Trying to Correct Banking’s Racial Imbalance

This article is part of our continuing Fast Forward series, which examines technological, economic, social and cultural shifts that happen as businesses evolve.

Wole Coaxum was a managing director at JPMorgan Chase in business banking when a police officer fatally shot the unarmed Michael Brown in Ferguson, Mo., in 2014.

The killing caused Mr. Coaxum to rethink his career goals.

“Everyone needs the opportunity to effectively participate fully in the economy, and I wanted to be part of the conversation,” he said. “The issues, including the lack of access to banking and financial tools, were hiding in plain sight. But for a community to have a social justice plan without an economic plan is like one hand clapping.”

Within the year Mr. Coaxum left JPMorgan to create Mobility Capital Finance, known as MoCaFi, a start-up focused on providing free or less expensive financial services to those with low-to-moderate incomes, “people like home health care workers, bus drivers and municipal employees,” he said, who frequently were underserved, discriminated against or shut out from traditional banks.

While those numbers have improved incrementally since then — as of 2017, roughly 25 percent of U.S. households had limited or no access to the traditional financial system, a racial divide remains. Most of those who are the so-called un-or-under-banked live either in communities of color or rural areas. Close to 17 percent of black households and 14 percent of Hispanic families lack basic financial services, compared with 3 percent of white households in 2017, the last year for which statistics are available from the F.D.I.C.

The loss of access means that “black and Hispanic people are spending 50 to 100 percent more per month for basic banking services, which, over a lifetime, can cost $40,000 in fees,” Mr. Coaxum said.

While the technology sector has been criticized for its lack of diversity, Mr. Coaxum and a handful of other founders are hoping that fintech — the frequently used term for financial technology — can lead to successful business models that can help correct the imbalance in the financial system.

Marla Blow had worked in start-ups and financial institutions after graduating from the 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 without access to banks and credit cards.

“Financial services companies have a long history of redlining and declining to serve communities of color,” she said.

While the economy recovered from the financial crisis, she said, the subprime market — often the only credit available to households with low-to-moderate income — lagged behind.

Credit…Cole Burston/Bloomberg

As a result, she started FS Card, a company that provided the Build credit card with a $500 spending limit, offering a lower-cost alternative to a payday loan. To get this done, FS partnered with Republic Bank to gain access to the credit-card system. She had traction: At the time she sold the company to Continental Finance in late 2018, FS Card had issued more than 100,000 cards and extended $50 million in credit, she said.

Ms. Blow joined Mastercard as the senior vice president for social impact, North America, at the company’s Center for Inclusive Growth last October, where she focuses on closing economic disparities.

Mr. Coaxum and Ms. Blow were also aware of another problem facing people with low-to-moderate income: the inability to get personal or small business loans. Traditionally, banks use three credit rating bureaus — Equifax, Experian and TransUnion, which rely on indicators like checking-account performance and mortgage payments, among others, to compute the important FICO scores.

But that often leads to a dilemma for those who have had overdrafts or pay rent. These people may have very low scores, or sometimes none at all. About 20 percent of consumers have insufficient credit history to secure loans from traditional means.

Credit…Ryan Christopher Jones for The New York Times

James Gutierrez, the chief executive and co-founder of Aura Financial and the grandson of immigrants, was driven by this imbalance, which, he said, left “customers with only two options — payday loans or auto title loans.” His first company, Progreso Financiero, opened in 2005 before smartphones became widespread.

It offered loans through supermarkets and storefronts. Both companies, Mr. Gutierrez said, took a risk on people who were “sometimes invisible but make the economy go round. And they paid us back.”

After he left in 2012, he began Aura, which offered loans to people often unbanked and underbanked, but this time through smartphones and in locations like supermarkets. To determine credit risk — and the interest rate for the loans — Aura “uses proprietary data, in addition to credit bureau data, that include income and expenses, bank account information” and whether the borrower gives money to relatives in other countries, he said.

Progreso was renamed Oportun after Mr. Gutierrez left. Under the current chief executive, Raul Vazquez, Oportun has an “omnichannel approach” of mobile, branded storefronts and grocery store availability and is now publicly traded on Nasdaq. Mr. Vazquez, the son of Mexican immigrants, said Oportun was not only providing financing, but was also trying to provide “relationship banking services” to customers who often worked multiple jobs with little time to spare.

All the founders emphasize that while they focus on low-to-moderate-income households, they are for-profit companies that can succeed as they scale.

MoCaFi, for example, which offers Mastercard debit cards, relies on the fees merchants pay credit-card processors for revenue. MoCaFi recently announced that it would expand significantly this summer by offering free deposit accounts at 55,000 A.T.M.s in five countries, 40,000 of which will be in the United States, in stores like CVS and Rite Aid, Mr. Coaxum said.At those A.T.M.s, customers can deposit checks or cash into their accounts and, as a result, avoid checking-cashing businesses.

For companies like Oportun and Aura that focus on lending, the revenue source is from the interest rates on loans that often hover around 36 percent (when including origination fees, the annual percentage rate, or APR, can exceed 50 percent). While that seems high when compared to bank loans or even credit-card financing, it is far lower than the effective rates for small payday loans — those that offer money to be repaid with the next paycheck — which can exceed 400 percent.

Mr. Vazquez said that the higher rates applied to first-time loans from borrowers with no credit history; he estimated that half of Oportun’s customers lacked credit scores. If they repay on time, a second loan might be offered at a lower rate, and ultimately, the borrower could establish a credit rating that would enable even better rates.

Leonard Chanin, the deputy to the chairman of the F.D.I.C., said that those short-term rates should be viewed as just that. An annual interest rate of 36 percent on a $100 loan could amount to about $3 if repaid in a month, he said, while in comparison a bank could charge a flat fee of $30 for an overdrawn $100 check.

He said that if online lenders and banks were prohibited from charging those interest rates, then lending could dry up, leaving some borrowers with no recourse apart from payday or auto-title loans.

While these companies are expanding, there is room for more, said Linda Lacewell, superintendent of New York State Department of Financial Services.

“Many are not participating in the financial system the way middle class and rich understand,” she said. “We want to help generate the opportunity to participate in a way that is efficient, but not discriminatory.”

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