financial Markets Discussion

3. Origins: From “Equity” to … “Equity” Putting the Economics in Economic Development Civil Rights Empowerment Economic Development: Assets Economic Development: Markets

4. 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

5. Market Failure in Lower 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 intelligence and poor economic networksDistressed neighborhoods have undervalued assets, reflecting lack of specialized market intelligence and poor economic networks Investment is function of profitability, risk and transaction costsInvestment is function of profitability, risk and transaction costs “Seeing,” measuring, access  Valuing  Market Activity and Opportunity“Seeing,” measuring, access  Valuing  Market Activity and Opportunity Undervalued, underutilized assetsUndervalued, underutilized assetsPovertyProductivity ConnectednessIsolation

6. Overall Framework: Enhancing Markets to Include LICs Goal: Align Market and CED Interests Strategy: Analyze Market Analyze Market Target Market Component Target Market Component Identify Change Levers Identify Change Levers Products and Activities: Choose operating activities to move levers Set Success Metrics; Evaluate Progress Community Economic Development Goals Is There A Market Solution? Key Levers for Affecting Market Behavior Choose and Implement CED Strategy

7. Goals: Aligning Markets and Development Low Alignment High Alignment Market Intervention Market solution possible if market operations and environment changed through public policy and advocacy Market Redefining Market solution possible if market operations and market environment changed through private activities Market Refining Market solution possible with new information, products or networks Pure Market Market solution possible; market already generates CED outcomes Non-Market No market solution; market is not the appropriate channel Market Interests CED Goals Adapted from Kahane, Weissbourd and Weiser

8. Goals: Aligning Markets and Development Low Alignment High Alignment Market Intervention Market solution possible if market operations and environment changed through public policy and advocacy Market Redefining Market solution possible if market operations and market environment changed through private activities Market Refining Market solution possible with new information, products or networks Pure Market Market solution possible; market already generates CED outcomes Non-Market No market solution; market is not the appropriate channel Market Interests CED Goals Adapted from Kahane, Weissbourd and Weiser This step helps determine whether a market based development strategy makes sense, and begins analysis of what level of market activity to focus on… Make Market Work (Addressing Internal Imperfections) Change Market Parameters (Using Market Mechanisms) Change Market Parameters (Using Non- market Mechanisms) Vital Work – but not CII! Market Works: Company profits while providing CED impact.

9. Other Exogenous Influences: InfrastructureFactors/ResourcesTechnologyTastes Institutional Context: Enabling Laws Prescriptive Regulation Entry Barriers Strategies: Identifying Key Levels and Levers of Market Activity Exchange ProductionConsumption Level: Market Environment

10. Production Functions Levers:ProductivityCosts Exchange Levers: Transaction Costs: Finding costs Measurement costs Exchange Functions Levers:TasteIncome Consumption Functions Strategies: Identifying Key Levels and Levers of Market Activity Level: Market Operations

11. Information Resources are the Modern Currency of Wealth Creation Who gets seen and served -- specialized market knowledge & customer accessWho gets seen and served -- specialized market knowledge & customer access Who gets employed -- employment networksWho gets employed -- employment networks What goods and services are produced – product and process knowledge and controls, flexible customization, financial risk and transaction costWhat goods and services are produced – product and process knowledge and controls, flexible customization, financial risk and transaction cost Value Creation -- Fed Ex (tracking system); Sabre (reservations system)Value Creation -- Fed Ex (tracking system); Sabre (reservations system) Information Determines: % Change Gross Domestic Product % Growth over last 50 years Greenspan: Fundamental change in the economy towards intangible assets

12. Finance Retail Employment Specialized products, policy More Efficient, Productive, Inclusive Systems Target specific market levels and levers Identify CED goals and relevant markets MainstreamMarkets Prod./Exchange Costs Market Intelligence Training, Transaction Costs Payroll Cards Specialized IC Models Skills Certification, Coordinated Networks A Framework for Enhancing Markets Neighborhood Assets Goals StrategiesActivities Adapted from Living Cities/Brookings

13. 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

14. Bexar County, Median Income Darker blue shades represent areas with higher median income.

15. Bexar County, Concentrated Buying Power Darker blue shades represent areas with higher concentrated spending power ($ per sq. mile).

16. Spending as a Percent of Income 1995 Consumer Expenditure Survey Income Bracket Income is NOT a Good Indicator of Spending Power Source: MetroEdge

17. 1990 census data 0.00% 4.00% 8.00% 12.00% 16.00% 20.00% < $5000 $10,000 to $12,499 $15,000 to $17,499 $20,000 to $22,499 $25,000 to $27,499 $30,000 to $32,499 $35,000 to $37,499 $40,000 to $42,499 $45,000 to $47,499 $50,000 to $54,999 $60,000 to $74,999 $100,000 to $124,999 > $150,000 Household Income Category % Households in Category 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: MetroEdge

18. Retail Float for Bexar County

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

20. 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

21. 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)

22. 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

23. When viewed with a “lifetime value” lens, the needs of financial institutions and underbanked customers can be aligned The Credit Path Alternatives Federal Credit Union Financial institution viewCustomer view Investment products High margin lending Fee income Cheap deposits Consumer credit Savings Closing the Gap: Creating Alignment

24. Market-Based Community Economic Development Presented to J. McDonald Williams Institute By Robert Weissbourd and Riccardo Bodini RW Ventures, LLC October 23 rd, 2006

25. 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

26. Adjusted Float CategoryDemandFloat Adjusted Float Demand Competition Index* Ranking Float Ranking Adjusted Float Automotive and Miscellaneous Auto Dealers $274,815,581$173,984,914$60,539,23565%11 Department Stores$141,644,895$109,663,674$60,169,73645%22 Household Appliances, Radio & TV Stores $24,107,052$19,945,792$12,268,64038%73 Furniture & Home Furnishing Stores $22,152,100$16,685,061$5,059,41670%84 Hardware/Building Materials$39,246,300$25,512,418$4,292,60983%65 Apparel$60,813,309$33,636,343$1,201,26396%46 Gasoline Service Stores$76,555,832$33,305,932-$1,190,874100%57 General Merchandise Excl. Department Stores $20,368,519$8,294,598-$1,893,699100%98 Automotive & Home Supply Stores $21,013,710$3,848,252-$10,014,285100%109 Eating and Drinking$135,155,484$40,390,315-$11,437,379100%310 Drug and Proprietary Stores$34,633,528$969,502-$21,313,171100%11 Food Stores$187,368,947-$39,025,055-$132,727,262n/a12 Source: Claritas 2002-2003, MetroEdge Metrics *Near Float as Percentage of Total Float

27. All Things Considered … CategoryDemandFloat Adjusted Float Demand Competition Index* Ranking Float Ranking Adjusted Float Automotive and Miscellaneous Auto Dealers $274,815,581$173,984,914$60,539,23565%11 Department Stores$141,644,895$109,663,674$60,169,73645%22 Household Appliances, Radio & TV Stores $24,107,052$19,945,792$12,268,64038%73 Furniture & Home Furnishing Stores $22,152,100$16,685,061$5,059,41670%84 Hardware/Building Materials$39,246,300$25,512,418$4,292,60983%65 Apparel$60,813,309$33,636,343$1,201,26396%46 Gasoline Service Stores$76,555,832$33,305,932-$1,190,874100%57 General Merchandise Excl. Department Stores $20,368,519$8,294,598-$1,893,699100%98 Automotive & Home Supply Stores $21,013,710$3,848,252-$10,014,285100%109 Eating and Drinking$135,155,484$40,390,315-$11,437,379100%310 Drug and Proprietary Stores$34,633,528$969,502-$21,313,171100%11 Food Stores$187,368,947-$39,025,055-$132,727,262n/a12 Source: Claritas 2002-2003, MetroEdge Metrics 2. Neighborhood Scan

28. Targeting Retail Hot Spots 3. Targeting Locations

29. 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.”

30. Hardware / Building Materials Float + Sites

31. 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 Lending Inner City Trade Area, 1995-97 Permits per 1000 Housing Units Building Activity Permits 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: MetroEdge

32. CONTENTS Applying the Framework Market-Based Community Economic Development The Real Potential of IC Markets: The Shorebank Experience Discussion

33. 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

34. Market Assessment

38. Industry Evolution Presents Opportunities & 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

39. 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

40. Use banks almost exclusively (36%) Heavy user of non-bank services (64%) 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%) 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 Banked (48%) Never banked (52%)

41. 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

42. 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

43. 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.

44. 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

45. 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