Neighborly: Leveraging Open Innovation to Spur Product Innovation in FinTech

Neighborly, the the kickstarter for municipal bonds, can leverage open innovation to develop new products and services to remain competitive and become an even more innovative market player.

When people think about public finance, innovation is usually not one of the first things that comes to mind. In fact, some people might argue that investment banking and traditional finance are outdated industries that lack the technology infrastructure to compete in the future. While most finance companies and investment banks have recently started to invest more in improving their technological capabilities, they have still struggled to innovate[1].

That is not the case for Neighborly, a financial technology (FinTech) start-up that allows individuals to invest directly in projects that they care about via municipal bonds. It has been deemed as the kickstarter for municipal bonds.[2] Municipal bonds are debts that are issued by a government entity to finance expenditures like infrastructure projects, schools, and/or hospitals. They are also usually tax exempt, which make them attractive securities for people looking to lower their tax burden (typically high net worth individuals).[3] As local government budgets have decreased over time and the tax base has shrunk, Neighborly has provided an innovative way for local governments to finance projects by directly connecting individual investors to projects that they’re interested in financing. Essentially, they are able to crowdsource investment resources to meet the demand of their customers.

Although Neighborly’s business model has successfully been able to crowdsource and pool individual investors, I believe the company can greatly benefit from leveraging open innovation. Open innovation could help the organization develop new products and services to remain competitive and become an even more innovative market player.

This is particularly important as Neighborly might face growth challenges in the near term due to macro and economic trends. For example, the 2017 tax bill reduced the income tax for companies and most individual Americans[4]; this is relevant because reductions in income taxes might drive down demand for tax-exempt bonds (Neighborly’s core product).[5] This presents a challenge to Neighborly as its base of crowdsourced investors might also shrink.

To address this issue in the short and medium term, Neighborly should leverage the insights and feedback from their customers to develop more products and solutions that can benefit local communities in a cost-effective way and that can benefit the people those communities serve (individual investors). It’s unclear that the organization is currently doing anything to address these shifts. They have invested in business development and expanded their financing offerings to new municipalities. However, there are many additional opportunities that Neighborly could capture. For example, many local governments will never have access to public finance offerings from large investment banks (ie. Goldman Sachs, Morgan Stanley) because the projects they need to finance are relatively small. Neighborly should focus on gathering input on the needs of these smaller local municipalities and develop affordable investment products that cater to them.

Open innovation is about finding ways to leverage the knowledge and creative solutions that exist outside of your organization. The primary benefits of open innovation include: new content generation, customer feedback, access to external expertise and creativity, and development of communities with shared incentives/interests.[6]

The megatrend of open innovation in product development is especially relevant to Neighborly because it is a natural extension of their existing business model. Neighborly has a two-sided platform that can foster collaboration. They have two sets of customers that they can leverage to gather information about new products and services to offer.[7] Some examples of ways for Neighborly to leverage open innovation to develop new products and services might include:

  • Leveraging community feedback from individual investors about projects they want to invest in
  • Matching this feedback with potential local municipalities that could meet the investor demand
  • Launching an advisory service offering to consult on financing public projects
  • Running a competition where local municipalities can pitch their development projects to potential individual investors (similar to the way cities entered a bidding process for Amazon’s HQ2)

Another medium-long term proposal would include creating forums for cities to collaborate and share best practices. For example, Neighborly could convene key decision makers in several local cities to discuss long-term development efforts, and they could additionally propose innovative financing options to the groups that are convened (i.e. a project that supports building wifi infrastructure across a metropolitan area that involves three cities. Finding ways to promote this collaboration and open innovation will lead to new ideas and potential ways for Neighborly to continue delivering value in the future.


While I do think this organization will benefit greatly from open innovation, I wonder if they embrace it, will their products be scalable or is this a high-touch business that requires customization for every municipality they interact with?




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Student comments on Neighborly: Leveraging Open Innovation to Spur Product Innovation in FinTech

  1. Ian – this article is fascinating. Neighborly’s work and mission and both impressive. It seems like Neighborly could benefit from expanding beyond its roots in municipal bonds in order to 1) increase the breadth of its product offering, and 2) decrease its sensitivity to the macro-trends you’ve highlighted. As Neighborly scales its operating, do you see value in the organization operating as more of an aggregator (or 2-sided marketplace) — collecting and screening investment-worthy projects, and providing a portal for investors to view those projects? It seems that the challenges these small projects face are two-fold: 1) they don’t meet funding requirements for traditional institutional investors, and 2) they lack access to /communication with other investors who are willing to put their capital to good use. Could Neighborly’s “value add” be in its ability to accept/promote viable community projects, rather than structuring the funding for each project?

  2. Ian, love this choice of topic, and thanks for highlighting the great work Neighborly is doing. I really like the idea of giving members of a community more control over how their money is being spent. I worry, though, that Neighborly could unintentionally be making communities less democratic by giving a disproportionate amount of influence to those wealthy enough with assets and liquidity to purchase bonds and drive project spending. I think a possible counter is that Neighborly frees up the government to spend money in complementary rather than overlapping ways to Neighborly. I would like to see Neighborly potentially work with larger organization and companies who could finance projects that other members of the community can’t afford but certainly need.

  3. I like how you included the macro-factors that could affect Neighborly’s business, and appreciate your healthy dose of skepticism.

    To your point, as a two sided marketplace, I think it’s interesting to think about Neighborly’s different areas for open innovation. In other words, open innovation amongst cities, amongst investors, and also between cities and investors. I’m curious who the typical investor is that Neighborly targets? Do these investors have any existing platforms for communing or collaborating? Similarly, with cities, are there already ways that cities share with each other?

    I like that you are questioning their growth strategy and agree that geographic expansion can only succeed in parallel with iterative innovation. I also agree that Neighborly should be considering how to extend their offering into the physical world.

  4. Ian – thank you for writing this! In addition to the recommendations for expansion you made, I’d like to add that I think Neighborly could be used to crowdsource feedback on what sorts of projects the community would like to see invested in, even if they themselves do not have the money to do so. For instance, is there a particular school within a city that really needs rework? Citizen’s preferences for city improvements could be taken into account through voting or an avenue to provide recommendations. Additionally, I find it interesting that Neighborly is using the blockchain to increase efficiency and transparency in a system that is otherwise opaque to citizens that are supposed to benefit from the funds ( .

  5. I enjoyed reading about technology enabling the democratization of the financial system, enabling more widespread and efficient use of capital. I would say that open innovation is a great way to customize fintech to each municipality and project; furthermore, Neighborly institutionalizes peer to peer lending by using financial instruments in the form of municipal bonds. Can the generation of new ideas and capital matching happen organically, or does there need to be a middleman to manage the process and formalize investments? Does machine learning need to be incorporated to optimize the process of open innovation?

  6. This is a great piece – thank you! I find Hill’s comment (that ‘Neighborly could unintentionally be making communities less democratic by giving a disproportionate amount of influence to those wealthy enough with assets and liquidity to purchase bonds and drive project spending’) to be instructive, and I wonder if there is potentially another factor in play. Could it be that there are some communities, perhaps even the communities most in need of this type of investment, that will be unable to attract such investment in the first instance because there aren’t enough investors from within the community (wealthy or otherwise)? In this way, might it give outsized influence to investors external to the community, in a way that might drive outcomes suboptimal to resident community members?

  7. I loved learning more about Neighborly and the intersection between FinTech and communities through this article! I think that Open Innovation will be a valuable tool for the firm since it conceptually aligns with the operating model/mission of the business. Essentially it would be aligning crowdsourcing of funds with the crowdsourcing of ideas. In both methods, the ultimate goal can be the betterment of communities – so I see it as a natural fit and a great vehicle for Neighborly to grow and remain competitive. You raised the question about scalability then. Personally, I think Open Innovation will help and won’t be limited by needing customization in each community. I think Neighborly could set some consistent guardrails for each community via their tech (i.e. geographical boundaries, other regulations, etc.) and then allow each community to source ideas that would be most meaningful to them via Neighborly’s platform.

  8. These are some intriguing ideas of the application of open innovation! I am particularly interested by the idea of our generation “voting with our dollars” as opposed to other forms of civic participation. Especially due to the fact that dollars do not go by “one person one vote,” will that be an effective way of influencing the way cities pick their projects? Funding an existing initiative is one matter but influencing with dollars which projects get done is another matter entirely. This may also cause other externalities in terms of transforming municipalities into more “business-like” organizations; for instance, cities may start engaging in in marketing campaigns for particular projects, which may be another drain of resources and energy.

  9. Neighborly is doing some interesting work and it was fascinating to get your thoughts. I do share some of the concerns mentioned above around who are buying the bonds and can this give unequal power to wealthier residents to influence spend of money. Additionally, the Social Impact Bond (SIB) model may look attractive in the outset, but may end up financially hurting municipalities if they could have done the project by raising the money through taxation. I like your idea of having an open competition, though I wonder if such a thing would defeat the purpose of Neighborly as being a company that supports local investors to invest into their own community.

  10. Really interesting article Ian! Love the way we can push resources and community ideas to take ownership of what we want to see in our community. I think open innovation can be a great channel to produce a larger range of products, increase the scope of interest areas (try to cover as many concerns/interests as possible), and democratize what gets done. For my last point, democratization, I do think is important to separate (at least in some part) the idea generation process from the money investing, so (as was mentioned in comments above) we do not concentrate all the decisions based on a few rich individuals.

    To your last question, I think that there are some common problems that can be generalized across municipalities and I think that with open innovation we can get a better statistical sample of what these common problems are and how important they are to the communities.

  11. This is incredibly interesting, as people now have more and more opportunities to directly influence their community. Another interesting application of open innovation would be seeing what community projects resonate with members and then implementing those. That way people can also personally influence what they want to see happen. However, what happens to projects that don’t get as much investment? Are those not done? What if they are very necessary for the community?

  12. Fantastic read! I believe these fintech companies are the wave of the future and have completely disrupted the banking industry. It is refreshing to hear about a company that is using fintech to help public governments fund necessary and beneficial projects for their constituents. I think open innovation would be beneficial for neighborly in idea generation, but I wonder how effective an open forum would be for securing investor financing. It seems that one of the largest hurdles they face is attracting investors to their platform. Well written article!

  13. Before reading this article I was hesitant if FinTech companies could truly be successful in open innovation. But the above vignette on Neighborly has changed my mind! I agree with your idea about the company possibly using community feedback from individual investors to see what projects they want to invest in. But I wonder if asking investors themselves would even be necessary? What is especially powerful with a company like this too, is that that without even asking they should be able to see what investors are interested in — through analyzing trends in which projects get funded vs. not. Is there an opportunity for Neighborly to use both open innovation and machine learning to further scale?

  14. This is a very interesting essay Ian. Great job! The only concern I had when reading about this initiative is how do we regulate the types of projects that people invest in? How do we make sure that those projects are doing good for the community in the long run, and are not simply a pet project that a rich investor cares about? I think that this platform is very interesting, but there is an inherent tension between democratizing project investments and pushing through projects that may not be popular to capital holders but may provide tremendous value for local communities.

  15. My first thought was that an organization might be wary of seeking funds on Neighborly because it could potentially be seen as a bad signal (As in “why couldn’t this org get funds elsewhere?”).

    To counteract that, your idea to “leverage community feedback from individual investors about projects they want to invest in” seems really exciting. It draws a parallel to the success Kaggle has had as a platform for data science competitions and prizes offered by both public and private entities seeking open innovation.

  16. Great work, Ian! Given that I’ve never worked in public markets, I found your article to be particularly helpful. A couple of thoughts on your question:

    Seeing that Neighborly works closely with public municipalities, I think open innovation would be highly beneficial. The threat of competition is a powerful deterrent in most cases, but with Neighborly, I would expect competing organizations to cooperate in pursuit of public good. In fact, I’m a bit surprised that Neighborly hasn’t engaged more organizations in their innovation process. Perhaps their investor relations preclude certain partnerships with other organizations.

  17. Great read, Ian. As someone who is not in the public markets as well, exposure to a fintech like neighborly is interesting. In response to your question, I would agree with a point that you raised earlier about what the overall mission of the organization should be. This idea that neighborly can provide catered products to municipalities that don’t have access or that level of customization should be key as they look to scale. While this likely dampens their growth profile, it seems to be more in line with what they are trying to do as a two-sided markets for smaller municipal projects.

  18. This is an amazing article, Ian. I hope to see more financial institutions leveraging technology to make an advancement in their competencies. Also, I like the idea on open innovation in public municipalities, the place where it is considered to be very far away from technology. However, I am not sure how investors would react to ideas generated from the open innovation. I think the role of middleman would be vastly crucial to sort out the ideas that are relevant. I am very excited about the synergy that open innovation can achieve in communities and financial industry.

  19. What a great article. I think you really touched on the key point with your scalability question. For any tech firm, the key is to create something that can then go to work at large scale without needing additional employees for the additional work. To this point though, I think it is possible for them to create a framework of options that small- and medium-sized city managers could use to propose projects; like a menu. Honestly, this is the kind of a project that could revitalize rural America, a place that could sorely use it.

  20. Thanks Ian! This is super interesting. I think this organization is one that could scale. It would require starting with projects that are relatively similar though. However, once the business gains traction, it would be possible to start crowdsourcing new ideas from investors. I agree with TOMGirl29 that once the company aligns crowdsourcing of funds with the crowdsourcing of ideas, Neighborly would provide a benefit to both networks that can help it scale. In fact, at that point, the business would likely benefit from scale, increasing the chances that municipalities are able to get sufficient investors for their projects and that investors are able to find a project they want to invest in. Although scale may require Neighborly to set some guidelines / disclosure requirements, I think the company can maintain significant flexibility regarding what projects municipalities put on the platform.

  21. Interesting article, thanks for the read! I definitely agree Neighborly could utilize open innovation for project updates and add-on services to customers – but I think this would largely be to create additional loyalty amongst customers so that they continue to use Neighborly and get valley from free services. I don’t think Neighborly could utilize open innovation projects for revenue-generating services. I think their core product is niche and serves a great unmet need. However, Neighborly doesn’t seem to have a lot of moat or loyalty with consumers & businesses that would protect them from someone else coming in, offering a similar service, and undercutting them in pricing / fees. Neighborly could use open innovation generated project ideas to create these additional services, and thus win over consumers from superior valuable add-on services. Certainly Neighborly should focus most of their resources on their core service – and growing their customer base there – which as you noted will require a lot of human touchpoints and resources ex-open innovation.

  22. Really interesting! I love the work that Neighborly is doing and glad you highlighted it. I’m curious to see if there’s an opportunity for the company to further “downstream” by providing funding opportunities at the individual level and if that happens, then how that impacts the company’s differentiation. I do see an opportunity for Neighborly to add value by vetting projects and providing “quality control” (i.e. monitoring status of projects and that the funding is being used properly). As a “trust provider” Neighborly could increase the volume of investment flowing into such projects where impact may not be as quantifiable as profits in a truly commercial venture.

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