The Link Between Lasting Financial Health and Community
Sawa research in partnership with Common Cents Lab, part of the Center for Advanced Hindsight at Duke University
My sense of community springs from my childhood: I grew up in southern Mississippi. Most of the people in my community didn’t have access to the economic rails that many people take for granted: a checking account, the ability to walk into a bank and get a loan. They would have been denied.
The hub of our community was the 100-member church where my father was the assistant pastor. Four generations of my family went there.
When I was seven, the church was renovated. It was super fancy, state of the art with an impressive organ, a modern audio system, plush carpet, improved lighting, new bathrooms, and air conditioning. Everyone was excited. But, how does a church made up of people who can’t qualify for a conventional loan pay for something like that? The funds came from a few places. There were the regular tithes and donations from the congregation. My uncle, who owned car dealerships in Seattle, added to the fund. For the rest, my father went to the bank and got a loan for the church.
If the bank had looked at each person individually, they wouldn’t have loaned a dime.
As a community, though, the bank saw a completely different credit situation. A community has the ability to surge. The bank could safely assume that if we as a church were falling behind, we would be able to pull money from our communities — both the church community and the other communities we were also members of — to make a payment.
The bet the bank was making in lending my childhood church the funds for our renovation was that someone in the community always had money available to offset an emergency. There might not be enough money in any one household in a given moment, but there would be enough in the community to compensate. Underwriting communities is less risky and more profitable. Because of that, they have a lower cost of capital. That’s a bet I think people should be able to take on themselves and the people around them.
“There is a convincing prima facie case that a modest amount of community based risk-sharing can lower the cost of capital and expand access to capital, making possible the accumulation of wealth,” says Michael Spence, co-recipient of the Nobel Prize in Economic Sciences, former dean of the Stanford Graduate School of Business, and Sawa board member. “It’s a premise worth validating with research from an experienced research partner.”
It’s a premise worth validating with research from an experienced research partner.
— Michael Spence, co-recipient of the Nobel Prize in Economic Sciences
The Common Cents Lab (CCL), part of the Center for Advanced Hindsight at Duke University and Sawa’s research partner, has conducted behavioral research on the power of community to create financial health. Their early research shows that delinquencies are uncommon and defaults are even rarer. In these findings, 87% of people never miss a payment and 10% rarely miss a payment, that is only once or twice ever. That accounts for 97% of people, with only 3% missing more frequently, and only a smaller subsection of those defaulting. Their survey of 400 people in Prolific, of which 252 owned their home or have a mortgage, supports the findings at a national level that show delinquencies are very low. At any given point in time, there’s always someone delinquent, but it’s almost never the same person.
This is a persistent yet mitigable problem of payment ability poorly assessed.
In the broader community, someone always has enough money to offset an emergency. Simply put, we’re miscalculating surge capacity, and millions of people have unnecessarily diminished access to credit because of it.
One of the current trends in the market is to mitigate this by further individuation — that is, finding ever smaller slivers of borrowers to underwrite, or extending capital in ever smaller slices, as “buy now, pay later” does on the transaction level. While these methods improve access to credit somewhat, all too often it’s with emphasis on the opportunity to “buy now” without regard for the experience of the individual who’s going to be “paying later.”
In the short term, community can help a person avoid a hole, or get out of a hole. Over time, the long term benefit of community is significant — it’s a route to creating financial health and addressing the wealth disparity. For people, that looks like: a community to turn to in times of trouble, the ability to talk about financial issues, enough good financial information to drown out the bad information and predatory lenders, and a transformation from financial precarity to financial health and wealth. That’s why we must build community.
This article first appeared as "How Community Can Transform Financial Health For Generations" for Forbes Business Council.