Bringing Transparency To Informal Banking

Fariha Raisa, Feedback Labs | August 9th, 2022

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Did you know that more than 26 million households in the United States are credit invisible, lacking formal credit scores altogether? Without access to mainstream credit, people are often forced to turn to predatory finance, like payday loans, which extract $9.1 billion from low-income families annually. Faced with financial exclusion, people living with low incomes establish informal peer-banking networks, making no-interest loans to family, friends, neighbors, and co-workers. These timely loans offer flexible repayment terms, underwritten by relationships instead of credit scores. Community-led finance works, but it is unrecognized and unsupported.

Acknowledging that the United States banking system fails to meet the financial needs of people living with low incomes, David Henderson, a Practitioner in Residence at Princeton University, is developing a technology platform to recognize and capitalize on informal peer-banking networks. By bringing transparency to informal banking networks and capital through third-party loan guarantees, the platform aims to legitimize peer banking as a viable alternative to wealth-stripping finance that traps families in poverty. He presented in a LabStorm that discussed the measurement of the platform’s impact, engaging nonprofits as loan guarantors, and suggestions that ensure the continuation of the current social contracts that make peer lending work.

Complementing the existing social contracts. Thinking from the perspective of constituents, attendees emphasized that David’s platform could use alternative data to demonstrate creditworthiness that can be recognized by mainstream finance institutions. This would enable peer-lending participants to access more capital in the future, which could have a tremendous impact on their lives and financial futures. Attendees shared that recording the outcome of the loan and showing the total social credit line that someone has access to is impactful for both peer-lending participants, as well as formal institutions that might be looking to expand their client base.
Measuring the impact on borrowers and lenders. David kicked off this conversation by stressing the need for impact measurements beyond loan repayment rates, which have historically been a controversial performance indicator for loan programs. Participants suggested looking at the impact of the loan platform on the relationship between the lender and borrower and pondering these questions: Were their relationships strengthened as a result? Is the lender likely to loan more money in the future?

David was also advised to pay attention to people who were not able to repay their loans. Asking for their feedback would allow him to learn about the impact of the interaction and use of the platform, even if a loan was not repaid. There were further ideas to look into the demographics of the people who will be impacted by the platform and build the target audience into the mission statement to ensure that the group is reached.

Involving nonprofits for loan guarantees. Attendees stressed that nonprofits could do more than guarantee loans; they could provide referrals to the platform and foster buy-in for this approach. Participating nonprofits will likely want to track the impact of the loan guarantees that they offer against their core impact metrics. Throughout the interaction, nonprofits may want to measure how their relationship with constituents is strengthened and how their constituents’ quality of life is improved. LabStorm participants also brought up that nonprofits might express concern about loan participants gaming the system. To prevent collusion, attendees suggested the idea of a flag in the system in case a default occurs more than a certain number of times.

Key takeaways

At the end of the session, David summarized his key takeaways:

Clarifying the target audience for his platform and identifying partner organizations that align with this demographic and the platform’s values.
The platform has the potential to help peer-lending participants access “good” formal banking.
Measure how the platform is building or strengthening relationships and trust within the community.

Learn More About LabStorms

LabStorms are collaborative problem-solving sessions designed to help organizations tackle feedback-related challenges or share what’s working well in their practice.