Last week personal finance app and website NerdWallet announced moving $2 million of NerdWallet capital to Self Help Credit Union – which serves low-income populations in Oakland, CA. The company is also partnering with the nonprofit association of community credit unions, Inclusiv, to scale up this effort nationally. Tim Chen, CEO and founder of NerdWallet, is hoping this will spark other companies to leverage the position credit unions have in local communities – many of which are in low-income and distressed areas hit hard by the pandemic – to pump much-needed funding and capital directly into the hands that need it most.
I recently spoke with Tim via LinkedIn Live to get a bit more insight into why doing this now is important to NerdWallet, how the employees of the company were a driving force behind the idea, how working with credit unions is a better fit for this effort than partnering with the big banks, and how helping underserved communities is also benefiting NerdWallet as well.
Below is an edited transcript from a portion of our conversation. Click on the embedded SoundCloud player to hear the full conversation.
Small Business Trends: What has the pandemic done to the folks that you usually try to help?
Tim Chen: Yeah, it’s a tale of two halves. We serve America pretty broadly, based on all the research we’ve done and all the living rooms I’ve sat in across the country, about half the country is paycheck to paycheck. The other half has a cushion, and they worry about other stuff, right? And so yeah, the pandemic certainly has had a big impact on both. You’ve heard the term K-shaped recovery. For half the population, there’s been a lot of stimulus, a lot of attempts at federal aid, which was effective, at least in the short term financially, even if it didn’t really help fix the long-term issues that people face. And then for the other half, a lot of people have actually done quite well financially who are in the more fortunate half. With interest rates going down, you’ve got asset price inflation. People have made a ton of money in the stock market and all sorts of other avenues. Some businesses have really thrived. So it’s just pretty mixed out there.
Sure, yeah. I guess I’ll start with a quick primer on what the problem is that we see. I think the problem is that banks and credit unions, they make a lot more money in high-income neighborhoods than low-income neighborhoods. And this is because they take your deposits from local people, and they loan it back out to local businesses and individuals. It’s like a business loan, a mortgage, a personal loan, that kind of thing. And in higher-income communities, you’ve got a lot of pristine FICO scores. You’ve got a lot of collateral. It’s just very easy to formulaically dish out loans. Lower-income communities, you’ve got a lot of really credit-worthy people. It might be your local bakery or your elementary school teacher that you know is solid from a job security perspective. It takes more feet on the street to actually get to know these people, to make those loans.
And there are a lot of people who are actually doing this quite well. So credit unions serving low-income communities are all across the country, and Inclusive is a network of 351 of these. And they can really help deploy capital more effectively. So, as we were internally looking at this, we kind of put two and two together. Our board wants to us to keep a bunch of cash in reserve for a rainy day. That’s going to be kind of the first money in, last money out. And I thought, “Hey, I wonder maybe we could do something more effective with this cash than putting it in our commercial bank.” And so we started looking around at rates, right? It turns out you can actually get the same rates sometimes even slightly better by investing in a local community credit union than you can at your bank.
And so we got our board comfortable with this and, “Hey, capital is now flowing into communities that need it.” I think there’s kind of two approaches here companies can take. You can invest in your local community. That’s great for… Our employees love it. There was so much fire and passion when we announced this. That’s awesome. And you can get volunteer opportunities in the community. Or the other approach you could take is, you could ask Inclusive to help you seek out the most needy communities in the country. If you talk to Inclusive, they’ll mention places like Northern New Mexico, where there’s a lot of reservations, not a lot of capital flowing in, and a lot of people that need of loans, right? So yeah, we’re still trying to sort that out. We know it’s going to be a big part of what we do going forward.
And if I set back, the reason we thought NerdWallet could maybe help here is, what we’re really good at is reaching a lot of people, and helping them with smart money moves that they may just not know are an option, right? So there’s a lot of corporate treasurers and CFOs out there who may not realize that this is a free lunch. Same rates, same backed by the government, and make an impact and employees will love it. That’s the message we’re trying to spread here.
Small Business Trends: And it seems like a lot of folks that are kind of in dire straits and in need of cash, they typically kind of depend on these places, day loans, or these really short-term, high-interest kind of things. How will this be able to kind of combat that? How do you make sure that the folks actually know that this kind of thing’s going on? I hope I’m getting this right. It looks like you guys committed to moving $2 million into Self-Help Credit Union. I had never heard of that until I looked it up after getting this email from your folks. And that company, it started in 2008, but it’s actually a combination of credit unions that have been serving these local communities for decades at this point.
Tim Chen: Right. Yeah. Self-Help is a great example of a community development credit union. We thought they were really attractive because they have a focus on the Oakland area. They funded the first grocery store in West Oakland in 50 years, the Community Grocery. Yeah. I think there’s stories like that to be told at all these credit unions. And yeah, it takes legwork to go find them. Just by happenstance, I was on the Consumer Advisory Board at the Consumer Protection Financial Bureau with a senior person from Self-Help, which is how he made the connection.
But as we started digging in we found more institutions, one in Berkeley and one in San Francisco, that we thought we would try to support as well. And I think the highest leverage point is actually getting other companies with a lot of cash involved as well. I did see Netflix did make an announcement that they were moving some cash into a more targeted bank. I think their positioning was Black-owned banks, but I think there’s a lot of overlap in the Venn diagram in terms of being able to make a social impact with these deposits.
Small Business Trends: Were you spurred on by some of the social unrest that took place at the beginning of the pandemic with the George Floyd situation, Ahmaud Arbury? Lots of frustration and lots of unrest, and it wasn’t just the social aspects. There are people that are really financially distressed and that kind of adds to the situation, and creates a higher and hotter kind of period of what’s going on over this past year. Did that have any kind of play in that?
Tim Chen: Truthfully, absolutely. Internally, there was so much dialogue among the employees, and in terms of what we could do. And every Town Hall, there were questions about, “Why can’t we take action faster? What can we do?” And so, it’s been a big amount of time since then. I wish we could have gotten this rolling sooner. Better late than never.
Small Business Trends: Right.
Tim Chen: And I think companies just have so many different priorities. I think what really happened for us internally was, we started saying, “Now’s the time to focus on a more organized corporate social responsibility program.” There’s never a great time. There are always competing priorities, but this is something that a lot of employees care about. I think the paradigm of the employer-employee relationship is changing very rapidly, and that certainly resonated over the last 12 months. And it feels great, and it’s a free lunch. So it’s something that just felt like something we had to do.
Small Business Trends: You talk a lot about how your employees were saying, “How come we can’t help make this move faster?” But what about your customers and your community? How has the relationship between NerdWallet and not only your employees but the communities you serve? How’s that changed?
Tim Chen: One of the massive trends you’re seeing in the investment management space, just as an example, is a demand for ESG oriented funds. Environmental, Social impact, Governance, and… Wow, the fund flows into those particular asset classes is huge, but it’s not the fund managers driving this. It’s really people putting their money where their mouth is. So we helped consumers with all sorts of different money questions. We’ve seen a huge uptake this year in people trying to figure out how to parse through these options, and be more socially responsible with their investing, just as one example. And I think on the depository side, I think we need to raise awareness. Typically we just let people sort things by interest rates on deposits, right? Maybe there’s other dimensions that people care a lot about though, that we should be making transparent as well.
Small Business Trends: You say that you’d like to see other corporate entities kind of join in this kind of activity. Have you seen that? Have you had others come to you and say, “Hey, how do we get involved?”
Tim Chen: Yeah. We’re starting to see a trickle. We’re about a week into this, and we really hope that that trickle becomes a huge flow. I think I read that there’s something like a trillion dollars in cash on the S&P 500 companies balance sheets.
Small Business Trends: Wow.
Tim Chen: And a lot of it is sitting in the money center banks across the country. All day long, you can lend based on FICO score, but I think the really impactful stuff is having those direct relationships with people, going out on a bit of a limb with someone you know who is a great credit risk, but maybe ran into some issues. I think those are the things that make a huge difference.
Small Business Trends: Can you talk about how credit unions operate differently than the traditional big banks, and how kind of leveraging or putting money into them actually helps communities more than what goes on with these big banks? Because it seems like a lot of the smaller folks don’t have the relationships with the big banks that you need in order to really get the best opportunity.
Tim Chen: I can speak generally, credit unions are nonprofits, they’re cooperatives between their members. A lot of credit unions will return surplus profits back to all their members at the end of every period. What this does mean is that they’re not as efficiency oriented is banks. A bank may think about it very much in terms of just chasing high quality asset growth, and seeking out very low cost sources of funding. And hey, if that’s easier to do in New York City than in rural Arkansas, that’s where I’m going to direct my marketing team, right? Credit unions are very community oriented. They have branches, they’re serving specific communities. The origin story of credit unions really came around things like a bunch of steelworkers got together and formed a credit union, or a bunch of people in a local community got together and formed a credit union.
And by virtue of that, they have much more feet on the street. They’re integrated in the communities. The people who are working at these unions are often members of the community. Sometimes they do this with part of their time, not as their full-time job. And so, over the past 10 or 20 years, a lot of them have struggled as big tech and big data and infrastructure software has really driven efficiency at the big banks. They’ve struggled to keep up, so I think there’s a lot to be lost if we don’t do a better job empowering them to continue to do what they do.
Small Business Trends: It just seems like helping… Well, not helping the credit unions, but leveraging the credit unions who do have a much more empathetic relationship to community than big banks who are kind of driven by those numbers. That not only impacts the individuals that live in the community, but that impacts the overall. Do you see this helping get money into the community, and then it kind of rifles around, because dollars, once they enter the community, maybe they have an opportunity to stay in the community and help lift every boat, so to speak?
Tim Chen: Oh, absolutely. Yeah. There’s definitely a recirculation effect within communities. If you fund a grocery store, you’re hiring from the community, you’re bringing hopefully lower pricing and better selection to the community as well. And yeah, there’s such a multiplicative effect. I think that’s why capital flight is such a big and problematic issue. And the nerdy optimizer in me also finds it pretty irritating. Credit unions often have better rates than your local bank. They’re nonprofit, so they have a bigger spread to work with, both on depository rates and lending rates. They earn the spread between the two. So yeah, they’re just great places to look, even if you’re just out for your wallet.
This is part of the One-on-One Interview series with thought leaders. The transcript has been edited for publication. If it's an audio or video interview, click on the embedded player above, or subscribe via iTunes or via Stitcher.