Let’s Narrow Economic Inequities by Supporting Minority-Owned Banks

During the pandemic, an unfair portion of the economic hardship has fallen on those least equipped to cope and has heightened the issue of economic disparity in our country.  It also exposed the critical role minority-owned and community banks play in financing small businesses in their communities – the real economy versus the Wall Street economy. For example, Georgia-based Citizens Trust Bank, an African American-owned bank, distributed 350 Payroll Protection Program  loans for a total of $30 million ranging in size from $1 million to as low as $400.

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The Issue With Minority-Owned And Community Banks

The issue is that there are too few of these minority-owned and community banks – less than 10% of the banking universe in the US are categorized as minority depository institutions.  We as a nation must do better to democratize access to capital.  This is a call to action to all those in the public and private sectors who have the influence and the means to affect change.

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The American Financial Exchange (AFX), an electronic inter-bank trading exchange whose members include community and minority-owned banks, recently held a webinar on this topic. Speakers included Jelena McWilliams, chairman of the Federal Depository Insurance Commission (FDIC), Kim Saunders, CEO of the National Bankers Association (NBA), the trade group for minority-owned banks and myself.  Our intent was an open discussion of both the issues and innovative solutions that are being developed by the federal government and the private sector to address challenges facing community banks.

Some major themes emerged: Innovation, alternative credit, fintech and the need for more physical banks in communities.

Alternative Credit

Chairman McWilliams said the FDIC sees innovation as a crucial element in a more inclusive banking system. Already fintechs are remaking traditional bank functions like credit and payments, bringing services to underserved communities through mobile apps and other technologies.

However, many citizens in minority communities are still “underbanked” and face barriers in obtaining credit, which in turn makes it more difficult for them to purchase homes, finance college educations and start new businesses — all essential elements of a middle-class lifestyle and full participation in the American economy. When minority-owned businesses stay viable, they maintain and create jobs, often in underserved communities with significant economic instability.

Even when small business and entrepreneurs of color do get credit, the costs can be steeper than for their peers. A 2018 Small Business Administration (SBA) report found that minority business enterprises typically experience higher interest rates and more loan denial than White businesses. The SBA found that personal and family savings are the most common sources of financing for all entrepreneurs, and among Black and Latinx founders, the reliance on those funds is even higher. [1]

The FDIC said they are well aware of these issues and have been working with regulators, financial institutions and technology companies to facilitate the use of alternative data in credit underwriting. Because minority and low-income borrowers often don’t have access to credit cards, checking and savings accounts, they frequently have low or non-existent credit ratings, which prevent them from qualifying for loans. One solution is using alternative data, which measures the payments they do make, like cell phone charges and dealer auto loans, to assess their credit.

Using alternative data can improve the speed and accuracy of credit decisions and helps banks to evaluate the credit worthiness of consumers who may have not otherwise had access to credit in the mainstream credit system.  This is the type of thinking that we need to move in the right direction.

The Old Fashioned Way

Remember the movie, It's a Wonderful Life?  George Bailey dedicates his life and bank to helping others.  His Building and Loan was willing to lend to its citizens because he knew them personally.  The movie was a fantasy, but today many of community banks practice the “know your customer rule,” critical to those who are not able to check all the boxes in loan applications, but are well able to repay their loans.

Kim Saunders of the National Bankers Association believes that while technology and innovation are critical, banks also need to have an actual physical presence in the communities they serve.

“The concept of our banks being present physically in low- to moderate-income neighborhoods is important, because when you have a question, when you're trying to learn the financial system, it's important that you have someone that you can have a face-to-face conversation,” she explained.

Saunders added that community banks also provide technical assistance and support for first time home ownership and business ownership, providing an opportunity to create generational wealth for families of color. However, these banks represent  a fraction of the banking ecosystem: Only 144 are categorized as minority owned, and only 21 are African American owned.  We need to do much better than this.

What’s Needed

We need to eschew conventional thinking to solve the challenges of helping regional and community banks serve their communities.  Building on the government’s programs, new initiatives are needed to increase the flow of funds to minority-owned banks and their communities.  Expanding lending to minority entrepreneurs and businesses will positively  impact the US economy in general by financing new companies and creating jobs.

Some companies are stepping up to the challenge. Notably, Netflix announced in June they are committing $100 million to support Black lenders.  More recently, Microsoft announced it would work with the FDIC and minority-owned banks to get money to minority-owned businesses.

We need more of these public/private partnerships to democratize lending and to allow for more innovation, encourage growth and spur employment and expand our network of minority banks.  Our country’s business and government leadership have the intellectual capital and resources to make it happen. The time is now.


About the Author

Dr. Richard L. Sandor is the Aaron Director Lecturer in Law and Economics
at the University of Chicago Law School. He is also chair and CEO of the American Financial Exchange, ameribor.net, an electronic exchange for direct interbank/financial institution lending and borrowing.
@the_AFX