The Mission Asset Fund: A bridge between informal and formal banking
For many people, opening a savings account isn’t simply a rite of passage. In fact, about 30 million people are unbanked or under-banked according to the Federal Deposit Insurance Corporation. Instead, people are relying on predatory institutions for money, like payday lenders or check cashing services.
This economic grey area is the only means of survival for people outside the banking system. Immigrants have traditionally loaned and borrowed money legally through their friends and family in informal lending circles, and formalizing these groups is the newest way immigrants are finding their way to America’s mainstream economy.
Informal lending circles have strong roots in places like Latin America, Africa and Asia and are often made up of family, friends, neighbors or co-workers. Generally there are up to fifteen members and each person contributes the same amount of money monthly. The pot of money is then given to a different member of the group each month and no interest is charged on the distribution.
These lending circles go by many different names like tandas, susus or cestas and have existed in the U.S. for decades. However, one of the biggest drawbacks is that activity in these groups is never reported to credit bureaus, so members save money but don’t build a credit history.
But that’s starting to change.
The Mission Asset Fund, a non-profit organization in San Francisco, California has recently partnered with Citibank to link informal lending to the credit markets. Instead of the traditional model where one person in the group holds the cash, the money is held in a bank. Group members have payments deducted from their checking account and the bank reports this monthly activity as an installment loan to the credit bureaus.
“We see this activity as taking a loan, and making payments on the loan every time they put money on the table,” Jose Quinonez, executive director of the Mission Asset Fund, said. “If someone misses a payment, the Mission Asset Fund comes in and makes the group whole.”
Moreover, many immigrants don’t trust banks. Getting a loan from a bank doesn’t seem like an option.
“It makes sense that when you’re poor and have no access to institutions, your only option is to turn to the person on your right, or the person on your left and ask for money,” Quinonez added.
But it wasn’t easy getting credit bureaus to accept data on lending circles, Vikki Frank of the Credit Builders Alliance, a non-profit organization that helps the unbanked establish credit, said.
“Credit bureaus need to have an ongoing relationship to verify the reputation of the company and a process to communicate monthly,” Frank said. “It is very hard to work with smaller creditors.”
Formalizing this invisible economy is vital for building a credit history, but it’s also a system of forced savings for many people who otherwise shun traditional bank products.
Jessica Ortega is a 34-year-old Peruvian who immigrated to California with no money, no credit history and no way to establish her financial life—that is until she joined a group organized by the Mission Asset Fund. That’s how Ortega went from having no credit score at all, to a credit score of 620.
“I didn’t grow up with the idea to save money,” Ortega said. “I made money, I spent money. The group pushes me to think that every month I have to have money in my checking account.”
Peter Tufano, professor of financial management at Harvard Business School, said that the appeal of the group has to do with creating your own support network.
“Saving is the opposite of consuming,” Tufano said. “Saving is a not-activity. It’s not drinking, not eating, not gambling. And when you’re trying to stop doing those things, it’s not so much about focusing on the positive, but rather, it’s about desisting from doing the negative.”
Tufano also said that having friends around reduces that temptation to spend.
“If your kids are bugging you for a pair of new sneakers, it’s easier to say no when all the other moms are saying no,” Tufano said. “If your neighbors aren’t buying plasma TVs, then you don’t feel bad about not buying one.”
And while joining the banking system isn’t an option for many immigrants, Jessica Ortega is finding out that joining America’s financial mainstream is within her reach.
Photo: Doris Vasquez, MAF