We Invited Our Borrowers and Investors to Help Set Our Interest Rate: Six Years Later, Here's How It's Going

Can you imagine your bank inviting you to come and talk about your interest rate?
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Can you imagine your bank inviting you to come and talk about your interest rate?

I usually open RSF Social Finance's quarterly pricing meetings with this question. So far, no one has said yes.

That's understandable. When we decided in late 2009 to abandon LIBOR (a move that turned out to be prescient) and set our own rate for the RSF Social Investment Fund, which we call RSF Prime, that alone was a departure from common practice. What seemed truly radical, though, was our commitment to setting the rate collaboratively, with face-to-face quarterly pricing meetings involving investors, borrowers and RSF staff all playing a significant role in determining the interest rates investors receive and borrowers pay, as well as RSF's share of the revenue.

Some of our own staff initially thought this was a crazy idea, even given RSF's history of innovation as a funder of for-profit and nonprofit social enterprises. It still feels radical to new participants. They don't know quite what they're sitting down to: the whole system of lending and borrowing becomes visible to them in a way it never has before.

Nicole Dawes, CEO of Late July Organic Snacks and former RSF borrower, says that participating in pricing meetings "has opened my eyes to the importance and impact of transparency in all financial transactions. Understanding how others are impacted by your decisions helps ground your actions."

She has taken that lesson into other financial interactions: "I have made a conscious effort to bring this open dialogue to my discussions with retailers and vendors, and found we both end up happier with the result."

Opening a space to talk about money

Dawes' experience is not unusual. Participants often find the pricing meetings transformative. In a typical financing scenario involving borrowers and lenders, the parties to the transaction are completely isolated from one another, and they don't think of themselves as part of a community. We have structured the pricing meetings to turn that model inside out.

Following a welcoming and orientation, we ask investors, "What motivated you to invest with RSF?" We discuss RSF's role as an intermediary and how we use our share of the interest borrowers pay. Next we shift to the borrowers. They talk about what their loan has made possible and answer questions about their business. And then we turn to the rate.

At this point, somebody always delays by asking a question that's not about pricing. It's not an easy conversation to enter. You might have to reveal something about yourself from a financial perspective, or be part of someone else revealing something. Suddenly the discussion gets very concrete and real. That can be a little edgy.

Confronting interdependence

I usually ask a couple of the borrowers what a rate increase would mean for them--what are the business consequences? Maybe they'll have to put off a key hire, or delay a capital investment they need in order to grow. We ask the same of investors--what would a higher interest rate mean for them? Maybe some could invest more money, increasing the pool available to everyone. What becomes clear is how a different rate affects the system as a whole.

I've heard investors say, "I don't need more if it has that consequence for you." I've even heard borrowers say, "We could afford to pay more"--and where do you ever hear that? You could tell by the looks on their faces that even they couldn't believe they were saying it. Such moments are the sign of a real shift in perspective. If my need has consequences for someone else, my need doesn't look the same anymore. As Chris Mann, a founding partner of RSF borrower Guayakí, puts it, "If you create a system that's not based on every single person having to maximize, there's room for everyone to do well."

The point is not that everyone agrees instantly (or ever) about the right rate. The point is to have an honest and full discussion. "What I like about the pricing meeting is we had an open conversation. It became almost like a family," comments investor Irma Jennings. Asked to name a highlight of the meeting, one participant says, "That there was an actual debate over what the interest rate should be." And another notes "the focus on value generation for all the stakeholders and that the RSF share is up for discussion."

We certainly encountered questions when RSF decided to take a bigger share to cover our operating costs: "Do you really need that much? What difference in your budget does 0.25 percent actually make? How are you setting your leadership salaries?" When you make relationships and interdependence visible, people become much more accountable--and they expect accountability from others. We welcome that. (Hear more from participants in this video.)

How pricing meetings matter

At the end of the meeting, we ask whether a rate change is needed. Sometimes we get consensus, sometimes a majority, and once a 50-50 split (not, as you might expect, along investor-borrower lines). We take that sentiment back to the Social Investment Fund Pricing Committee, which considers every quarter whether to adjust RSF Prime (dubbed "the un-LIBOR" by one writer). The recommendation of the quarter's pricing meeting is a key factor, along with the market context and RSF's costs.

The larger impact of these meetings is that they build a sense of connection and contribute to our mission of changing the way the world works with money.

"It was a fascinating exercise to participate in," says Daniel Fireside, capital coordinator at Equal Exchange. "We keep saying that this isn't the kind of thing that would have ever happened with our previous mortgage holder, or anyone else for that matter. Bringing financial transactions back to the level of personal and institutional relationships is a big part of our model as well, and it's very inspiring to have forged this partnership."

We believe this is a model other financial organizations (community banks, for example) could use to strengthen community ties and make financial transactions more direct, transparent and personal. The concept is adaptable. For example, we're now piloting virtual pricing meetings using conferencing technology.

After 27 pricing meetings (most of which I have facilitated) over six-plus years involving more than 300 investors and borrower representatives, I'm confident in saying that they're far from a crazy idea. At every single pricing meeting, someone tells me, "I never actually understood how the system worked, and now I can see that making my capital available has produced real benefits in the world beyond what I earn," or "Now I understand how many people are making my loan possible." What's crazy is that not everyone who invests or borrows has this experience.

John Bloom is vice president, organizational culture at RSF Social Finance, a pioneering funder of social enterprises based in San Francisco. Follow RSF on Twitter @RSFSocFinance.

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