June 02, 2022
We’re posting this episode almost exactly two years after George Floyd was murdered in the street in Minneapolis by Derek Chauvin.
Everyone knows that America has an enormous racial wealth gap. Everyone knows there are big racial disparities in rates of credit approval, and that African-Americans are more likely than whites to rely on high-cost alternatives to mainstream financial services. Everyone knows that communities of color struggle to access business capital.
But not enough people know that the US has a group of specially-designated financial institutions that have solutions for these problems.
My guests today are Nicole Elam, CEO of the National Bankers Association, and Robert James II, who chairs the NBA’s board of directors and is also president of Carver Financial Corporation in Savannah, Georgia.
The NBA is the trade association for Minority Depository Institutions, or MDIs. It was founded nearly a century ago, in 1927, to build on the work being done by a group of Black-owned banks that were chartered shortly after the US Civil War, because white-owned banks were not serving the needs of Black communities.
A lot has changed since those days. Nearly a half-century after the NBA’s founding, America enacted a series of civil rights laws that covered banking, including the Fair Housing Act in 1968 and the Equal Credit Opportunity Act in 1975. The government also created a special designation of MDIs in US banking law, giving these institutions access to funding and other special programs. Still, today – another half-century later – the problems of racial economic inequality persist. Solving them requires a complex range of strategies, and MDIs have an important role to play in that effort.
In today’s conversation, we talk about that role, and we also talk about the fact that these banks are struggling. They are very small, and their numbers are declining. As my guests explain, they are starved for capital and that also face an existential threat – one that actually mirrors the threat facing the overwhelming majority of community banks today: how to modernize their technology.
These small, traditional institutions have to compete both with large banks that have armies of software developers and cutting edge technology, and also with new fintechs that have the same. Technology brings huge advantages in today’s financial market (and, let’s face it, in most everything else). On the front end, banks need great technology to meet the expectations of today’s banking customer, especially as millennials become the largest consumer segment. On the back end, banks need efficient operating systems that make them cost-competitive with their rivals, including big banks that have massive economies of scale, and also young fintechs that have no branches and zero legacy technology and can be incredibly lean.
Achieving this technology upgrade is profoundly challenging. These banks rely on core IT processing vendors that are, themselves, working hard on technology modernization but that are usually not positioned to offer the latest and best and to make change affordable. The only way most small institutions can thrive in today’s high-tech world is to team up with fintech and regtech firms as vendors and partners.
Those young firms are all digitally-native. They are founded and led by tech people. They live at the cutting edge of digital change. The fintech sector, once marginal and risky, has now matured enough to include many firms with proven technology and track records. Banks want to work with them, and vice versa – most fintech and regtech firms want to work with banks, which have great advantages over them in customer acquisition and cost of funds. It’s a natural marriage between financial companies that have complementary strengths and weaknesses.
The challenge is how to make it happen.
As we discuss in today’s show, AIR is working with the NBA to help answer that question, for both MDIs and CDFIs – Community Development Financial Institutions. My colleague David Ehrich is working with Nicole, Robert and other partners on a project to identify the gaps and barriers facing these institutions and to find ways to overcome them. In the coming days we’ll be announcing more details, including the names of organizations that are partnering in the effort.
In our talk today, Nicole and Robert describe the MDI landscape, including how these institutions uniquely serve the needs of minority consumers and small businesses. They talk about the challenges they face, and describe the offers of help that MDIs received following the murder of George Floyd in 2020, and the fact that much of it, while well-intended, was off target in actually meeting the need. And they talk about what is needed now, including insights for regulators and invitations on how our listeners can help.
The United States has a small number of MDIs, and about 9,000 community banks and credit unions. I’m among the growing group of people today who believe that many of them – maybe most – are not going to survive unless they are able to modernize their technology. If these institutions disappear, their customers will lose more than a source of financial services. These entities are woven into the fabric of their communities, deeply understanding the needs, the challenges, the possibilities of their markets. If the MDI sector can figure out how to navigate the journey to digital modernization, we hope they will chart a course that can then be followed by thousands of others.
In addition, as MDIs develop their digital skills and offerings, there’s a good chance they’ll create some solutions for communities of color that other providers will be able to learn from. That would be good for everyone.
Nicole and I live in the same part of southeast Washington DC, in the Navy Yard area. During the COVID lockdowns, we both had the opportunity to watch the city government building the beautiful arches of the Frederick Douglass Memorial Bridge. For those outside the United States, Frederick Douglass was one of America’s great slavery abolitionists in the 19th century. He was born into slavery, escaped, and became a national leader, working with Abraham Lincoln and acting as a moral force, arguing for racial opportunity and justice. His work after the Civil War included helping launch the movement to create banks that would serve freed slaves and Black communities.
He lived right across the Anacostia River from where I’m sitting now, and the bridge connects his old neighborhood with Nicole’s and mine today. It’s a reminder that the work done by minority depository institutions is part of a long, ongoing arc, and that it matters.
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