The past two decades have seen significant changes inU.S. financial markets. One trend with critical

implications for the microlending field is the increasingmovement “down market” by traditional or for-profitlenders, toward customers who were previously consideredunbankable.

This trend was documented in a recent reportcommissioned by FIELD. The study, which involved areview of literature and secondary data, as well asinterviews with individuals in the private financial sector,detailed changes in lending trends among banks and otherfor-profit financial institutions. Key findings include:1

• Banks are the primary suppliers to the micro marketand have increased their presence since deregulation.

• Credit scoring has become so precise in predictingrepayment probability that it is the primarymethodology used by for-profit providers to determinewho is approved for credit or a small business loan.

• For-profit providers of commercial loans less than$35,000 are aggressively reaching “down market” byusing credit cards as the primary product, and creditscoring as the decision-making methodology.

• The profile of a successful applicant for microcreditfrom a for-profit provider is fluid because providers areactively refining credit-scoring algorithms.

• “Gaps” still exist in credit availability for smallbusinesses that nonprofit microlenders can fill, however,borrowers in this niche are increasingly marginal andrisky.

Taken together, these findings suggest that for-profitlenders, led by traditional banks, will continue to expandtheir efforts to reach toward the markets historically servedby the microenterprise field. This can be viewed as apositive trend, given that one of the field's goals has beento find ways to connect low-income and underservedentrepreneurs to formal financial markets. But there arechallenges for the field and its customers as well. Mostimportantly, the products offered by some for-profitlenders may not serve entrepreneurs well in the long term.This is particularly true for credit cards with interest ratepolicies that are unclear or that can escalate rapidly in thecase of delinquency. In addition, if for-profit lenderssucceed in taking away the microenterprise field's lowest-risk customers, this will raise costs and loss rates, makingthe path toward self-sufficiency in lending even moredifficult.

Responding to National Trends

The market scan identified a number of implicationsthat these trends hold for the microenterprise field.

The first is that while national trends point in onedirection, they may not be experienced equally in allplaces, and for-profit market penetration might play outdifferently in some local or regional markets – or amongspecific populations. For example, while some banks haveused the Community Express program to expand

UNDERSTANDING NATIONAL LENDING TRENDS AND LOCAL MARKETS:THE ROLE OF MARKET RESEARCH

OCTOBER 1999

ISSUE 2SEPTEMBER 2006 ISSUE 18

Microenterprise Fund for Innovation, Effectiveness, Learning and Dissemination

The Aspen InstituteOne Dupont Circle, NW • Suite 700Washington, DC 20036Phone: (202) 736-1071Fax: (202) 467-0790Web site: www.fieldus.orgE-mail: fieldus@aspeninstitute.org

1 Patty Grossman, Ellen Chen and Paige Chapel, Findings and Recommendations: Supply-Side Scan of Microenterprise Financing. (Washington, D.C.: The Aspen Institute/FIELD, October 2005).Available from http://fieldus.org/Projects/pdf/SupplySideLitScan.pdf

SC A L I N G-U P SE R V I C E S

significantly their level of microlending, the useof this program varies widely across the nation.Furthermore, there are certain populations thattend to fall out of existing credit-scoringmodels. To the extent that these populations –such as new immigrants, who often lack a credithistory – are concentrated in particulargeographic regions, these areas may have seenfewer for-profit lenders enter their market.

Second, it is also the case that even in theface of similar trends, microlenders mightchoose to respond to this new context indifferent ways:

• Some might seek to compete directly withfor-profit lenders, using technologies such ascredit scoring and on-line lending to increaseoutreach and efficiency; or expanding marketresearch and marketing efforts, with the goalof providing products that better fit theircustomers' business financing needs;

• Others might target niches that remain,although the study noted that nonprofitlenders may require more equity in theircapital structures in order to absorb the lossesassociated with these more risky borrowers;

• Still others might choose to partner with for-profit lenders, for example, providingbusiness loan packaging services to customerswho might otherwise not qualify for bank debt.

To help practitioners begin to think abouthow they might respond to this new context,FIELD first shared the results of the “marketscan” of private sector lending trends with a setof larger-scale microlenders during a conferencecall held in February 2006. After a discussion ofthe trends and their impact on the participatinglenders, FIELD then invited participants whowere interested to apply for $7,500 grants thatcould be used to fund market research intowhether and how the national trends identifiedin the scan were affecting their local markets.FIELD awarded grants to five microlenders:ACCION New Mexico, the WisconsinWomen's Business Initiative Corporation(WWBIC), ACCION New York, BiGAUSTINand ACCION USA. This FIELD forumdescribes the market research they undertook,and presents the common lessons and findingsfrom their efforts.

The Market Research ProjectsAs is described in Table 1, the five

organizations sought to explore a range of issuesusing market research. Some, such as WWBICand BiGAUSTIN, looked to understand thesupply side of the market in their target markets – namely how banks and other for-profit lenders in their region were approachingthe market for microloans – and to explore how

2

TABLE 1: SUMMARY OF MARKET RESEARCH PROJECTS

GRANTEE ACCION NY WWBIC ACCION NM ACCION USA BIGAUSTIN

Geographic TargetMarket

ResearchTopic

New York City and adjacent communities inNew York andNew Jersey

Focus on the newimmigrant market;to what extent isthis market beingserved by creditcards?

Throughout New Mexico

What is or shouldbe the role of credit scoring indetermining whowill receive orrepay credit fromACCION NewMexico?

Nationwidelender withbranches inBoston, Mass.;Miami, Fla.; andAtlanta, Ga.

What is theacceptance of andexperience withInternet lendingamong ACCIONUSA's customers?

Austin, Texas MSA

How canBiGAUSTIN reachout to businesses insuburban and ruralcommunities? Whatrole should theInternet and partnerships play?

Based in Milwaukee, Wisc.; lends statewide

What is the current statusof bank lending tomicroenterprises inWWBIC's market? How can WWBICposition itself to partner or receive referrals?

TABLE 1: SUMMARY OF MARKET RESEARCH PROJECTS (CONT.)

GRANTEE ACCION NY WWBIC ACCION NM ACCION USA BIGAUSTIN

Key ResearchQuestions

MarketResearchMethodology

MarketResearchSample

How are creditcard companiesmarketing to new immigrants?

Are credit cardcompanies servingtheir needs?

How canACCION NY create productsthat better meetthe needs of new immigrants?

Two focus groups;one of businessowners, one ofnon-businessowners

Individual surveysadministered tofocus groupparticipants

Spanish speakers,recent immigrantsliving in Queens

Do credit scoresrepresent “perfectinformation” aspredictors of portfolio-at-riskand/or default fornonprofitmicrolenders?

Why is ACCIONNM's portfolioquality healthierthan its clients'typical credit scoreswould predict?

Analysis of borrowers’ creditscores at applica-tion, and howthese correlate toincidence of earlydelinquency orwrite-off

Telephone surveysto determine whichfactors motivateon-time payment

479 clients whoreceived loans in2005

A sample of 194 ofthe above individu-als. Sample participants drawnrandomly fromeach range of creditscore. Responserate: 45%

Will Internetlending satisfyour target audience's needfor convenience?

Why are applicants dropping out ofthe on-line applicationprocess?

What is the profile of theInternet applicant?

Telephone interviews

20 minutes max;English orSpanish depend-ing on preferenceof respondent;$10 incentive

Sought to complete 100interviews, com-pleted 75 (25%response rate)

300 individualsaccessing on-lineapplications;includes thosewho didn't complete andwere withdrawnby loan officer

What financial products and servicesdo small businesses in suburban and rural communities ofSouth Central Texasneed? How do thesediffer from those inurban areas?

What roles do theInternet, and on-lineproducts and servicesplay in servingborrowers? Wouldthey be accessible and useful to rural borrowers?

What partnerships can help BiGAUSTINmarket to borrowers in suburban and ruralareas?

Survey of small business owners in the MSA

Survey of financialinstitutions that makeor could make loans to small businesses inthe MSA

Survey of economicdevelopment groups in the MSA

Literature review

85 microbusiness own-ers in the Austin area.Approx. half reachedthrough Las Comadrespara Las Americas;other half reachedthrough Austin-arealistservs and smallbusiness membershiporganizations

6 banks and 6 economic developmentorganizationsinterviewed

Who applies formicroloans?

What is WWBIC's targetmarket size and nature?

What relationship-lendingopportunities exist below$50,000?

Which for-profit lendersuse credit scoring? Whendo they use it?

What happens when loansare denied due to poorcredit scores?

How are CommunityExpress vs. microloan decisions made? Whomakes them?

What is the market forreferrals?

Focus group with ninebankers

Telephone interviews withbank and credit unionlenders

Review of bank and creditunion Web sites

Review of loan tips/linkson entrepreneurial Websites

Review of prior research

Nine bankers in focusgroup

19 phone interviews withlenders; selected to providea cross-section of community with focus onthose most frequentlyinvolved in microlending

49 lending Web sitesreviewed

partnerships and referrals with these lendersmight play a role in their future lending. Two ofthe projects focused more on howmicroentrepreneurs responded or related to thestrategies used by for-profit lenders to reach thismarket, namely credit cards and credit scoring.

ACCION New York focused on thepotential of one particular target market – newimmigrants –that has a large and growingpresence in its region. While new immigrantsare often the targets of lending offers by creditcard companies, it was less clear how well theywere actually being served. ACCION NewYork's research sought to shed light on thisissue. And ACCION New Mexico lookedspecifically at the issue of credit scoring: firstlooking at whether there was a correlationbetween the credit scores of customers and theirsubsequent repayment histories, and thenexploring the factors that motivated customers– even those with relatively low credit scores –to repay their loans. Finally, ACCION USAchose to explore the initial results from itsefforts to employ a new strategy – on-linelending – to compete against for-profit lendersand reach more customers.

As Table 1 illustrates, the microlenders alsoused a range of market research techniques,including focus groups, telephone surveys ofcustomers and potential customers, as well asinterviews with bankers, and reviews of existingliterature and Web sites. Their experience withusing these tools is discussed below.

Key Research Findings

FIELD convened the five grantees in June2006, at the conclusion of their research

efforts, so they could share the results of theirindividual work, and discuss the implications ofthe findings for their work and the field as awhole.

Although the research efforts were modestin scope, some of the findings have led tochanges in products. For example, ACCIONUSA is making improvements to the customerservice offered to on-line applicants, and

ACCION New Mexico is considering how toprovide preferential pricing and/or reducedapplication requirements for applicants withstronger credit scores. Other findings areleading to changes in the lending process.ACCION New Mexico is considering how toincorporate consumer credit scores into itsunderwriting process, and WWBIC also isconsidering several ways to create new lendingstrategies in partnership with local banks.

The research findings are also influencingthe microlenders' marketing strategies andtactics. For example, both WWBIC andBiGAUSTIN have learned that many banks andother potential referral partners are unaware ofor have misperceptions about their products,and that opportunities exist to improve thatunderstanding. ACCION New York plans toposition itself as the first source of credit fornew immigrants, and is building marketingstrategies around that goal.

While the approaches and findings of theprojects were distinct in many aspects, they didyield some collective findings related to the keythemes identified in the original market scancommissioned by FIELD. These findings are:

Credit scoring is widely used by banksseeking to serve the microenterprise market;however, as yet banks are reaching only theleast risky borrowers. Several of the marketresearch efforts validated the finding that banksare increasingly using credit scoring as a keydeterminant in underwriting loans tomicroentrepreneurs. This is the case for a widerange of banks – money centers as well ascommunity banks. And although some banksmaintain that they continue to look at otherfactors, the credit score clearly plays a majorrole in the lending decision.

The research also found that the creditscores that are generally acceptable to banksremain higher than those of most microlendingcustomers. Generally, banks appear to belending to customers with credit scores above680, while the average credit score for two ofthe microlenders in the group averaged around590. At the same time, quantitative analysis

4

from ACCION New Mexico, as well asanecdotal evidence from the other microlenders,supports the banks' assessment thatmicroenterprise program customers with lowercredit scores are more risky.2 ACCION NewMexico found a clear correlation between lowercredit scores at the time of application anddelinquency in the early months of loanrepayment.

Of course, nonprofit microenterpriselenders came into existence in large part to servecustomers to whom banks and other lenderswere unwilling to lend. Twenty years ago, oneof the reasons banks did not make microloans isthat the cost of underwriting those loans wastoo great compared to the interest they earned.Today, credit scoring reduces the cost to banksof determining which customers are likely torepay, thereby allowing them to make some ofthose loans – but only to those who are the leastrisky. These cost reductions have made banksmore willing to extend consumer credit tohigher-risk customers.

As a result, it appears that the risk inmicrolenders' portfolios is increasing. Forexample, ACCION New Mexico staff has notedthat customers increasingly have higher levels ofaccumulated consumer debt. In other words,because lenders are willing to provide credit tothese individuals, they are accumulating debt,leading to weaker credit scores. Microlendersmay also face increased risk because they cannotor do not report their clients' microenterpriseloans to the credit bureaus. If these clients thengo on to seek other forms of credit, their creditscores will not reflect their true debt exposure.If they are successful in securing additionaldebt, this can lead to increased risk to thelender after they already have issued a loan.

The other dynamic introduced by creditscoring is that it enables loans to be made witha very rapid turnaround time and reduced levelsof documentation. Market research – both thatconducted by the five FIELD grantees profiled

here, as well as larger-scale market researchstudies that were reviewed as part of the marketscan commissioned by FIELD – indicates thatthese are very important product features forconsumers, perhaps more important than price.

These findings have two importantimplications for microlenders. The first is that,as the original market scan indicates, it is likelythat in the future the loan portfolios of mostmicrolenders will hold higher levels of risk thanthose seen in the field to date. This in turn willaffect their costs, capital structures and path toself-sufficiency. The second implication is creditscoring offers a set of benefits – in terms of thepotential for cost savings, rapidity of decision-making, and the ability to predict and managerisk – that holds importance for microlendersseeking to increase the scale and self-sufficiencyof their lending activities. This signals theimportance for microlenders of finding ways tobuild their own credit-scoring models, or to useavailable credit-scoring models more heavily intheir underwriting process.3

Banks and other lenders are looking tocredit cards as the vehicle for making thesmallest microloans. While credit cards offerimportant features to borrowers, there may beroom to compete against these products. Two ofthe market research efforts reinforced thenational finding that credit cards are the tool ofchoice for banks and other lenders seeking totarget the microenterprise market. In its focusgroups with new immigrants in Queens,ACCION New York found that many of themwere inundated with offers for credit cards –this despite the fact that many of them lacked acredit history. In the market research conductedby BiGAUSTIN, 24 percent of the businessowners interviewed had used credit cards tofinance their start-up. Credit cards were themost used source of external financing(financing from sources outside of the businessowner and his or her spouse); they were usedmore frequently than loans from friends and

5

2 These comments were heard both from microlenders who engaged in these market research projects, as well as from some who participated inthe FIELD conference call in February 2006.3 FIELD anticipates publishing a separate piece in fall 2006 on how microenterprise lenders are implementing various approaches to credit scoring.

family, or bank loans and lines of credit. Finally,WWBIC's focus group and interviews withbankers in the Milwaukee area revealed that,generally, credit cards were the first productoffered to customers seeking very small (lessthan $5,000) business loans. If the customerswere not interested in a credit card they werethen offered other products, such as a homeequity or SBA-guaranteed loan.

The market scan commissioned by FIELDfound that there are reasons borrowers prefercredit cards to other sources of debt. Thesereasons primarily have to do with the ease ofaccessing credit; namely, the short turn-aroundtime for approvals, and the fact that relativelylittle information is required from applicants (asthe decision is based largely, if not solely, ontheir credit score). ACCION New York's focusgroups with new immigrants in Queens foundtwo other reasons these individuals preferred toreceive credit (including credit cards) frombanks. First, the banks' name recognition andbrand had meaning to them, and second, somepreferred to apply in person, rather thanthrough the mail, which created fear of identitytheft.

Nevertheless, the ACCION New Yorkfocus groups identified some potentialcompetitive advantages for microlenders seekingto tap the new immigrant market. While it isimportant to recognize that this research waslimited in scope (involving only two focusgroups with 13 individuals) and focused on avery specific market (new immigrants living inQueens), the findings raise issues that have beenidentified in other market research efforts, andcould be worth exploring in other markets andpopulations. In particular, the focus groupsfound that potential borrowers had strongconcerns, in some cases based on experience,about the lack of clarity or understanding ofcredit card policies, particularly regardinginterest rates and fees. As such, they stronglypreferred to have materials and informationprovided in their native language, and/or toreceive information through seminars.

The focus groups also found that thismarket segment was interested in some face-to-face contact with the organization from whichthey were borrowing; they had strong concerns

about identity theft, and they strongly dislikedmarketing techniques such as phone calls and e-mails that were seen as invasive. Individualswho had only an Individual TaxpayerIdentification Number (ITIN), not a SocialSecurity number, often had difficulty accessingtheir first loan through a bank or credit cardcompany.

These consumer preferences and/or barrierscreate the potential for nonprofit microlendersto compete against their for-profit counterpartsin serving the new immigrant market, asACCION New York is seeking to do. Itsstrategy focuses on building the correct mix ofproducts and services, including financialliteracy education, credit builder loans (smallloans for any purpose that can be obtained withan ITIN and do not require a credit history),development of a staff with a broad mix oflanguage skills and cultural understanding, aswell as marketing strategies tailored to thispopulation. Its OnTRAC financial educationprogram, in addition to covering financialplanning and cash-flow management, covers thewise use of credit cards – when it is safe toapply for a credit card, understanding terms andconditions, limiting the number of cards, andmanaging the size of card balances. Withbusiness owners, the course also covers thelimitations and risk of running a business withcredit card debt.

On-line lending services hold potentialfor increasing outreach to unserved clients,but critical issues need to be addressed inimplementing this strategy. Banks and otherlenders are increasingly using on-line lendingservices to increase outreach and appeal to theircustomers' desire for convenience. Web researchconducted by BiGAUSTIN and WWBICfound that many banks now offer on-lineapplications, as well as informational andeducational resources on small business via theirWeb sites.

Nonprofit microenterprise programs alsoare beginning to explore and offer on-lineproducts and services to clients. There arechallenges, although perhaps not thoseoriginally anticipated, in using thesetechnologies to reach clients effectively. Many ofthose who have considered offering on-line

6

services thought the primary challenge would bea lack of Internet access among the groups oftentargeted by microenterprise programs: low-income individuals, new immigrants withlimited English skills, and so forth.Interestingly, the market research conducted byACCION USA and BiGAUSTIN suggestedthat Internet access may not be a critical issue.ACCION USA found that 37 percent of theusers of its on-line application who weresurveyed had family incomes below $40,000.Among the small and microbusiness ownerssurveyed by BiGAUSTIN, almost 78 percentcurrently used the Internet for their business,including 20 percent who engaged in on-linebanking.

However, ACCION USA's market researchdid reveal significant challenges inimplementing an on-line application process.These related to the completion of theapplication and follow-up during the lendingprocess. ACCION USA found that a highnumber of applicants dropped out of theapplication process. Survey research revealedthat some of those individuals thought theyhad, in fact, completed the application, andwere surprised when no follow-up occurred.They also found that some customers felt thatthe application/information requirements weretoo rigorous, others didn't understand some ofthe requirements and processes, many droppedout at the payment stage (initially there was anapplication fee), and many who were nativeSpanish-language speakers used the Englishversion of the application (even though aSpanish version was available).

Interestingly, FIELD's experience with itson-line mentoring program, MicroMentor,4

echoed many of these same challenges: althoughparticipants obviously had Internet access, andsome experience sending e-mails or conductingWeb research, few have had the experience offilling out forms, or with providing in-depthinformation on-line, and many did not

understand functions suchas “save.” FIELD'sexperience also found thatclients often would notfollow up, and wouldbecome deflated if theydid not receive immediatefeedback on a request.

Based on feedbackfrom its customer surveys,ACCION USA is makinga number of changes to itson-line applicationprocess. It has developed anew 15-touch plan thatincludes both e-mail andtelephone contactthroughout the applicationprocess. Loan officers havebeen given customerservice training in supportof this new plan.ACCION USA also ismaking changes to its Website to make the Spanish-language applicationmore prominent, and to offer video clips as analternative means of communicating keyinformation to non-readers. Finally, it isimplementing a credit-scoring algorithm thatwill allow for less documentation and fasterturnaround in the lending process.

Concerns about the security of informationand identity theft also surfaced through themarket research. ACCION New York focusgroup participants reported being leery of mail,e-mail and telephone offers for credit cards,which explains why they preferred to apply forcards in person at a bank. BiGAUSTIN'sinterviews with business owners also identifiedconcerns about identity theft as a factor limitinguse of Internet banking services by some.Microenterprise programs seeking to offer on-line services need to recognize and look for waysto address these concerns.

7

4 On October 1, 2006, MicroMentor will be transferred from the Aspen Institute to Mercy Corps, which plans to grow the program both in theUnited States and internationally. For more on this transfer, see http://www.micromentor.org.

Nonprofit

microenterprise

programs also are

beginning to explore

and offer on-line

products and

services to clients.

As microlenders seek to compete against orcollaborate with banks, they must understandtheir positioning in the market relative to theseinstitutions. The market research identified anumber of issues related to the positioning ofnonprofit microlenders relative to banks. Bankshave tremendous marketing and brandingpower relative to nonprofit lenders. Thus, thename awareness of banks is very strong,compared with nonprofit microlenders who areoften practically unknown to the vast majorityof low-income individuals residing in a market.As ACCION New York's focus groups revealed,banks are perceived as safe. Given theprevalence of predatory lenders in somecommunities, it is important that unknownmicrolenders be able to position themselves astrustworthy, community-focused institutions.

Microlenders also have strengths comparedto traditional banks in some markets. Becausethey are smaller and have a tradition ofcustomizing products, microlenders are oftenbetter able to deal with clients' linguistic orcultural issues. As an example, ACCION NewYork's staff currently speaks eight languages, andall materials are available in Spanish as well asEnglish. Furthermore, ACCION New Yorkaccepts ITINs from applicants, while somebanks require a Social Security number.Microlenders also are willing to offereducational services around financial literacyand business development that banks do not.These services appeal to some (although not all)clients. Finally, for some customers, a term loanthat can be structured to the actual use of thefunds, and is clearly used for business purposes,may be a better tool for building the long-termfinancial health of the business than credit carddebt.

Pricing is another area where positioning isimportant. ACCION New York's focus groupsreported that while its products and bankproducts were competitively priced, there wasgreat concern about the pricing of the creditcards offered by non-bank financial institutions.Several participants were aware of or had

experienced instances of rates being raiseddramatically, the assessment of unanticipatedfees and penalties, etc. WWBIC also found thatits products were competitively priced withthose of banks. Interestingly, however, many ofthe bankers interviewed had the mistaken beliefthat WWBIC's rates were much higher.

While microlenders may price theirproducts competitively with banks, they arechallenged by the time it takes to process andapprove loans. As noted above, this is one of thereasons that many consumers opt for creditcards, even though they may be a moreexpensive borrowing option. WWBIC's bankinterviews found that bankers often referredcustomers to WWBIC only as a last option –because of its relatively long turnaround time,as well as the mistaken belief that pricing washigh.

In response to this market knowledge, thefive organizations are pursuing a mix ofstrategies that blend competition, collaboration,and the targeting of remaining niche markets.ACCION USA is looking to strengthen its on-line lending efforts, which compete againstother on-line lenders such as Innovative Bank,by making the set of improvements identifiedabove. At the same time, it also is pursuing astrategy of collaborating with banks, amongother institutions, in seeking ways to leverage itson-line lending service. This strategy includestesting co-branded products with Banco Popularin Puerto Rico and Hope Community CreditUnion in the Gulf states.5 ACCION New Yorkis targeting the new immigrant population,which remains largely unserved, although manybanks and credit card companies are activelytrying to tap this growing market. ACCIONNew York's efforts hinge on strengthening itscompetitive advantages vis-à-vis larger lendinginstitutions. At the same time, however, theyare seeking to collaborate with mainstreamfinancial institutions to ensure that clients canbuild their credit history through productsbeyond those that ACCION New York canoffer.

8

5 In addition to co-branded products, ACCION USA's strategy includes third-party referrals from banks and community organizations, andthey are discussing the development of private-label products.

Both WWBIC and BiGAUSTIN arefocusing their strategies around building newcollaborations with banks and economicdevelopment organizations, seeking to serveclients that these organizations can't serve, ormay not want to serve alone. ACCION NewMexico is looking to continue to serve a clientbase with credit scores that are oftentimes lowerthan those accepted by banks, but to do somore effectively by better utilizing credit scoresto mitigate portfolio risk and speed up itsunderwriting process. Interestingly, one ofACCION New Mexico's primary strategies forserving clients in rural parts of the state hasbeen to partner with banks that will accept loanapplications and close loans for them.

Findings from the MarketResearch Process

The market research techniques used by themicroenterprise lenders included customersurveys (with both current and potentialclients), customer focus groups, interviews andfocus groups with bankers, and reviews ofexisting literature and Web sites. In most cases,the lenders used more than one data-gatheringtechnique to inform their market researchquestions. Their experiences in conducting thesemarket research efforts can help inform othermicroenterprise organizations that seek to usethese techniques.

Copies of many of the market research toolsdeveloped as part of these efforts – surveyinstruments, focus group guides, and so forth –are posted on the FIELD Web site atwww.fieldus.org/ScaleResearch.

Lessons from the customer surveys. BothACCION Texas and ACCION New Mexicoconducted telephone surveys of past clients aspart of their market research. BiGAUSTIN alsoconducted telephone surveys, but focused on aset of small businesses that had not, for themost part, received services from theorganization. Their collective efforts yielded thefollowing lessons:

• Customer surveys that seek to developformative guidance about lending productsand practices do not need to be particularly

detailed or long, as longas they are done well.ACCION NewMexico's survey askedsix questions; ACCIONUSA's survey took only10 to 15 minutes tocomplete. As is the casewith any survey, theconstruction of thesample, the surveyquestions and theresponse rate willdetermine theusefulness of the surveyinformation.Organizations seekingto implement acustomer survey maywant to seek advice onsampling and desiredresponse rates fromthose with expertise inadministering surveys.These can include academics as well as paidmarket- or survey-research firms.

• The customer surveys that were mosteffective in informing lending practices werethose relating to specific product features andcustomer demands. Both ACCION NewMexico and ACCION USA gatheredinformation regarding specific marketing andcustomer service approaches, as well asproduct features such as prices andturnaround time, that they were able to usein improving their product. Specifically,ACCION New Mexico is re-examining itspricing and its underwriting processes inlight of customer feedback, while ACCIONUSA is implementing new customer servicefeatures. By contrast, BiGAUSTIN's surveyfocused more generally on where smallbusinesses received their financing, their useof the Internet and their technical assistanceneeds. While the survey yielded someinteresting information, and suggested somepossible directions that BiGAUSTIN mightpursue, it did not have the specificity thatcould lead to changes in loan products orlending processes.

9

In most cases, the

lenders used

more than one

data-gathering

technique to

inform their

market research

questions.

• Customer survey data is evenmore valuable if gathered overtime. Both ACCION USA andACCION New Mexico foundthe customer surveyinformation to be highlyvaluable. However, bothorganizations had hoped forhigher response rates than theyachieved during the term ofthe FIELD-funded projects. Asa result, they both have electedto continue the survey process.

Lessons from customer focusgroups. ACCION New York'smarket research focused on focusgroups with a specific targetmarket. The 13 participants inthe focus groups also completedsurveys that collected basicdemographic and business data.Findings from ACCION NewYork's experience are:

• Customer focus groups are an excellent toolfor developing detailed qualitative data andfeedback that can be used to shape marketingand product strategies. ACCION New Yorkused this tool very effectively to gather veryspecific information on how new immigrantsin one of its target markets were receivinginformation about credit cards, and how theyviewed the marketing materials they received.

• Due to the limited number of participants ina focus group, it is important to be carefulabout extrapolating findings. ACCION NewYork valued the opportunity to delve deeplyinto the reactions of a set of customers inQueens, but realized that the specificfindings from the focus groups would notnecessarily apply to clients from otherneighborhoods or ethnic backgrounds. Focusgroups are best if they can be supplementedby a broader customer survey, and areparticularly useful in informing efforts totarget or design products for a specificpopulation or ethnic group.

• The quality of a focus group depends onseveral factors, including the skill andexperience of the focus group facilitator, thephrasing of the questions, and thecomposition of focus group participants.Again, this is an area where hired expertisecan be quite valuable. Both ACCION NewYork and WWBIC elected to hire consultantswith expertise in conducting focus groupresearch to structure and facilitate theirresearch.

Lessons from bank interviews and focusgroups. WWBIC and BiGAUSTIN bothfocused part of their market research onlearning more about banks' strategies towardsmall businesses and microentrepreneurs in theirtarget markets. WWBIC used both a focusgroup with bankers as well as telephoneinterviews to gather this information, whileBiGAUSTIN relied solely on phone interviews.The key lessons from these research efforts are:

• The focus group and interviews wereeffective in yielding a sense of bank strategytoward small business customers: whichcustomers the banks are targeting, how manyloans they were making per month, andwhich loan products they were offering theircustomers. In this sense, they were a meansto confirm trends identified in FIELD'snational market scan. WWBIC clearly foundthat banks faced with businesses seekingmicroloans offered credit cards as the firstproduct, turning to home equity loans andthen SBA-guaranteed loans for customers forwhom credit cards were not a good fit.

• These research techniques were also valuablefor obtaining the banks' impressions of themicrolending program and their products.This information is key for programs seekingto develop partnership or referralrelationships with private lenders – as theirwillingness to partner will depend in part ontheir perceptions of the program.Interestingly, WWBIC found that banks hadsome misperceptions about their products –namely, that prices were much higher than in

10

Focus groups are

best if they can be

supplemented by a

broader customer

survey, and are

particularly useful

in informing

efforts to target or

design products

for a specific

population or

ethnic group.

reality. They also found concerns – which werecorrect – about the relatively slow turnaround timefor approving loans. BiGAUSTIN found that whilebankers who had partnered with the organizationthought highly of its services, other banks had noawareness of its program.

• Once again, professional expertise may be valuable.Both WWBIC and BiGAUSTIN used consultantswith market research experience to conduct theirfocus groups and interviews. While it is hard toknow what types of information they would havereceived had program staff conducted the research,given that both organizations were asking forfeedback on the banks' view of their products andservices, it is likely that the banks spoke more freelyto a third party.

A Final Word

The market research efforts of these fiveorganizations indicate that it is possible to generate

useful market information with a relatively smallinvestment of resources. The funding provided byFIELD was small – $7,500 per organization. Twofactors are key to generating solid and usefulinformation at this level of investment. First, theresearch should be narrowly focused – not seeking tocreate a comprehensive picture of the organization'smarket, but rather focusing on a specific issue or trendfaced by the organization. Second, the use ofprofessional expertise can help ensure that the researchfindings are as valid and useful as possible.

Engaging in these simple forms of market research –as well as more extensive efforts when feasible – will beessential for all microenterprise lenders in the future.As the market study commissioned by FIELD revealed,national trends in the financial industry have criticalimplications for nonprofit microlenders. They mustfind ways to understand evolving market trends andhow those are playing out in their local market, inorder to adapt and respond successfully to the changethat is inevitable.

For More on Scaling UpMicroenterprise Services

Readers interested in learning more about the issue ofscaling-up microenterprise services are invited to visitFIELD's Web site, www.fieldus.org, to find additionalresources developed and/or identified by FIELD. They include:

Lessons Regarding Scale: Findings from a LiteratureReview. FIELD and the Association for EnterpriseOpportunity produced a literature review on scale in 2006 as part of a project funded by the Citigroup Foundation. The review identifies key lessons on scale-up drawn fromresearch in the microenterprise, community developmentfinance and nonprofit fields. See http://fieldus.org/Projects/pdf/ScaleLitReview.pdf

FIELD's On-Line Resource Bank includes a section called“Think Bigger, Work Smarter,” which is dedicated to theissue of scale. Included are a number of articles and tools,including resources on scale-up strategies such as mergers andacquisitions. See http://fieldus.org/Projects/direction3.html

Strategic Restructuring as a Scale-Up Tool: The Case ofMicroBusiness Development Corporation. FIELD forumIssue 17 profiles MicroBusiness Development Corporation, a Denver-based microenterprise program that used bothmerger and acquisition as tools to increase dramatically thescale of its microenterprise services. See http://fieldus.org/Publications/FieldForum17.pdf

Findings and Recommendations: Supply-Side Scan of Microenterprise Financing. This study commissioned byFIELD in 2005 identifies key trends in microenterpriselending among for-profit financial institutions, and discussesthe implications of these trends for the scale andsustainability of nonprofit microenterprise lenders. Seehttp://fieldus.org/Projects/pdf/SupplySideLitScan.pdf

Scaling Up Microenterprise Finance in the United States.In 2004, FIELD convened a meeting of leading microfinanceproviders in the United States to discuss critical issuesrelating to scale. This report summarizes their discussionsand recommendations. See http://fieldus.org/Projects/pdf/Scale-UpMtgRpt.pdf

FIELD also will publish a piece in fall 2006 on howmicrolenders are implementing various approaches to creditscoring in an effort to increase the scale of their lendingefforts. Check http://fieldus.org/Projects/Scale.html forupdates.

11

Credits

The Increasing the Scale of Microenterprise Finance Services Project is funded by the Ford Foundation.

Author:Joyce A. Klein, Senior Consultant

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