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From Inclusion To Mobility: How CDFIs Use Measurement To Serve Communities

Long considered the “on-ramp” to financial services for underserved communities, many CDFIs are shifting their focus to support financial health.

By Marisa Walster

Program:

EMERGE
Category:

Measurement

Wednesday, October 30, 2024

*This article was supported by the Citi Foundation. All views and endorsements expressed in this article are solely those of the author.

In 1994, the Riegle Community Development and Regulatory Improvement Act was signed into law, establishing a fund for Community Development Financial Institutions (CDFIs). Built on a vision for financial inclusion for all, CDFIs have spent the past three decades realizing their mission to expand financial access and opportunity to historically marginalized communities.

In that time, CDFI customers have bought their first homes, launched businesses, and pursued long-term financial goals using tools like checking accounts, mortgages, and small-business loans. While CDFIs have long been considered an “on-ramp” to accessing the mainstream financial system for marginalized communities, they are poised to evolve.

More than 1,000 CDFIs operating across the country today are leading the charge to erase deeply entrenched wealth inequities for the 4.6 million clients they serve. CDFI assets have tripled to over $50 billion in the last five years and, according to a survey of 269 CDFI members of Opportunity Finance Network, 84% serve low-income, low-wealth, or historically disinvested individuals.

Despite these impressive statistics that demonstrate CDFI commitment to promoting financial access and inclusion, families with a Black head of household still have 10 times less wealth than households with a white, non-Hispanic householder, underscoring that more work lies ahead to close the racial wealth gap.

Shifting the Focus From Access to Outcomes

CDFIs have focused on – and greatly improved – financial inclusion through products and services tailored to underserved communities’ needs. For example, CDFIs in the federal CDFI program originated more than $57 billion in loans and investments, provided funding for 76,000 affordable housing units, and financed more than 126,000 businesses in 2023 alone.

That suite of services is expanding. Many CDFIs have begun to look beyond financial inclusion to fundamentally improve the financial health of those they serve. Mentorship, coaching, and counseling services have emerged as new solutions for CDFIs to help people achieve their financial goals.

Nonetheless, according to the Financial Health Pulse 2024 US Trends Report, seven out of 10 Americans are not Financially Healthy, and deep disparities persist by race, gender, and income. Financial health measurement can help CDFI’s understand whether and how CDFI services can make customers financially healthier, and advance their shared mission to support underserved groups that disproportionately struggle financially.

Why FinHealth Measurement Matters

CDFIs can ensure their core activities go beyond improving access to support customers’ financial well-being by measuring and understanding household and community financial health.

Unlike access, financial health is a holistic measure of an individual’s financial life. While metrics like credit scores measure just one facet of a person’s finances, financial health assesses whether that person is spending, saving, borrowing, and planning in a way that will enable them to be resilient and pursue opportunities.

When CDFIs measure financial health, they evaluate how well a person is doing in all aspects of their financial life – and create a set of data points CDFIs can manage and work to improve over time.

This is a significant shift from how many CDFIs have approached measurement historically:

- Measuring factors like on-time loan repayment, job creation, or take-home pay for small business owner clients doesn’t paint a complete picture of how the owner is doing financially.
- Measuring whether they have a savings cushion in case of emergencies or are making progress on long-term financial goals does.

Financial health measurement using tools like the FinHealth Score® can help CDFIs measure and understand which solutions communities need to thrive for generations to come.

How 3 CDFIs Are Innovating Through Measurement

Achieving financial health for all will require change. New ways of thinking across our society can create new paths to financial health and many CDFIs are already breaking ground on this work, including:

Pacific Community Ventures

Pacific Community Ventures is a nonprofit CDFI that serves primarily women and people of color-led small businesses with fewer than 10 employees. For businesses smaller than even traditional small businesses, the financial health of the business and the owner are deeply intertwined.

Pacific Community Ventures seeks to support both, which is why they use tools like surveys to understand where small business owners need help most:

- 49% of customers do not offer benefits to employees, despite 72% saying it was very important to improve employee well-being.
- 43% said lack of human resources staff is a barrier to offering benefits.

Recognizing the complexity of benefits decisions, Pacific Community Ventures built:

- The Good Jobs, Good Business Toolkit to help small business owners create jobs.
- Innovative products and services that are simple, easy to use, and help small businesses navigate benefits decisions.

“Creating and sustaining good jobs to financial health outcomes begins by understanding the unique challenges faced by underinvested small business entrepreneurs, such as those we serve. By offering tailored resources, such as the Good Jobs, Good Business Toolkit, Pacific Community Ventures is providing pathways to unlock the full potential of meaningful employment. Ultimately, fostering economic resilience in underserved communities.”
– Bulbul Gupta, President & CEO, Pacific Community Ventures

Ascendus

Ascendus is a nonprofit CDFI lender that works with micro-businesses over the life of the loan to understand and improve their financial success. Though it traditionally used business and personal credit dimensions to measure impact, Ascendus began to shift its purpose over the last few years.

It now emphasizes financial mobility – or “ascension” – rather than financial inclusion. Executing that shift while supporting its small business customers required understanding whether its services have a positive effect on financial health.

As part of that shift, Ascendus started measuring its business clients’ financial health annually with the FinHealth Score® to understand progress over time and benchmark its clients against national trends.

Today, Ascendus sees measurement as a “three-layer impact cake”:

- Firm-level measures, like survival rate, jobs, and revenues.
- Individual-level measures, like household income, take-home pay, and personal credit.
- FinHealth Score measure, performed at the time of loan close and annually thereafter.

Ascendus is using that data to:

- Shape engagement with clients based on their individual needs.
- Identify which solutions its clients really need to inform product and partnership development.
- Deepen relationships with bank partners and generate new ones by identifying clients ready for banking services.
- Tie the financial health of clients to job performance goals.
- Deliver on its mission by strategically supporting the financial health of their clients and communities.

“For Ascendus, the FinHealth Score® makes our implicit understanding about our impact explicit. Over the life of a loan, which in some cases can be longer than high school, Ascendus can now take actionable steps to drive improvement in what we and our clients value most—their financial health.”
– Paul Quintero, CEO, Ascendus

Neighborhood Trust Financial Partners

Neighborhood Trust Financial Partners (NTFP) is a nonprofit originally launched by Neighborhood Trust Federal Credit Union, a CDFI, to provide financial empowerment services within the credit union. After seeing success with this approach, NTFP has replicated its unique model with other credit unions across the country, raising philanthropic dollars to increase support for credit union members and strengthening credit unions’ overall impact.

NTFP believes that our economy unjustly relies on labor that is low-wage and low-power. As a result, workers are trapped in cycles of insufficient income and cash flow, often forcing them to rely on high-cost, predatory financial products.

To solve this, NTFP is committed to improving the financial health of workers, particularly by eliminating predatory debt as a precursor to long-term financial wellness. It delivers trusted financial guidance and products designed to enhance worker financial health and reduce their reliance on debt. Pathways to Financial Empowerment, a financial coaching solution jointly developed by Inclusiv and NTFP, trains credit union staff in a trusted, action-oriented approach rooted in tracking data and results. The solution provides a variety of services to credit unions, such as Financial Coach training paired with licensing and training on an outcomes tracking software, and ongoing technical assistance. With Pathways, credit unions can strengthen their capacity to meet member needs and provide more holistic support.

To measure how its solutions are influencing financial lives, NTFP closely monitors its impact in the following areas:

- Increased access to pro-worker products: NTFP enhances the availability, access, and usage of products that can break the cycle of predatory debt, creating agency and empowerment among workers.
- Reduction in predatory debt: NTFP’s strategies lead to decreased reliance on harmful financial products and improved overall cash flow and balance sheets.
- Empowered workers: Ultimately, NTFP focuses on creating conditions that enhance workers’ agency, financial stability, and overall economic well-being.

“Since its inception, Pathways, co-designed with Inclusiv, has helped credit unions measure financial health outcomes, and I’m proud of that legacy in advancing financial inclusion. Now, we’re building on that foundation—tracking how reducing debt and freeing individuals from predatory financial services strengthens financial stability and paves the way for long-term financial freedom.”
– Justine Zinkin, CEO, Neighborhood Trust Financial Partners

Helping Communities Thrive

CDFIs have an important role to play in the financial health movement, serving as an “on-ramp” to the financial services industry for many underserved communities and catalyzing financial health for all.

By incorporating financial health measurement into their business practices, CDFIs can better evaluate the needs of customers, their families, and their communities – and support their long-term wealth-building and well-being.

Citi Foundation aims to help equip CDFIs with the tools to continue moving beyond financial inclusion to promote a broader picture of financial health. This year the Citi Foundation supported the 10th Anniversary of Financial Inclusion Week to galvanize leaders worldwide in advancing a more inclusive financial future, and launched a new Request for Ideas as part of its Community Finance Innovation Fund to support the next evolution of growth for CDFIs across the U.S. to promote financial health for all.

Written by

Marisa Walster

Vice President, Financial Services Solutions

Financial Health Network