1. April 21 and 22, 2005 Chicago, IL

2. Achieving Sustainability, Scale, and Impact in Community Development Finance Kirsten Moy and Greg Ratliff The Aspen Institute April 21, 2005 THE ASPENINSTITUTE FEDERAL RESERVE SYSTEM An Informed Discussion:

3. Contents of Presentation  Initial conception and framework for research  Lessons across the case studies  Three models for understanding scale  Putting the models together  Balancing scale and impact  Objectives for the day and a half THE ASPENINSTITUTE

4. Why Pursue Scale?  To provide access to credit to as many low income people and communities as possible on a permanent and sustainable basis.  Goal is to create larger organizations that can reach more people, tap into economies of scale and become more sustainable, and ultimately have greater impact in low income communities.  Scale became our proxy for success. Need to better understand the dynamics of getting to scale. THE ASPENINSTITUTE

5. Model for Reaching Scale THE ASPENINSTITUTE Source: Alan Okagaki & Associates

6.  Banknorth Group A bank that grew 10-fold in 10 years but maintained its community focus.  7-11 (Vcom Expansion) Rollout of a new financial services delivery system utilizing technology.  VISA Credit Card The world’s most widely accepted payment system for consumers and businesses.  ACE Cash Express Growth of a nonbank financial institution with a broad retail presence.  Allied Capital and BLX A diversified financial services company focusing on small & emerging businesses. THE ASPENINSTITUTE Case Comparisons Undertaken

7.  The Reinvestment Fund Evolution of a CDFI into a regional community development organization.  Self-Help (Fannie Mae SF Mortgage Program) Creating a secondary market for HLTV single family mortgages.  ACCION International/ACCION USA Retooling Evolution of one of the world’s premier microfinance organizations/network.  Dell Computers Built to order computer manufacturer and supplier.  Unified Western Grocers A California-based cooperative working to grow its members’ size, sophistication and earnings. THE ASPENINSTITUTE Case Comparisons Undertaken

8. Description of Case Selection  Industry leaders that were generally acknowledged to have successfully scaled up.  Organizations where we had a personal contact who would provide entrée and higher quality information.  As a group the organizations emphasized financial service delivery, and included nonprofit, for profit and cooperative models.  Selected organizations whose business approach could serve as a model for CDFIs. THE ASPENINSTITUTE

9. Lessons Across Cases 1. The profitability of new product introductions was the primary driver of product development. The ability to produce a diversified yet complementary set of products was critical to achieving scale. 2. Demand for services or a clear market gap were the primary drivers in determining which products and services to scale up. 3. Geographic expansion was central to generating sufficient volume of transactions to reach scale. 4. Significant investments in Infrastructure were also crucial to successful growth. Investments often increased integration of operations and facilitated product development. 5. Investments in Technology often led to increased efficiency and cost savings. THE ASPENINSTITUTE

10. Lessons Across Cases 6. Companies partnered with organizations that had specific knowledge or expertise in an area the growing organization didn’t, or where the partner produced a needed component of the product or service. 7. Capital was raised several times at strategic points in the growth and scale process and the volume of capital raised was in the tens of millions in every instance. 8. Several organizations in the study changed their legal structure to accommodate future growth. 9. Regulatory changes often supported growth and expansion of organizations. 10. Different management skills are needed at different points in the growth process. Successful organizations recognized this and accessed the requisite skills through a variety of means. 11. The ability to adapt to changing market conditions in a timely manner allowed organizations to continue to grow. THE ASPENINSTITUTE

11. Model: Product Level THE ASPENINSTITUTE

12. Model at Product Level Suggests  Going to scale is not a linear, but an iterative process comprised of idea development/standardization/ infrastructure building/testing and evaluation at every stage.  The process takes far longer and cost far more than any of us would like to think or can support.  It is likely that many (most?) developing products will be rejected along the way.  A full rollout cannot be staged until there is a perfected prototype – something we rarely achieve in the CD world.  Implicit in the model is strong product demand (i.e., broad acceptance or desire for a product), if scale is the ultimate goal. The private sector does not think in terms of “building scale,” but of reaching target levels of profitability, geography, market share, brand dominance, and they have far more resources to do so. THE ASPENINSTITUTE

13. Model: Organization Level INSTITUTETHE ASPEN

14. The Model: Organization Level - ACCION THE ASPENINSTITUTE

15. At the Organizational Level, the Model Suggests a Different Set of Findings  Organizational scale cannot be achieved without one or more products/services that go to scale.  Scale cannot occur w/o sufficient geographic or program scope for an organization to expand.  Scale cannot be achieved w/o sustainability.  Key investments in infrastructure can catapult an organization to a new level of activity and impact.  Need for new organizational structures and new partnerships as the organization grows.  Reaching scale can take a long time, a period possibly better measured in decades than in years.  Scale is a characteristic associated with networks (or an industry), not an individual organization. THE ASPENINSTITUTE

16. Model: Industry Level

17. The Model: Industry Level - VISA THE ASPENINSTITUTE

18. The Industry Model Offers…  Typical industry structures support direct interaction between the customer and the industry member. In the CDFI industry the most direct interaction is between the funder/investor group and industry members as well as with regulators.  In an industry of small players, industry networks and other forms of affiliation become more important as agents for successful scale and growth.  Access to common infrastructure can enable networks of organizations to work cooperatively to deliver greater volumes of product with increased efficiency  Strong training and development efforts are necessary for growing management talent  Sufficient industry clout can create a more supportive legal, regulatory and policy environment  An industry leader can play a powerful role in setting standards and creating standardization in an industry. THE ASPENINSTITUTE further insights into the scale-up of a product, how product and organization scale are linked, and how an industry reaches scale

19. Challenges of CDFI Industry Model  Overcome the disruptive effect of subsidy and build a stronger connection to the customer (the ultimate issue is impact).  Improve strategic positioning: A clearly defined value-added role for CDFIs within the financial services market place that builds a strong connection to mainstream institutions.  The creation of a viable network that can take the industry to scale and entails at a minimum:  Workable governance structure  Effective industry branding and communications, clout  Identification of new flexible sources of capital beyond traditional government and philanthropic dollars that can support growth at each level of development. THE ASPENINSTITUTE

20. Product Innovation Organizational Innovation Industry Innovation Design for scale (e.g., standardization, simplification & refinements) Infrastructure Technology Capital Partnering Management New organizational structures Regulatory policy Strategic positioning Industry intermediaries Industry infrastructure New sources of capital impact New Pathways to Scale for Community Development Finance actions Graphic Representation Courtesy of Langdon Morris, InnovationLabs, April 2004 THE ASPENINSTITUTE

21. Balancing Impact and Scale THE ASPENINSTITUTE

22. Tension of Growth  There is a fundamental tension between being community or place-based and going to scale.  Scale is not a realistic goal for the majority of place-based development finance organizations.  The CDFI product mix has been developed in response to community need not sustainability.  We have it reversed. Sustainability is the path to scale. Scale is not always the path to sustainability.  Funders and CDFIs have focused mostly at the product or organization level where scale in terms of numbers reached defines success.  A viable business model that incorporates long term profitability will be required.  Investing in Infrastructure is critical to future growth and successful scale.  CDFIs have limited mechanisms for raising the amount of capital required to successfully scale up their operations. THE ASPENINSTITUTE

23. To Grow or Not to Grow?  We all want greater impact, but is increased product/service delivery the only way to have greater impact?  Pursuing impact apart from direct product/service delivery can free us to explore alternative strategies: e.g.,  Policy and regulation, which can affect far larger numbers of individuals or communities than the delivery of a financial product; or  Becoming sufficiently connected, credible and resourced as an organization to affect an issue or a market. Demonstration effect. THE ASPENINSTITUTE

24. Research Conclusions:  To achieve scale, our thinking must shift from the current focus on product innovation to product delivery, and from developing products to developing organizations and the industry. In addition, the funding environment must parallel these shifts.  To achieve scale, we must first achieve sustainability; to achieve greater scale, we must optimize our use of subsidy.  Growth is perilous, and growth for growth’s sake can reduce the community development impact of our initiatives. THE ASPENINSTITUTE

25.  Any strategies for achieving scale in the CDFI industry must address fundamental issues of industry structure; two emerging directions for the industry to investigate:  Greater integration (or re-integration) of the field’s activities into those of mainstream financial institutions, focusing on the value- added and optimal roles of CDFIs,  Development of stronger and more comprehensive infrastructure to support networks of CDFIs that will work cooperatively or collectively to deliver products and services to significantly larger numbers of people.  It’s ultimately about impact, and achieving scale is only one way to achieve impact. Research Conclusions: THE ASPENINSTITUTE

26. Purpose of this Conversation  Refine the proposed common framework for scale and sustainability.  Explore new business models and industry structures with potential for promoting scale and sustainability in the field.  Consider mechanisms for implementing future dialogue and action supporting the development of new organizational and industry practices. THE ASPENINSTITUTE

27. Achieving Sustainability, Scale and Impact in Community Development Finance Contact Information: Kirsten Moy and Greg Ratliff Kirsten.moy@aspeninst.org and Gregratliff6@aol.com The Aspen Institute THE ASPENINSTITUTE FEDERAL RESERVE SYSTEM An Informed Discussion:

28. April 21 and 22, 2005 Chicago, IL

29. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI by Langdon Morris Innovation An Industry Searching for a Business Model?

30. © Copyright 2005 By InnovationLabs Business Model Innovation models why ?

31. © Copyright 2005 By InnovationLabs Business Model Innovation “point of view 80 IQ points” is worth Alan Kay

32. © Copyright 2005 By InnovationLabs Business Model Innovation

33. © Copyright 2005 By InnovationLabs Business Model Innovation

34. © Copyright 2005 By InnovationLabs Business Model Innovation Chip capacity (Moore’s Law)... Use of Fax Machines... Use of Cell Phones... Use of Internet … Information Excess... Growth of Human Population... Consumption of Resources … Increasing Pollution … Exponential Change!

35. © Copyright 2005 By InnovationLabs Business Model Innovation 2004-11-08 New Scientific Consensus: Arctic Is Warming Rapidly REYKJAVIK -- The Arctic is warming much more rapidly than previously known, at nearly twice the rate as the rest of the globe, and increasing greenhouse gases from human activities are projected to make it warmer still, according to an unprecedented four- year scientific study of the region conducted by an international team of 300 scientists.

36. © Copyright 2005 By InnovationLabs Business Model Innovation Human Population: Fundamentals of Growth Population Growth and Distribution In 2000, the world had 6.1 billion human inhabitants. This number could rise to more than 9 billion in the next 50 years. For the last 50 years, world population multiplied more rapidly than ever before, and more rapidly than it will ever grow in the future. Anthropologists believe the human species dates back at least 3 million years. For most of our history, these distant ancestors lived a precarious existence as hunters and gatherers. This way of life kept their total numbers small, probably less than 10 million. http://www.prb.org/Content/NavigationMenu/PRB/Educators/Human_Population/Population_Growth/Population_Growth.htm

37. © Copyright 2005 By InnovationLabs Business Model Innovation http://www.de.tomshardware.com/business/20030219/images/17.jpg

38. © Copyright 2005 By InnovationLabs Business Model Innovation http://qsi.cc/blog/archives/cat_finance_economics.html

39. © Copyright 2005 By InnovationLabs Business Model Innovation How you manage here Is not the same as how you manage... here change gap

40. © Copyright 2005 By InnovationLabs Business Model Innovation You are here* *Manage accordingly

41. © Copyright 2005 By InnovationLabs Business Model Innovation complexity complexity complexity complexity

42. © Copyright 2005 By InnovationLabs Business Model Innovation hard to do ?

43. © Copyright 2005 By InnovationLabs Business Model Innovation Innovative Business Models Stagnant Business Models

44. © Copyright 2005 By InnovationLabs Business Model Innovation

45. © Copyright 2005 By InnovationLabs Business Model Innovation This is a mobile telephone. This car company is a telephone company. * Motorola Digital DNA

46. © Copyright 2005 By InnovationLabs Business Model Innovation This is a mobile telephone. This clothing company is a telephone company.

47. © Copyright 2005 By InnovationLabs Business Model Innovation Now available: E-mail Satellite TV Internet This is a portable telephone This airline manufacturer is a telecommunications provider.

48. © Copyright 2005 By InnovationLabs Business Model Innovation A Parable of Business Model Warfare 10 companies succeeded. They changed their business model. 10 companies failed. They stayed with their original business model. The difference between success and failure in Venture Capital investing.

49. © Copyright 2005 By InnovationLabs Business Model Innovation modeling the market

50. © Copyright 2005 By InnovationLabs Business Model Innovation Differentiated/Customized Commodity / Mass High Wealth Low Wealth Used Cars Rolls Royce GM Ford Toyota Honda Public Transportation Lexus Mercedes BMW Transportation Market Ferrari

51. © Copyright 2005 By InnovationLabs Business Model Innovation Differentiated/Customized Commodity / Mass High $$ Low $$ Chevrolet Pontiac Buick Oldsmobile Cadillac GM Business Model: 1925 - 1980 Used Cars Public Transportation GM

52. © Copyright 2005 By InnovationLabs Business Model Innovation Differentiated/Customized Commodity / Mass High Wealth Low Wealth Chevrolet Pontiac Buick Saturn Cadillac GM Business Model: 2006 Saab Hummer Onstar GM Finance Used Cars Public Transportation

53. © Copyright 2005 By InnovationLabs Business Model Innovation GM Profit: 1975 Making & Selling Cars Financing Cars

54. © Copyright 2005 By InnovationLabs Business Model Innovation GM Profit: 2006 Financing Cars Making & Selling Cars $500 million$2,500 million

55. © Copyright 2005 By InnovationLabs Business Model Innovation IBM Business Model Services Finance Software Hardware 2004 Services Finance Software Hardware 1990

56. © Copyright 2005 By InnovationLabs Business Model Innovation IBM “Industry contraction in recent years has forced IT companies to choose between being high value innovation players or high volume distributors of other people’s intellectual capital. Companies that are caught in middle run the risk of being hammered from both below and above. “IBM is an innovation company.” IBM Annual Report 2004 See also: IBM PC Division ATT Compaq Sears Levi Strauss K-Mart Oldsmobile Mercury Buick

57. © Copyright 2005 By InnovationLabs Business Model Innovation Charles Schwab; Fidelity Friends, Family, Charity, & Welfare Differentiated/Customized Commodity / Mass High Wealth Low Wealth Financial Services Market Check Cashing Private Banking Bill Gates et. al. CDFIs Credit Unions Large Commercial Banks Citibank; Bank of America; etc. Community Banks

58. © Copyright 2005 By InnovationLabs Business Model Innovation

59. © Copyright 2005 By InnovationLabs Business Model Innovation High Wealth Low Wealth Market Size Financial Services Market

60. © Copyright 2005 By InnovationLabs Business Model Innovation High Wealth Low Wealth Market Size Upper Market Lower Market Middle Market

61. © Copyright 2005 By InnovationLabs Business Model Innovation High Wealth Low Wealth Market Size Upper Market Lower Market Middle Market Working Poor 40% of families have less than $42k of combined income (200% of “poverty”)

62. © Copyright 2005 By InnovationLabs Business Model Innovation The Chasm Model early adopters visionaries pragmatists chasm conservatives

63. © Copyright 2005 By InnovationLabs Business Model Innovation The Chasm Model early adopters visionaries pragmatists conservatives chasm

64. © Copyright 2005 By InnovationLabs Business Model Innovation High Wealth Low Wealth Market Size Upper Market Lower Market Another View of the Financial Services Market Middle Market Bill Gates et.al. Homeless

65. © Copyright 2005 By InnovationLabs Business Model Innovation Lower Market Homeless

66. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market CDFI Target Market

67. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market?

68. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market?

69. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market? The Chasm

70. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market? The Chasm © Copyright 2005 By InnovationLabs Business Model Innovation

71. © Copyright 2005 By InnovationLabs Business Model Innovation GrameenPhone Target Market chasm 2 cell phone market, Bangladesh Infrastructure investment: $300 million 2003 profit: $75 million Ode Magazine : http://www.odemagazine.com/article.php?aID=4062

72. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market? © Copyright 2005 By InnovationLabs Business Model Innovation Key characteristics of the existing market …. ….from the characteristics of the target market. … tend to be different …

73. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market? © Copyright 2005 By InnovationLabs Business Model Innovation Key characteristics of the existing capability …. ….from the characteristics of the required capability. … tend to be different …

74. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market? © Copyright 2005 By InnovationLabs Business Model Innovation Do you find customers … … or do customers find you? … or …

75. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market? © Copyright 2005 By InnovationLabs Business Model Innovation lower choice lower expectations less educated customers higher choice higher expectations better educated customers market attributes

76. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market? © Copyright 2005 By InnovationLabs Business Model Innovation little infrastructure little shared infrastructure little “marketing”? investment in management development? significant infrastructure significant shared infrastructure significant marketing significant investment in management development organizational capabilities

77. © Copyright 2005 By InnovationLabs Business Model Innovation CDFI Existing Market? CDFI Target Market? © Copyright 2005 By InnovationLabs Business Model Innovation it’s a subsidy business make it on your own funder expectations

78. © Copyright 2005 By InnovationLabs Business Model Innovation Challenges 1. How much of the shared infrastructure of the financial services industry does the CDFI industry utilize?

79. © Copyright 2005 By InnovationLabs Business Model Innovation Charles Schwab; Fidelity Friends, Family, Charity, & Welfare Differentiated/Customized Commodity / Mass High Wealth Low Wealth Check Cashing Private Banking Bill Gates et. al. CDFI Large Commercial Banks Citibank; Bank of America; etc. Credit Unions Community Banks Financial Services Industry Shared Infrastructure Federal Reserve System Credit Reporting Credit Rating (Moody, S+P) Secondary Markets Post-Secondary Education Accounting / GAAP Rules & Regulations Stock Markets Computer & Telecommunications Providers Real Estate Industry Federal Reserve System Credit Reporting Credit Rating (Moody, S+P) Secondary Markets Post-Secondary Education Accounting / GAAP Rules & Regulations Stock Markets Computer & Telecommunications Providers Real Estate Industry

80. © Copyright 2005 By InnovationLabs Business Model Innovation Challenges 1. How much of the shared infrastructure of the financial services industry does the CDFI segment utilize? 2. Is it easier for mainstream financial institutions to move downstream than for the CDFI to move upstream?

81. © Copyright 2005 By InnovationLabs Business Model Innovation Is it easier to move downstream?

82. © Copyright 2005 By InnovationLabs Business Model Innovation Challenges 1. How much of the shared infrastructure of the financial services industry does the CDFI segment utilize? 2. Is it easier for mainstream financial institutions to move downstream than for the CDFI to move upstream? 3. Can CDFIs raise sufficient capital to address more sophisticated markets?

83. © Copyright 2005 By InnovationLabs Business Model Innovation Where are you? Where do you want to go? Your organization’s name: Your name: Where do you draw the line between your existing market and your future market? What are the biggest obstacles you face: Does the chasm exist for you? Please put any other comments on the other side. Questionnaire

84. © Copyright 2005 By InnovationLabs Business Model Innovation http://www.wheelsafe.co.za/4b5c8e10.jpg http://www.davesdaily.com/ http://www.funtown.com/sig ns2/pic.jpg It’s Confusing to Deal with Change … In Summary:

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86. © Copyright 2005 By InnovationLabs Business Model Innovation http://www.quadranet.org/tokezone/itchy/pix_oz/images/Road%20signs%20on%20the%20Nullarbor%20highway.jpg New Business Ahead Models

87. © Copyright 2005 By InnovationLabs Business Model Innovation http://www.quadranet.org/tokezone/itchy/pix_oz/images/Road%20signs%20on%20the%20Nullarbor%20highway.jpg ChangesAhead!

88. © Copyright 2005 By InnovationLabs Business Model Innovation http://www.quadranet.org/tokezone/itchy/pix_oz/images/Road%20signs%20on%20the%20Nullarbor%20highway.jpg ThankYou!

89. © Copyright 2005 By InnovationLabs Business Model Innovation References Ode 22 http://www.odemagazine.com/article.php?aID=4062 Langdon Morris InnovationLabs Lmorris@innovationlabs.com www.innovationlabs.com

90. April 21 and 22, 2005 Chicago, IL