The Time for Microcredit is Here.
Empathy is the reason.
Photo by American Heritage Chocolate on Unsplash
Welcome all the new subscribers of the newsletter! Previous issues are available free. My first issue was Four Lessons Digital Banking Vendors Can Learn from Rick Wilson & Politics. You can find out more about who I am & what I do .
Today’s essay ran much longer than I intended. Instead of cutting it or publishing a longer read, I decided to publish the first part today. I will publish the rest early next week.
“The pressure I’m under right now is kind of overwhelming,” he said, “especially with how uncertain things are right now.”
These are the words of a student, in an article about how students are coping with school & economic hardships during the pandemic. But his words could be mine, yours, your customers - anyone, anywhere affected by the pandemic/economy punch.
Then I read Theo Lau’s essay Can Empathy be the Cure? This article, along with all the other articles I’ve been reading about entrepreneurship, empathic works & innovation during the pandemic, pushed me to think again and more about the connections between empathy and microcredit. (If you’re curious, I’ve written about empathy, and here & here) for years.)
There is, of course, the dictionary definition of empathy. Lau, though, captures the emotional essence of empathy.
Every word and every act of kindness matters. No action is too small when it comes to creating a more inclusive and equitable future for everyone.
At first glance, the connection isn’t clear
In fact, microcredit in developed markets doesn’t make sense.
Microcredit has been around since the 1970s. Traditionally, microcredit has targeted the poor, specifically most impoverished people – and especially women -- in the world, to use very small loans to lift them out of poverty. Typically, microcredit is delivered through financial institutions created specifically to serve the recipients – Grameen Bank and SEWA women’s cooperative bank are among the most well known. Microfinance institutions work also throughout Europe and they partner with banks and non-profits all over the world. In the US, there are several organizations including Accion and Grameen US.
Credit unions, community banks and retail banks have, understandably, largely stayed away from small value small business loans. The traditional customers for the traditional microcredit-sized loan do not fit a bank’s profile for a good credit risk. They may be poor or keep a relatively low balances in their checking account, may not own a house or car, don’t have a credit card and lack financial backers and credit scores.
Forces that Make the Case for Microcredit
There are several forces at work right now that make a case for a strategy that includes microcredit
New small businesses starting
Multiple generations will suffer long term economic consequences of the pandemic/recession
Acts of empathy for each other and local small businesses
Banks seeking true digital disruption need new products that address customers’ current situations. Those situations require empathy.
New Small Businesses Are Starting
Hundreds of thousands of small businesses have collapsed in the last 6 months. I’m not suggesting a sunshine, rainbows, unicorns view of the pandemic and the economic devastation that is happening all around us. No. What history and evidence says, though, is that some people who lost their job(s) or businesses because of the pandemic are starting or will start very small businesses. This re-startup is not unprecedented:
The Great Depression was far and away the most "technologically progressive decade of the 20th century," according to the detailed research of economic historian Alexander Field, outpacing the high-tech boom of the late 20th century by a considerable margin.
Source: The Atlantic Magazine
Today, there are multiple pressures: pandemic, depressed economy, shuttered small businesses and corporate layoffs, that stress people, families and communities. Yet, college kids are finding ways to compensate for jobs they lost because of COVID 19. They are creating microbusinesses.
The ingenuity students are showing during the pandemic demonstrates why “this generation has been called the most entrepreneurial generation yet.” Dr. Sarah Cochoran
Source: The New York Times.
Sometimes, more than 1 business at a time. That student I quoted at the start of this issue? He’s creating multiple streams of income.
The pandemic further spurred Mr. Cabrera to start making cookies and brownies infused with CBD, a cannabis derivative believed to have health benefits. He sells them to relatives and friends for about $5 to $10 each.
This is not a US-specific phenomenon. For example, Indonesia has seen many small food-related businesses emerge.
These are small businesses that escape the notice of banks.
Of course, many of these new businesses will fail or the owners lose interest, get a full time job. But many will survive and the challenges their founders face are greater than those faced by previous generations.
Long Term Economic Consequences
What are those challenges? We are just starting to learn about the long term consequences of the COVID 19 virus on people who had the virus.
The news about the long term economic consequences of the 2008 Financial Crisis and now the Pandemic Health and Financial Crisis is just starting to emerge. It’s not good.
Multiple Generations are Falling Behind in Wealth Creation
Economic hardships are affecting adults who have been independent as well as those just starting out in university or the workforce. The Financial Times recently quoted an Edward Jones survey that 24 million Americans gave financial support to adult children during this time.
In addition to the fact that they are at the beginning or middle of their education & working lives in an environment characterized by job loss, social isolation and heightened health, Gen X, Millenials & Gen Z will feel the economic impact of the pandemic and economic decline far longer.
The long term effects on the ability to create wealth will cross several generations. All signs point to Gen X, Millenials and Gen Z falling farther behind in wealth creation than previous generations. The Washington Post points to several indications that the economic stress will extend way beyond this year, next year or the year after for those already 50 years old through millennials. and Gen Z Gen X.:
Generation X (born from 1965 to 1980) came of age during the era of wage stagnation and growing inequality ushered in by the 1970s and ’80s. When the typical Gen Xer reached 35 in 2008, his or her share of the nation’s wealth was just 9 percent, less than half that of boomers at a comparable point in life.
Millennials haven’t hit the 35 mark yet — that won’t happen until about 2023 — but their financial situation is relatively dire. They own just 3.2 percent of the nation’s wealth. To catch up to Gen Xers, they’d need to triple their wealth in just four years. To reach boomers, their net worth would need a seven fold jump.
Older Millennials came of age during the 2008 Financial Crisis. This article didn’t even touch Gen Z and the generation behind those young people. Gen Z is graduating high school and college in the middle of pandemic with massive unemployment.
What this means for small business owners is that they will have less wealth with which to expand and scale their businesses. So will their families – who often provide funding for business owners to expand their businesses, buy more raw materials, hire an additional worker, sell and deliver more products or services.
How does the economic situation and pandemic and some small business restarts connect to microcredit? I will address that in the next issue.
Who publishes this newsletter?
I’m a former Gartner analyst. I’ve worked in and covered the banking industry for 27 years. I still think & write about digital banking — but also indulge my other interests, women in tech, startups - especially those in the US Midwest & South Eastern Europe), leadership & change, and AgTech.
I write this newsletter for people who are trying to differentiate their banking software in an increasingly competitive market. That could be people who work at software companies currently developing banking software or people at vendors that want to move vertically into the banking market. It’s also for bankers and investors who want to know more about digital banking transformation strategies & the technologies that power them.
I publish weekly. For now, this newsletter is free.
I can help your business– Need the ear and advice of an experienced strategist & analyst? Entering the bank market and want to understand your competitors? Feedback on your sales or marketing approach? Technology analysis for acquisitions? Want to get the attention of the right analysts?
Brief me on your solution/fintech/API/platform.
You can find & talk to me on twitter and LinkedIn — I look forward to our conversation.
Please share this newsletter with your friends & colleagues.