Johnny Wright is a Chicago native and a West Coast celebrity coiffeur, who earlier this year parlayed his campaign-trail service for Michelle Obama into a regular White House gig as the First Lady's First Hairstylist.

Wright's burgeoning fame (he has signed on for a reality television show, too) got its start from the training and licensing he received at a Southside Chicago beauty school a decade ago that owes its existence to a $200,000 low-income opportunity investment from a Cook County community development financial institution, in partnership with Harris Bank.

The owners "took the dollars from Harris Bank, bought a police station in the 6th district that was abandoned, and converted it into a beauty college," said Yevette Boutall, a director of the CDFI, Community Economic Development Association. "That's what you call teamwork."

Since the formal designation of CDFIs in 1994, the Treasury estimates that they have financed around $29 billion in small-business and affordable housing loans in poor communities.

Acting as intermediaries to banks, credit unions and foundations, the CDFIs provide low-cost financing to neighborhood developers and small-business owners that might otherwise have trouble obtaining market-rate loans.

But the traditional CDFI model, say many observers, is in crisis. Since last fall, CDFIs have been losing access to low-cost sources of funding from partner banks that are cutting lines or lending at higher rates - though demand for financing is as high as ever. The dried up secondary market for low-income tax credits has only added to CDFI's woes.

Community development financing faces a critical threat of sliding into a "permanently diminished role," said Mark Pinsky, the CEO of Opportunity Finance Network, a nationwide association of 170 CDFIs.

The problem has grown acute enough to grab the attention of Federal Reserve Chairman Ben Bernanke, who is calling for the creation of a broader and more diverse funding base to carry CDFIs through the current credit crisis, and beyond. CDFI organizers say banks have to be kept in the picture, since they provide 54 percent of the total funding for CDFIs.

"If we can't pull banks back into the communities, I think the level of disinvestment, unemployment and blight will increase very dramatically," said Calvin Holmes, executive director of the Chicago Community Loan Fund, which provides pre-development financing for local retail, housing and nonprofit construction. "We've got to have our traditional bank partners with us."

In its second-quarter market conditions survey of about 100 member CDFIs, Opportunity Finance found more than half of the respondents reported being "capital restrained" and were boosting loan-loss reserves in their portfolios. Most expect "operating and liquidity challenges" to continue this year, with 30 percent expected to fund fewer loans to start-ups, non-profits and housing developers. Meanwhile, the survey found that requests for CDFI funding are on the rise, in part because traditional financial has become off-limits.

Pinsky says his group is in talks with government officials to find "new ways of increasing liquidity, whether its various forms of guarantees that would help investors put money into CDFIs" or getting additional government awards from the Treasury's CDFI Fund, a division which handles financial assistance to institutions in economically depressed areas

The CDFI Fund responded in June with $90 million in awards provided by the government's stimulus package - with another round anticipated to reach the streets in September, for a total planned 2009 disbursement of $207 million.

The stimulus package also doubled, to $6.5 billion, the amount of New Market Tax Credits the CDFI Fund would back for approved community development investments this year.

But many think it will take more to fill in an expected 39 percent drop in available CDFI capital. The CDFI Fund last year recommended that Treasury set aside up to $2 billion from Troubled Asset Relief Program funds for CDFIs.

Where has the money gone? CDFIs have lost several of their primary benefactors of recent years, either to failure or mergers; Wachovia Corp., Washington Mutual Inc., and Merrill Lynch were among the most active in CDFIs. (The investments earn banks Community Reinvestment Act credit.) The overall market downturn, too, has played a role; a recent study presented to the Fed showed that CDFIs were frequently found to have lost "concessionary" funding or short-term capital lines. Self-Help, a community development credit union in Durham, N.C., had only hours to replace a $25 million overnight facility called in by a lender on the day Lehman Bros. collapsed. Another CDFI had to cut ties with a lender that sought full collateral on loans already guaranteed by the Small Business Administration, and ordered the CDFI to cede interest in the loans (a violation of SBA guidelines), according to Paul Weech, a former chief of staff with the SBA who interviewed dozens of CDFIs for the study.

Loans that are being renewed for CDFIs are coming with rate hikes of 200 to 250 basis points, according to Weech.

The market for Low-Income Housing Tax Credits is perhaps the most critical loss for CDFIs. The credits in recent years had provided about $8 billion annually in equity financing for developers of affordable housing projects as they neared closing. But 40 percent of that volume came from Freddie Mac and Fannie Mae purchases, which were halted in the spring of 2008.

"Most of the projects that have gone on in Detroit have been so because they've been subsidized by tax credits," says Ray Waters, president of ShoreBank Enterprise Detroit - the nonprofit arm of ShoreBank in Chicago. Without the tax credits, banks became hesitant to pick up pre-development loans and that forced ShoreBank to turn away from funding new developments almost exclusively in favor of rehab projects.

In his June remarks on CDFIs, Bernanke called for bringing new venture capital investors into the stagnant LIHTC market. Some of the market has been ameliorated with a program under the 2008 Home Economic Recovery Act to provide grants to states in lieu of tax credit investments for housing developers.

The act also opened up another possible new funding channel for CDFIs: membership in the Federal Home Loan Bank System. So far, only a "small number" of CDFIs - those that are banks, thrifts and credit unions - will have the capacity to qualify for collateralized advanced for lending, says Pinsky, whose network is negotiating less restrictive CDFI terms on asset requirements with the Home Loan Bank System's regulator, the Federal Housing Finance Agency. "Most CDFIs tend to be unregulated institutions, and that creates a challenge for the FHFA and Federal Home Loan banks, who need a certain amount of 'apples-to-apples' information," says Pinsky.

Some questions have been raised whether those same regulatory issues are holding back Treasury from offering up TARP funds, as recommended by its CDFI Fund board within the agency. Fifteen to date have received TARP funds, for a total of $132 million.

In lieu of TARP, Pinsky says, "the Treasury could make equity equivalent investments in loan funds and some equity funds and secondary capital investments" to spur liquidity.

Some CDFIs are devising their own solutions to boosting capital and revenue streams. Calvert Foundation in Maryland, for example, has raised $160 million, with an average 3 percent rate of return, for a mutual-fund type instrument in "community development notes" that has attracted 4,700 investors - and the praise of Bernanke.

And Holmes of the Chicago loan fund is considering how his and other CDFI organizations can help unfreeze the secondary market. One idea is for some CDFIs that have enough capital to take the bullet for partner banks that are unable to front loans under tightened risk management guidelines. "Maybe we can take over the long-term asset and management risk over time. Maybe we become the solution for that, because we think we have the balance sheet and the regulatory environment to do that."

Longer-term solutions may also come into play from outside the CDFI circle of influence. The president's regulatory overhaul includes expansion of financial services companies subject to CRA, which could widen the field of potential CDFI financiers.

CDFIs are also eyeing the use of $80 million in funds allocated in 2009 to the Capital Magnet Fund, a vehicle controlled by the CDFI Fund created under the Home Economic Recovery Act.

CDFIs play a crucial role in economic development because they provide cost-effective financing to borrowers that might not qualify for conventional loans. The loans provided by CDFIs are done at levels too low to be profitable for standard banks, and often need to be ferried through several layers of participation.

"CDFIs are one of the few ways to get capital into the lower quintiles," said Pinsky. "The goal here is to get the credit flowing in a responsible way. I'm not sure who else besides CDFIs are going to be doing that."

In Chicago, a $1 million loan on a 2004 project by the Chicago Community fund provided the foundation for an Uptown-area mixed-use development of housing, office and retail that has since attracted a Target anchor store.

Holmes' group is also taking the lead on a $2 million to 3 million pre-development loan - one which required more than 17 different sources of financing - to replace a decaying 70-year-old public housing project with a new 3,000-unit affordable-housing development.

"That project will be worth hundreds of millions by the time it's done," says Holmes.

Since October last year, motorists in Decatur, Ga., have had the option to pay for metered parking using cell phones. After pulling into a parking space near the courthouse, the driver dials in a parking space number and the allotted time before receiving a text message confirming authorization. MobileNOW!, the company spearheading the project, plans to expand coverage later this year to 350 spaces, up from 50.

While fledgling, the initiative could soon spread fast if Americans find it as useful as Europeans: the company's licensor has so far installed 70,000 mobile parking meters in Belgium, plus others in the United Kingdom, Estonia, Slovakia and Ukraine.

"We are trying to use as much existing technology as possible to make it easy for people," says Krista Tassa, president of MobileNOW!, based in Whitestone, N.Y.

Like MobileNOW!'s, many mobile payment schemes have taken hold overseas while remaining in niche pilot stages across the U.S. But with 270 million wireless subscribers nationwide at the end of 2008, representing 87% of the U.S. population, according to CTIA Wireless Association, experts say there's good reason to believe that mobile payments will become as widespread as Internet banking and ATMs (there are others, of course, who have their doubts). If banks aren't ready, other providers, such as wireless phone carriers and payment vendors, will steal the show.

"The one who enrolls is the one who controls," says Richard Crone, chief executive officer of Crone Consulting, a firm in San Carlos, Calif. "This isn't just a first mover advantage, this is a protect strategy."

Crone predicts three phases for mobile commerce in the coming years. The first is underway with mobile self-service, which many mobile banking services offer for account balances and ATM/branch location information. Next will come mobile payments, then user-defined mobile marketing that could prove crucial to attracting merchants. "Financial institutions need to strategically position themselves to ride each of the three waves," he says.

In the United States, paying for goods and services by cell phone still remains in its nascent stages, due in part to lack of simplicity, lack of investment, and cost of hardware. Merchants are reluctant to install any new terminals, which are needed to read new technologies that are already used in cell phones overseas, such as embedded radio chips that enable contactless transactions at the point of sale.

Meanwhile, the payments system in place here already works well: credit and debit cards are accepted almost everywhere, giving a ubiquity and convenience that makes it hard for other payment types to crack the market.

"We have got cash, cards and checks - and they perform adequately for what we need to do," says Nick Holland, a senior analyst at Aite Group. "Fundamentally, whatever you are doing, particularly in the physical payments realm, it has to be better than cash, otherwise it's dead in the water."

Yet with cell phones as ubiquitous as televisions, coupled with the emergence of smart phones, it may be only a matter of time before these devices will match the convenience of existing payment methods, experts say.

Initiatives overseas are proving that consumers like the convenience of using phones to pay bills or make purchases, although the high levels of unbanked in those countries make it a difficult U.S. comparison. In Africa, mobile transfers have taken off across the continent. M-PESA, a payments solution serving the unbanked in Kenya, grew to 1.8 million users in its first 15 months, representing 5 percent of the country's population, according to Aite Group. There, as in the U.S., many cell phone owners don't have bank accounts.

Five competing technologies are vying to provide new convenience for cell phone users. Voice, text messaging and smart phone browsers all can be used for making payments, and are attractive to vendors since they are open systems that can be harnessed easily. Closed systems include downloadable applications and a wireless chip, commonly referred to as NFC, short for "near field communications." These are more complex to pull off because they generally require coordination among various players, such as wireless carriers, banks and other vendors. U.S. banks and card firms have been testing NFC for six years, including a new pilot in India led by Citigroup.

Providers that have had success note that simplicity pays off, with open systems leading the way. That means tapping into what is already widely available. MobileNOW!'s system uses a touchtone response system to take calls, and text messaging to send authorizations. Their first time parking, drivers receive a text message with a personal identification number and password, which they later use to set up an account online, as they would with a highway toll pass.

"The initiatives that work do not necessarily rely on upcoming technology," Holland says. "A lot can be done with existing voice systems and text messaging."

ShortStop, a chain of four convenience stores in Boulder, Colo., completed a pilot of accepting mobile payments for gift cards earlier this year and plans to continue using it. It also uses existing technology. The retail chain has hired Mocapay, also of Boulder, which sells mobile platforms that use text messaging and existing terminals to send and receive gift cards. Mocapay installs software that is downloaded to the terminals. Users receive a code on their cell phones that can be typed in at the point of sale and the account is debited.

Kevin Grieve, chief executive officer of Mocapay and a former chief strategy officer at First Data Corp., says the payments system should not alienate banks since it doesn't displace interchange fees they collect. Mocapay makes money by charging a fee on top of the interchange involved with the gift card. The model assumes mobile payments will add more revenue and loyalty for merchants, increasing sales. Customers can use text messaging, a phone's browser, or an iPhone application to receive the data.

U.S. wireless carriers have yet to sell phones with them, but the chips have done well elsewhere. In Japan, for example, NTT DoCoMo, the country's largest cell phone carrier, has worked with merchants to promote use of payments using NFC chips embedded in handsets. The chip makes it possible for the phones to store data such as personal identification, bank account numbers, balances, credit account information and transit passes. The service, dubbed "Osaifu-Keitai," includes a mobile-phone-based settlement function using credit or prepaid electronic money. NTT DoCoMo has sold 30 million handsets with the chips since its introduction in 2004 through July 2008, the latest figures that are available. The phone company also struck deals through alliances with railroad companies, major convenience stores and supermarkets to develop platforms to accept the payments.

Yet no matter what technology works, banks need to start building a base to capture part of the mobile payments stream in the coming years, Crone says. "The bank must enroll the customer for some type of mobile self-service," he warns. "You need to get the mobile number ingrained in the fabric of the customer profile. If you don't have mobile banking capabilities, you must install it."

One place to start is with their Internet users. About 18 percent of Internet households reported that they have done some type of mobile payment, according to an October survey of 1,000 online users by Synergistics, an Atlanta consulting firm. Methods included online bill payment, transfers, "peer-to-peer" payments, online loan payments and online purchases.

Some banks are already well on their way. Bank of America has signed up 2.6 million active users since it started mobile banking in August 2007. It's new payments venture with First Data, which has gone to market with applicable NFC-chipped stickers that work on any phone, may be one to watch in terms of merchant uptake.

For other banks, the time is now. "We're in the early adopter stage of mobile payments," says Genie Driskill, the chief operating officer at Synergistics Research Corp. "The infrastructure is in place, based on the number of people that have cell phones and smart phones and are already using them for financial activities."

The Next Frontier

The U.S. trails other countries in the acceptance of mobile payments, but with 270 million wireless users here, it's a market that's ripe for growth. Will banks be ready?

Marketing

Smart Moves

More and more banks are incorporating financial education into their marketing. The outreach is aimed partly at rebuilding trust, but mostly it's the recognition that an informed customer is a good customer.

AD BEAT

A New, Old Message

San Antonio's Frost Bank brings a more cosmopolitan feel to its new campaign, while staying true to its bank-next-door roots.

Corporate & Institutional

A Slow Comeback for Chapter 11 Financing

Fat incentives lure some banks back to the market, but many, wary of regulatory scrutiny, remain on the sidelines.

Corporate & Institutional

Not Such a Bright Spot

Robust in 2008, commercial and industrial lending has been lackluster in 2009, and delinquencies are on the rise.

Snapshot

Best of the Bunch

Top 100 mid-tier banks and thrifts ranked by 3-year average ROE

Putting together a ranking of top-performing banks sure isn't as easy as it used to be. Included in this issue is a list of the top 100 mid-tier bank holding companies, ranked by three-year average return on equity from 2006 through 2008. But to get to that 100, we had to bend the rules a bit.

Mortgages

Brother, Can You Spare a Warehouse Line?

A bleak outlook for the recovery of warehouse lending has many mortgage bankers believing it's time to call in Uncle Sam - as well as start knocking on more doors along Main Street.

Main Street

An End to the Roadblocks?

The Obama administration wants to dismantle much of Riegle-Neal and allow banks to open branches wherever they please. But first it faces the tall order of eliminating the thrift charter.

Security

Old Crimes, New Tactics

As thieves become more sophisticated, banks face new challenges in thwarting theft — both in branches and online.

Risk Management

Speaking the Same Language

There's little disagreement that standardizing definitions for common terms could help bankers and regulators identify risk more quickly. The problem is the cost.

Op-Ed

Credit Card Legislation Presents Compliance Challenges

In the coming year we can expect bank examiners to respond favorably in those instances where careful, proactive compliance management is evident.

The Economy

Piling Up on the Fed

Bipartisanship finally comes to Capitol Hill, and it could threaten a key element of the Obama administration's plan for regulatory reform.

Back Porch

Select quotes from the world of financial services.

Abolishing the OTS Could Raise Capital Concerns

A case could be made that eliminating the thrift charter might spook investors and, in turn, limit the institutions' capital-raising options.

Hits and Has-Beens

Executive changes

Now in its tenth year the Banking Technology Awards were created to recognise innovation and excellence with the financial services IT industry. This black tie event takes place in the lavish Grosvenor Ballroom on London's Park Lane in November. Every year the event becomes more prestigious and in 2008 there was a record 500 guests in attendance. The awards generate huge interest from the Banking community and as a sponsor it is a fantastic opportunity to promote your brand through a continuous campaign encompassing print and online channels. Plus the additional opportunities on the evening including hosting a table of 10. Your attendance on the evening will allow you to network with the most senior financial IT professionals within the industry whilst aligning yourself with Banking Technology magazine.The 2009 awards will be launched in the May issue of Banking Technology. Details of the categories, judges, how to enter and other information will then also be available on this website. Please visit us again soon.Sponsorship is limited although there are still categories available last year's sponsors included ; hp, Vocalink, Women In Technology, Arcontech, Finiti.