Social Entrepreneurship - MicroPlace

 

microplace

 

MicroPlace Overview

New poverty estimates released in August 2008 show that about 1.4 billion people in the developing world (one in four) were living on less than $1.25 a day in 2005. Microfinance has been recognized worldwide as a simple but powerful tool that enables the poor to pull themselves out of poverty. Most commonly, it involves making small loans to the working poor in developing countries. The loans are used to establish or expand small businesses that generate additional income for the family, enabling them to buy food, access healthcare, educate their children, put aside savings and lay the foundation for a better future. The microfinance organizations need capital to expand and reach more of the working poor. At the same time, millions of everyday people here in the United States are looking for ways to make investments that yield a financial return while making a positive impact on the world.

MicroPlace (an eBay inc., company) is involved in a remarkable effort in connecting the investors to the working people in poverty thus providing more microfinance to the poor and addressing the poverty of the world. MicroPlace, launched in 2007, is a website that enables everyday people to invest in the world’s working poor. This online investment site, whose mission is to alleviate global poverty, facilitates investments in microfinance that have proven to be an effective way of transforming people on the margins of society into economically productive individuals. MicroPlace is championing a model that fuses people’s instincts to be philanthropic with the efficacy of investing to raise microfinance capital. To date, microfinance has enabled a billion people to lift themselves out of poverty. MicroPlace aims to extend microfinance’s helping hand to the next billion people working in poverty-- one investment at a time.

Technology 

While building a regulatory infrastructure is one big task (explained in next section), establishing a “back-office” capacity of the website is an essential and integral part for the success of the business. MicroPlace benefits from the lessons eBay have learned working with the millions of small business owners and consumers who buy and sell on its family of sites. Having PayPal, eBay's online payment service, on its side has further helped the MicroPlace to thrive. PayPal will process the loans free of charge, thus giving the added value for the investor to invest all his money to the downtrodden. Going forward, the company is focusing on improving its user interface, which will provide investors with more search criteria by which they can choose their investment, such as which institutions offer the highest rate of return and which offers loans primarily to women and/or the “poorest-of-the-poor.”

MicroPlace has invested heavily in the development of software that helps microfinance institutions (MFIs) collect and organize data. "Microlending is just a good fit for eBay," says eBay spokeswoman Catherine England. "It really leverages eBay's areas of expertise to address what we see as an emerging market.

Local context and market creation challenges

MicroPlace faces many diverse challenges in its business but it has been able to handle most of it with EBay on its side.
 

Regulatory Clearance:
In order to offer investments on the website, MicroPlace must be registered as a broker-dealer with the Securities and Exchange Commission (SEC), a government agency that sets rules for the securities industry. As a registered broker, MicroPlace must also join the Financial Industry Regulatory Authority (FINRA), the organization that provides compliance oversight for the SEC. Getting the compliance is not a easy hurdle, as seen with KIVA.org which settled as a non-profit organization for this reason. By considering being part of EBay, it has immensely helped MicroPlace in terms of EBay doing the work to get the regulatory clearance.

Also, MicroPlace as a broker-dealer would need to hold $1 on hand for every $6 invested. Obviously, EBay hasn’t been in this field and needed a partner to handle this. Turner (MicroPlace founder)’s previous employer Calvert foundation agreed to take this mantle and it got support from several other foundations to chip in, all due to the high profile EBay in the picture. Calvert is also the issuer of several securities offered on MicroPlace.

Microfinance Institutions (MFIs): MFIs are the means for MicroPlace to reach the borrowers. MicroPlace has made partnerships with existing MFIs and also setup its own MFIs to reach these poor. There are challenges with these MFIs. MFIs are harmed by various factors like financial crisis, natural disasters, political instability, reaching the right people and mismanagement of funds. Also, more MFIs are needed to address the ambitious target of MicroPlace to reach the billion people.  

Execution: MicroPlace, with its current strength of 26, is really small for the scale it aspires to achieve. It has to grow to reach its target and as we have seen with many organizations, execution will be a challenge. Being under the hood of EBay, MicroPlace is well placed to face this challenge.

Important “socio-technical” considerations

The MicroPlace initiative is a classic example of business meeting social development and leverages technology that can reach a wide audience.

Technology:

Technology is the most important component of MicroPlace that allows the investors to contribute to this social cause. MicroPlace target is to capture the day-to-day investors with investments starting as low as $20. Providing the accurate and enough information for the investor on its website is critical for MicroPlace. It is important to gather on how the money invested is helping the poor, while also capturing the information about the potential borrower so the investor can make his/her choice. MFIs will be the major source for providing this information, but using the technology to gather it from MFIs is crucial. Also by making it easy and secure for the investor to make an investment using the easy-to-use PayPal interface is another important part of the business.

Social Impact:

At its core, microfinance is about human dignity. It is based on the old adage: "Give a man a fish, you have fed him for today. Teach a man to fish, and you have fed him for a lifetime." Microfinance borrowers take great pride in their ability to lift themselves out of poverty through their own initiative. They work hard to survive from day to day and a loan provides a way for them to create a sustainable solution to their economic lot in life. A loan is attractive because microfinance borrowers know that successful repayment can result in the opportunity to take out more and bigger loans in the future. While a charitable donation can be helpful in the short-run, it may not represent an ongoing source of financial support.

why it works

There are millions of poor people who live in the direst of conditions for whom donations are critical for survival. Microfinance does not target these people. It addresses a segment of the poor that are looking for a hand up, not a hand out. MicroPlace is targeting a billion of these people to pull them out of poverty once and for all.

Characteristics of the innovator(s)

Tracey Pettengill Turner is the founder of the MicroPlace. Tracey is a well-known social entrepreneur committed to finding market-based solutions to global poverty. She is a seasoned business executive who has been involved in international development, social investing and philanthropy for more than 15 years. Prior to founding MicroPlace, Tracey was CFO of KickStart, an organization that designs and sells products focused on poverty alleviation. In 1998, she started her first company, 4charity, a web-based marketplace for charitable giving, and served as its CEO.  

Earlier in her career, Tracey held a variety of positions with socially responsible firms including the Grameen Bank in Bangladesh (working with the noble prize winner Muhammad Yunus), Calvert Ventures and the World Bank. Working for the Grameen Bank of Bangladesh in the 1990s, Tracey Pettengill Turner saw first hand how microfinance works to lift people out of poverty. What she also learned was how microfinance can be a profitable investment. In October 2007, Turner and eBay launch the first of its kind MicroPlace, a website where investors can chose to invest in microfinance institutions (MFIs) in specific areas of the world.

Business model

MicroPlace is the first microfinance site to allow everyday folks to earn interest on their investment. MicroPlace is a registered broker-dealer, and is a for profit business. MicroPlace's business model is actually comparable to online traders like E-trade and Ameritrade. Investors can simply click on the area of the world they would like their microfinance investments to support. They are then presented with a list of MFIs operating in the area, their missions, and the terms of investments, including interest rates, maturity, and security issuer. Each MFI also features recent microfinance borrowers and their businesses.  The interest rates charged by MFIs to the borrowers are significantly less than the rates charged by the local moneylenders, while with the high volume of this lending; the availability of the loans is also much higher. The repayment rates for microfinance borrowers are high, averaging 97 percent historically much higher than American consumer lending repayment rates of around 85 percent, proving this as a good bet for investors while making a positive impact on the world.  

The expensive infrastructure that MicroPlace has built to facilitate the investing is in itself would be an entry barrier for a new entrant. MicroPlace currently charges a fee to the organizations that offer investments through the MicroPlace website, to make itself sustainable. This fee covers MicroPlace’s costs to support the website, provide customer service and be compliant with security regulations. MicroPlace does not charge any fees to the investor. Any profits generated by MicroPlace will be used to fund eBay’s socially beneficial activities like the eBay Foundation.

Scalability and long-term success 

Deutsche Bank estimates that we need $250 billion to help the billion people out there living on less than $1 a day to work their way out of poverty. So far, the world has raised $25 billion. In 2007, Americans gave $300 billion to charity but invested $2.7 trillion in socially responsible investments. Poverty is a big problem and we need a big lever. MicroPlace believes that socially responsible investing is the only lever big enough to address this problem. It is generally believed that institutions and individuals are motivated to make themselves as well off as possible and that microfinance has been successful because it is based on this principle. Because borrowers, lenders, and investors alike are all motivated to make themselves better off, their incentives to maximize profit are aligned and self-supporting. MicroPlace and its partners, being for-profit organizations are no different in this aspect. With the costly infrastructure in place already, MicroPlace is poised to scale and is in there for a long haul.

Conclusion

Microfinance is a proven and successful concept. MicroPlace having built a sustainable business model around this concept is scalable and well placed to succeed. It does have its challenges, but most of the challenge was to setup its expensive infrastructure, which is already in place, and it is sure to take off from here to bring many more investors into its groove to help the people in poverty around the world. 

Having spent considerable amount of my childhood in India, I have seen the significant population living in poverty and how hard they struggle to make the ends meet. I can hence, truly appreciate the difference MicroPlace is making in alleviating the poverty around the world.

Comments:

I liked the idea and concept of MicroPlace.
New way of helping the needy.

They need to make the financials, spending and strategy visible to everyone so that people are sure that their investment is going to needy and the right people.

Posted by Sagar Mantri on January 11, 2010 at 05:27 AM PST #

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