LOS ANGELES — Future economic growth in the United States requires investment in markets historically overlooked by mainstream financial institutions, a new study from the Milken Institute and the Ford Foundation says.
Built on extensive research and interviews with a wide range of financial and community leaders, the new study, Creating Capital, Jobs and Wealth in Emerging Domestic Markets: Financial Technology Transfer to Low-Income Communities, demonstrates why companies should invest in such under-invested — and less competitive — markets, from low-income and rural communities to women- and minority-owned small businesses.
With U.S. job growth slowing, its labor force becoming more diverse, and returns on investments down, these markets offer an important opportunity to investors — and, potentially, a crucial boost to the economy. Not only are the markets virtually untapped, they are lower-cost and faster-growing than traditional markets, the authors say. Furthermore, proven financial technologies enable investors to deploy their capital at comparable risk to mainstream investments.
"Companies must realize that this is a key business strategy — an imperative to future success," says Betsy Zeidman, Director of the Center for Emerging Domestic Markets at the Milken Institute, who wrote the study along with Glenn Yago, Director of Capital Studies, and Bill Schmidt, a research analyst. "Plus it helps these entrepreneurs and communities grow and prosper. It′s a win-win result for these companies."
Two of the biggest opportunities for investors are with minority- and women-owned companies, whose numbers are growing much faster than the U.S. average, the authors say.
"Low-income communities present viable, untapped opportunities for financial services companies — an industry that can often be challenged by saturated market segments," says Steve Bartlett, President of the Financial Services Roundtable, an organization representing 100 of the largest integrated financial services companies in the United States. "This new report from the Milken Institute shows us some of the ways businesses can tap into the opportunities emerging domestic markets provide."
The report cites several reasons that mainstream businesses, financial institutions and investors should look carefully at emerging domestic markets:
o Advances in technology have made it more affordable to service them.
o Real estate costs are much lower in these communities — a major advantage.
o By partnering with community development financial firms that have an extensive knowledge of their markets, investors can evaluate, mitigate and price risk appropriately.
So why do entrepreneurs in these markets still have trouble getting the capital they need? A lack of data about the firms and their loan performance, a shortage of networks linking borrowers and financial institutions, and other obstacles have kept investors away, the report states. To help remove these obstacles, the authors have assembled a compendium of market leaders′ activities in low- and moderate-income communities, as well as a list of "best practices" that can help address the gap between capital supply and demand in these areas. Recommendations:
o Establish a comprehensive, integrated repository of information on these businesses and their loan performance that will help investors see how well this market can perform.
o Pool small-business loans from multiple lenders and package them into a security that can be sold to a third party, reducing lenders′ credit risk and increasing lending.
o Create a privately managed, public-purpose mezzanine fund targeting businesses in low-income communities that would offer much-needed flexibility to their capital structure.
o Establish an innovations lab that would increase learning about how these financial tools work and improve relationships between entrepreneurs and financial services providers.
o Create a network through which banks, community-based lenders and others would exchange information, deal flow and expertise that would grow customer bases and match investors and lenders with entrepreneurs and reduce financial risk.
"This report shows that financial technologies that have proven effective for other markets are transferable to low-income communities," says Michele Kahane, Program Officer for the Ford Foundation, which sponsored the research. "We are seeing increasing numbers of companies applying innovative business strategies to achieve competitive advantage in untapped markets and, simultaneously, fostering wealth creation where it is most needed."
Learn more about Win-Win Partners, a group of companies and organizations achieving competitive advantage through community investment, or the Ford Foundation.
View a pdf copy of Creating Capital, Jobs and Wealth in Emerging Domestic Markets: Financial Technology Transfer to Low-Income Communities. View an abridged version.