The Breakdown | Explaining Southern California's economy

Meet Starbucks, your new neighborhood investment bank

Welcome to your friendly neighborhood investment bank. Do you want them to leave room for...return on investment?
Welcome to your friendly neighborhood investment bank. Do you want them to leave room for...return on investment?

Here's an idea that's going to get people talking — and funding small businesses. The New York Times' Joe Nocera writes his column today about Starbucks' plan to partner with microfinance organization Opportunity Finance Network to solve a major American problem: a lack of small-scale lending. The project is called Create Jobs for USA. It's a great idea, but it has at least one significant problem: return on investment for the Starbucks customers who would be putting up their money.

Starting November 1, while waiting for you nonfat vente caramel latte, you can donate, say...$5 to the cause. You'll receive a red, white, and blue "indivisible" bracelet (the bracelet is an inevitable piece of viral marketing these days). Starbucks will seed the fund with a $5 million donation. As Nocera points out, this will enable Create Jobs for USA and OFN to borrow against this fund, utilizing a 7-to-1 leverage ration. Presto! Your $5 becomes $35.

That money will then be invested in small businesses in "underserved communities," something that Starbucks CEO Howard Schultz believes is sorely lacking (he actually believes that small business lending in all communities is sorely lacking). These business will then! You have to admire the boldness of this heroic businessman do-gooder end-run around the gridlocked, borderline malevolent traditional financial system. Schultz sees a problem and decides to tap into Starbucks' most powerful equity — its customer loyalty — to effectively transform the company into a caffeinated investment bank.

This kind of thing is bubbling in the economy right now. The Occupy Movement, coupled with the Dodd-Frank debate over Wall Street regulation and big banks hitting customers with fees, has crystalized the public's disgust with the banking establishment. Innovative retailers plus technology plus, of course, the bracelets, plus microfinance plus the everyday glamor of seeing your five bucks turned into 35 and them amped up to many millions...well, why can't Starbucks, or Google, or Apple, or any other company that people actually admire replace the banks that they detest?

It will be thrilling to watch this experiment in action. I have only one question: Why can't I get a modest return on my $5? The money that's raised will be treated as donations and awarded as grants, so what Starbucks and OFN will be doing, if I understand the framework correctly, is funneling customer money to needy small businesses through entities called community development financial institutions (CDFIs). OFN's success rate is high, so there's an excellent chance that the funded businesses will pay their loans back, with interest. 

If you donate money at Starbucks, or online, you're saying goodbye to the dough. You get the bracelet and all, and you get to feel better (and I assume you can treat the donation as a tex deduction), but Starbucks is really just facilitating a relationship between OFN and a large, untapped source of capital. Other types of small-scale lending allow you to do this and then have your portion of an investment pool paid back, with interest. You then have the option of re-investing, continuing the virtuous cycle, or taking your money out of the system.

I think Starbucks is missing an opportunity here to set up a re-investment structure. If I donate $5, and the eventual return is a very modest 5 percent, that's $0.25. Doesn't sound like much, but with the 7-to-1 leverage ratio, it becomes $1.75. Some of that goes to pay back the borrowed money, but it also presents donors with the chance to continually increase their investment. 

It might be impossible for Starbucks to do this without turning itself into some kind of quasi-financial institution, which could be legally thorny (although, theoretically, not impossible). But if the program is a success and inspires more like it, there will be good reason to decide if banks are the only outfits that should be in the lending game.