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Impact investors could deliver for CDFI banks

Opinion: Current conditions have created an opportunity for community depository financial institutions to create a new stream of post-pandemic funding.

Jan 7, 2022 / Consumer Banking

Community development financial institutions have been finance’s first responders throughout the pandemic, and it’s clear from recent funding infusions that the federal government is attuned to their value. That support is crucial, but the current spotlight on CDFIs has also created an opportunity for depository institutions to tap into institutional impact investors to create a new stream of post-crisis funding.

According to US SIF Foundation’s biennial trends report, total impact investment assets under management in the U.S. grew 42% from 2018 to 2020. CDFI banks are well-positioned to attract impact deposits, especially from big corporations and other institutional investors looking to make good on commitments to support racial equity and underserved communities.

While many CDFI banks don’t need new deposits now, lifeline institutions should be prepared for an eventual drop in liquidity. When the counter cycle comes, CDFIs will need to continue providing capital to their communities. Starting relationships with impact investors now ensures those dollars will be there.

These relationships bring a host of benefits beyond immediate liquidity:

  • A reliable, diversified, low-cost deposit base that provides a hedge against local economic downturns;
  • More capital to invest in products and services for customers;
  • Connections with newer, tech-enabled platforms that bring in fresh ideas and resources;
  • Opportunities to highlight the institution’s community impact, which can attract additional capital sources.

Diversifying a CDFI’s deposit base with impact investor accounts from various states and communities provides a shield against local economic challenges—such as natural disasters or the loss of a major employer—that could cut into the bank’s capital base.

“Impact investors typically place deposits in banks during periods of economic downturns, and they prove to be a stable, cost-effective funding source,” says Teresa Martin, director of deposits at Virginia Community Capital, which has a long history of working with impact investors to raise deposits.

“These deposits have enabled VCC to provide financing and technical assistance programs dedicated to affordable housing, healthy food access, and women- and minority-led small businesses, to name a few,” Martin adds. “We have found that partnerships in this sector fulfill financial, impact and mission-focused goals for our clients.”

Working with impact investors can also help CDFIs build growth capacity. Impact investors are an excellent source of diversification because their deposits tend to be more flexible than other capital sources.

Dominik Mjartan, president and CEO at Optus Bank, says impact investment platforms have played an important role in channeling mission-driven funding to the communities the bank serves.

“Because we strive to close the racial wealth gap by providing services to all customers, regardless of their inherited privilege, our local deposit funding is not sufficient to fund high-impact lending,” Mjartan says. “We rely on impact investors who seek to align their deposits with their purpose.”

CDFI banks need to advance their technology deployment. Research from McKinsey & Co. shows that consumer and business digital adoption in the U.S. vaulted five years forward in just the first eight weeks of the pandemic. As CDFIs stretch to catch up, partnerships with fintech-enabled impact platforms can provide shortcuts.

In addition, having thought partners from a different area of the finance field can spur new initiatives. Fintech firms tend to be fast-moving and open to experimentation. They may be willing to partner with banks to pilot beneficial projects that align with investor goals.

CDFIs thinking about seeking impact deposits may have concerns about brokered deposits and added layers of compliance. For most depository institutions, these potential issues won’t come into play. Unlike deposit brokers, which tend to be highly market-sensitive, impact investment platforms focus on deploying capital for mission alignment, rather than maximizing rate of return. This reduces the likelihood of volatility in deposit volume.

Impact investors typically don’t add to the compliance burden because existing certification and reporting requirements demonstrate CDFIs’ dedication to underserved populations. Impact investors naturally will want to see impact metrics – for banks not already collecting them, this is an additional step. It’s worth doing in any case to satisfy investor requirements and  demonstrate to other stakeholders that CDFI banks are not just about transactions.

The time is right to engage with new capital partners. The pandemic has brought new awareness of the value of CDFIs, and with it a new opportunity to get on the path toward long-term resilience.

Stacy Noel Zielinski is community development director at CNote.