Product Spotlight: Microloans for the Top of the Pyramid

> Posted by Sonja E. Kelly, Fellow, CFI

We live in an age of cash flow unpredictability. Here at CFI we’ve championed work like Portfolios of the Poor, which focuses on those at the base of the pyramid. But what about those who aren’t poor? Who is paying attention to the wealthy? Are they fully included?

A new product is now addressing an oft-neglected gap in the market. The product is a microfinance loan for those at the top of the pyramid who need credit while they wait for their yearly bonus to be approved by their company’s board or while they wait for a deal to go through in order to receive their golden parachute.

“I’m waiting for my $80 million golden parachute,” says CEO Robert McMillion, CEO of Lime Werner Cable since January 1 of this year. “In the meantime, I find that I don’t have the $700 for the weekly allowance that I give my daughter and son.” McMillion stands to receive $80 million if the company’s purchase by Cobcast Cable goes through and he steps down as CEO.

“I really am in a pinch,” says McMillion. “My daughter’s prom is coming up, and without money in her checking account, how can she go shopping? Similarly, my son was hoping to buy a new sports car, and without the cash, he will have to finance it at high interest rates. If I can avoid him having to do that, I will.”

McMillion does have a great deal of stock and has saved for retirement—one might say that he doesn’t have a problem on his hands. But his stock isn’t liquid, and if he were to take out the retirement money before he actually retires, he would have to pay high taxes on it.

McMillion is not alone. U.S.-based CEOs used to be able to count on their golden parachutes and high year-end bonuses. Now, under the Dodd-Frank Act, CEOs have to wait for full board approval in order to receive the money, and even then the amounts are slightly lower than in the past. Golden parachutes have gone from $30.2 million in 2011 to $29.9 million today (we are not making this up), and executives are under increasing PR pressure to reject or only take a portion of their bonuses when companies don’t do well.

“The $0.3 million—or 1 percent—drop in the average golden parachute really makes a difference,” says Washington Post reporter Sibalee Fonay. “It could mean the difference between buying your spouse just a Mercedes instead of a McLaren for her birthday.”

French microfinance organization FauxFinance is coming to the rescue with a product they call Bonus-Gap. FauxFinance reports that they have already seen extremely high interest in the product in the American market in which they operate. “American CEOs are used to a yearly influx of cash, but the volatility and unpredictability of year-end bonuses, golden parachutes, and stock prices can really disrupt their family cash flow. It creates a culture of financial fear, and we hope that we can mitigate that fear.”

“We find that we can address a critical market failure and fill a niche role in the microfinance market,” FauxFinance continues. “Everyone seems to be focused on clients that are around or below the poverty line. The wealthy aren’t receiving the services that they have a right to.”

CFI cares deeply about financial inclusion for all. We cannot ignore the wealthy as we look to address cash flow issues through financial inclusion, and we look forward to watching the success of this product as it is rolled out in the U.S. market.

Happy April Fool’s Day! If you’re not from a country that takes the opportunity of April 1 to play a harmless joke, click here for a bit of background. Did we get you?

Image credit: Jeremy Piehler

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