For this month’s Nonprofit Spotlight we interviewed Dan Leibsohn, President, Executive Director and Founder of Community Development Finance (CDF). Dan is also Founder of Capital Flows, a community development consulting company, and founder of the Low Income Investment Fund (formerly Low Income Housing Fund).
Mr. Leibsohn graduated from the University of Michigan in Economics and received a Masters in Public Administration from Harvard University where he also studied city planning.
Dan Leibsohn
In May 2009, CDF opened the first nonprofit, full-service check cashing store in the country in the Fruitvale neighborhood of Oakland, California. It was designed to help low-income families lower their costs, save money and move out of poverty. The check cashing component of the institution is designed to be financially sustainable through earned revenue. We recently traveled to Dan’s store to learn more about the check cashing project.
Q: What is a “check cashing” store and how was yours created?
A: Our check cashing store is a nonprofit corporation that provides check cashing services at much lower prices than the market rate stores. For example, we charge customers a below-market rate fee of 1% for a check under $1,000 compared to 3% at the store a couple of blocks away. Our customers are low-income community members who may become subject to burdensome overdraft and “non-sufficient funds” fees at traditional financial institutions. By using our services, they can avoid such unnecessary fees while developing the capacity to enter the financial mainstream again at a later date. We have a lending program and all the other traditional check cashing services and we also offer financial coaching services and small business assistance.
Today’s economy has severely impacted our customers who now earn less money and bring in smaller checks. Also, some of our customers who are immigrants used to earn enough money in America to be able to send some home to their families. Now some immigrants in America are receiving money from relatives abroad because they cannot earn enough here. The effects of the poor economy inspired us to provide a bridge to traditional banking for low-income community members.
Q: What are the ideal circumstances for operating a check cashing store?
A: The needs for any location are different based on the population living and working nearby and on the competition in the area. In order for our check cashing store to provide its services at below market prices, the store must rely on high volume. In other words, the store is self-sustaining as long as we have a lot of customers paying a small fee. Additionally, for our store to be sustainable, it is crucial to have a location that is convenient for our customers. Finally, we rely on grants to cover the rest of our costs.
Q: Tell us about your goals for the check cashing store project.
A: The ultimate goal of the check cashing store project is to get our customers to enter the financial mainstream if they want to and are able to. Our check cashing store can provide a bridge to traditional banking. Once our customers learn how to manage an account correctly, traditional banking will be less expensive for them. We also hope to be able to serve those who cannot enter the financial mainstream with lower prices and financial coaching. We estimate that we save our customers about $150,000 annually through our lower costs and other services.
Q: What is the biggest challenge the check cashing store has recently encountered?
A: We had experienced a lack of interest in the financial coaching services that we offer. Our customers might have been embarrassed about the fact that they had financial issues, or perhaps they didn’t have time to use our services.
To overcome this apparent lack of interest, we made the process less formal. By engaging our customers in casual conversations at the beginning of the process, we have successfully increased the number of participants in our program and the depth in which we are able to assist them.
The other major challenge is building up our volume and obtaining grants and donations to support the full effort.
Q: Can you tell me about a success story that holds particular significance with you?
A: We have recently had a breakthrough in our lending program. We have provided 1,177 loans at one third to half the market fees and at a loss rate of less than 2% where the average loss rate for many pay-day loan alternatives is 8-12%.
Another is the one I mentioned before: our being able to save customers about $150,000 per year.
Q: How do you see the Community Development Fund going forward and what are your personal future goals for the organization?
A: There are many possibilities. For example, with the right support, we believe that we can help to capture 5-10% of the pay-day loan market by creating a network of nonprofit lenders throughout the state. We see ourselves creating this network by partnering with nonprofits, credit unions, CDFIs, church groups and public agencies.
In general, we’d like to pass along what we’ve learned about the lending market, financial coaching and the needs of check cashing customers by helping to expand these approaches to as many other locations and organizations as possible.
Q: How does this tie to the field of microfinance?
A: Appropriately structured micro-finance lending is a large key to assisting low-income households and small business in escaping poverty. Everyone focuses on pay-day lenders and check cashing stores, however, there is an entire set of financial institutions and practices in low-income neighborhoods that replaces the institutions that the rest of the society uses. Low-income households tend to use the entire range of services, not just an occasional or isolated service; they are more expensive and make it more difficult for people to move out of poverty. They include car title loans, rent-to-own stores, pawn brokers and others. This entire range of institutions constitutes a dual financial economy and it is this entire range that must be addressed. We believe that micro-finance plays a major role in this effort.
In brief, micro-finance lending and financial counseling are key to assisting low-income households and small businesses escape poverty. An entire dual economy exists in these low-income communities that bypasses more traditional financial institutions. Pay-day lenders and check cashing stores are only a small piece of this puzzle. Car title loans, rent-to-own stores, pawn brokers and other businesses often charge astronomical interest rates for their services and fuel the cycle of poverty. These institutions and their effect on low-income communities must be addressed, and micro-finance and financial counseling can play a major role in helping these communities transition into a higher socioeconomic level.