Trying to correct the racial imbalance of banking – Finance & Commerce
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Wole Coaxum was managing director of JPMorgan Chase in corporate banking when a police officer shot dead unarmed Michael Brown in Ferguson, Missouri in 2014.
The murder caused Coaxum to rethink his career goals.
“Everyone needs the opportunity to participate fully in the economy, and I wanted to be part of the conversation,” he said. “The problems, in particular the lack of access to banking and financial tools, were hidden in plain sight. But for a community, having a social justice plan without an economic plan is like applauding with one hand. “
During the year, Coaxum left JPMorgan to create Mobility Capital Finance, known as MoCaFi, a startup focused on providing free or cheaper financial services to people with low to moderate incomes, “people like home health workers, bus drivers and municipal workers. He said, who were often underserved, discriminated against or excluded from traditional banks.
Now the deaths of George Floyd, Rayshard Brooks and Breonna Taylor, coupled with racial disparity in COVID-19 results, have amplified deep fault lines nationwide. Additionally, black-owned businesses have been hit harder by the economic fallout from the pandemic. The confluence of these crises exposed another underlying problem: income inequality and the resulting loss of access to the financial system among communities of color.
By the time Coaxum left traditional banking to become an entrepreneur, nearly 30% of households in the United States did not have a bank account or, even if they did, were still resorting to significantly more expensive alternative systems like check-cashing centers or payday loan companies. .
While those numbers have gradually improved since then – in 2017, around 25% of U.S. households had little or no access to the traditional financial system, a racial divide persists. Most of those who are said to be unbanked or underbanked live either in communities of color or in rural areas. Almost 17% of black households and 14% of Hispanic families lack basic financial services, up from 3% of white households in 2017, the latest year for which statistics are available from the Federal Deposit Insurance Corp.
Loss of access means “Blacks and Hispanics are spending 50 to 100% more per month on basic banking services, which over a lifetime can cost $ 40,000 in fees,” Coaxum said. .
While the tech industry has come under fire for its lack of diversity, Coaxum and a handful of other founders are hopeful that fintech – the term frequently used for fintech – can lead to successful business models that can help correct the imbalance of the financial system.
Marla Blow had worked in startups and financial institutions after graduating from Stanford Graduate School of Business. But it was through her experiences at the Treasury Department and the Consumer Financial Protection Bureau that she thought about focusing on those who don’t have access to banks and credit cards.
“Financial services companies have a long history of redlining and refusing to serve communities of color,” she said.
As the economy recovered from the financial crisis, she said, the subprime mortgage market, often the only credit available to low to moderate income households, has fallen behind.
As a result, she started FS Card, a company that provided the Build credit card with a spending limit of $ 500, providing a cheaper alternative to a payday loan. To do this, FS has partnered with Republic Bank to access the credit card system. It was successful: By the time it sold the company to Continental Finance in late 2018, FS Card had issued more than 100,000 cards and granted $ 50 million in credit, she said.
Blow joined Mastercard as senior vice president for social impact, North America, at the company’s Center for Inclusive Growth last October, where she focuses on reducing economic disparities.
Coaxum and Blow were also aware of another problem facing people with low to moderate incomes: the inability to obtain personal or small business loans. Traditionally, banks have used three credit rating bureaus – Equifax, Experian, and TransUnion, which rely on metrics like current account performance and mortgage payments, among others, to calculate important FICO scores.
But this often leads to a dilemma for those who have had overdrafts or are paying rent. These people may have very low scores, if any. About 20% of consumers have insufficient credit history to obtain loans through traditional means.
James Gutierrez, CEO and co-founder of Aura Financial and grandson of immigrants, was motivated by this imbalance, which he said left “clients with only two options – payday loans or auto title loans “. Its first company, Progreso Financiero, opened in 2005 before smartphones became widespread.
He offered loans in supermarkets and storefronts. Both companies, Gutierrez said, took a risk on people who were “sometimes invisible but who run the economy. And they refunded us.
After leaving in 2012, he launched Aura, which offered loans to often unbanked and underbanked people, but this time via smartphones and in places like supermarkets. To determine credit risk – and the interest rate on loans – Aura “uses proprietary data, in addition to credit bureau data, which includes income and expenses, bank account information” and whether the borrower gives money to relatives in other countries, he said. .
Progreso was renamed Oportun after the departure of Gutierrez. Under the leadership of current Managing Director Raul Vazquez, Oportun has an “omnichannel approach” to mobile storefronts, branding and grocery store availability and is now listed on the Nasdaq. Vazquez, the son of Mexican immigrants, said Opportunity not only provided financing, but also tried to provide “relationship banking” to clients who often worked multiple times with little time to spare.
All of the founders point out that while they focus on low to moderate income households, they are for-profit businesses that can be successful as they evolve.
MoCaFi, for example, which offers Mastercard debit cards, relies on the fees that merchants pay credit card processors for their income. MoCaFi recently announced that it will expand significantly this summer by offering free deposit accounts at 55,000 ATMs in five countries, including 40,000 in the United States, at stores like CVS and Rite Aid, Coaxum said. At these ATMs, customers can deposit checks or cash into their account and therefore avoid check cashing businesses.
For companies like Oportun and Aura that focus on lending, the source of income comes from interest rates on loans which often hover around 36% (including origination fees, the annual percentage rate, or APR, can exceed 50%). While this seems high compared to bank loans or even credit card financing, it is much lower than the effective rates of small payday loans – those that offer money to be repaid with the next paycheck – which can exceed 400%.
Vazquez said the higher rates applied to early loans from borrowers with no credit history; he estimated that half of Opportunity’s customers did not have a credit score. If they repay on time, a second loan could be offered at a lower rate and, ultimately, the borrower could establish a credit rating that would allow even better rates.
Leonard Chanin, the deputy chairman of the FDIC, said these short-term rates should be viewed like this. A 36% annual interest rate on a $ 100 loan could run up to around $ 3 if it’s paid off in a month, he said, when in comparison a bank might charge a fee. Fixed $ 30 for a $ 100 overdrawn check.
He said if online lenders and banks were banned from charging these interest rates, loans could dry up, leaving some borrowers with no recourse outside of payday loans or car loans.
As these businesses grow, there is room for more, said Linda Lacewell, superintendent of the New York State Department of Financial Services.
“Many are not participating in the financial system as understood by the middle class and the wealthy,” she said. “We want to help generate the opportunity to participate in an effective, but non-discriminatory way.”