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Can Black-Owned Banks Survive a Digital Economy?

Almost a year after the #BankBlack campaign first began, will black-owned backs be able to sustain the momentum and attract younger clienteles?
Killer Mike performs at of the 2015 Coachella Valley Music And Arts Festival in Indio, California.

Killer Mike performs at of the 2015 Coachella Valley Music And Arts Festival in Indio, California.

Nestled on Chicago’s South Side in its predominantly black Chatham neighborhood are the Seaway Bank & Trust Co. headquarters. On a typical day, Motown-esque soul music plays softly as customers are greeted, sometimes by name, by a mostly black staff. A black security guard watches near the entrance, waving his hand and smiling at customers as they exit.

Founded in 1965 to combat discriminatory lending practices, Seaway is one of many black-owned banks that has received several million dollars more in new deposits this year thanks to the #BankBlack campaign, a 2016 call for African Americans to divert a portion of their money into black-owned banks in the wake of multiple police brutality incidents involving unarmed blacks.

Within the community, this subtle shift of funds into black-owned banks is a positive effort to support businesses and institutions that help sustain the black community, which has historically been economically disenfranchised.

Black-owned banks are seeing the #BankBlack campaign as a chance to reverse that trend. The call to action came in February of 2016 when rapper and activist Michael “Killer Mike” Render posted a call to Instagram for blacks to open accounts at Citizens Trust Bank in Atlanta or other black-owned banks. Other celebrities like Solange Knowles issued similar calls. Render’s plea intensified as police brutality victims dominated headlines, particularly after the deaths of Philando Castile and Alton Sterling.

“It’s ranging from grandmothers coming in opening up checking accounts for $100 for their children, to professionals in the city coming in saying that there are other banks that are more convenient for them, but they think it’s an important time for them to support Seaway,” says Veranda Dickens, Seaway’s chairman.

The Great Recession that devoured homeowners of color alongside rapidly changing banking technology and consumer expectations has made it difficult for black-owned banks to stay afloat and keep up with what consumers want. While blacks and Hispanics were three and two times as likely to receive subprime loans, respectively, black-owned banks that primarily serve black and low-income communities were forced to shut down or consolidate. And, at the same time, younger technology-savvy consumers were increasingly turning to banks with mobile banking applications or financial technology start-ups for banking services.

But at a time when the long-term survival of black banks looks perilous, the #BankBlack campaign has emerged as a form of economic action, bringing new cash and a renewed interest in their well-being. As the black community is reckoning with police brutality time and again, the #BankBlack campaign serves as an effort to preserve banks that provide critical services for black communities — services that many see as necessary to improving the systemic economic problems within the black community.

Though exact figures of the recent surge haven’t been tabulated across all 22 black-owned banks, stories like the one in Houston picking up almost a million dollars in donations from over 4,000 new clients aren’t uncommon. But as black-owned banks capitalize on the social media momentum, it’s unclear whether they can maintain this growth spurt by tapping into social media, modernizing their banking technology, and competing with other community and large-scale banks in order to survive.

“Obviously the more history that you have, the more likely that your black bank will survive.”

Like many community banks, black-owned banks recognize that they need to offer mobile apps and become more fluent in social media to attract the next generation of customers. But some say there are non-technological factors black banks need to consider when coming up with long-term strategies.

To stay in business, banks must grow to an optimal size, establish or remain in areas with a strong black buying power, consider the migration patterns of blacks, and consider the overall racial tensions in the areas they serve as well as the historical support for black-owned banks, says William Michael Cunningham, social investing adviser at Creative Investment Research, a Washington, D.C.-based research firm that specializes in community development and impact investing. “Obviously the more history that you have, the more likely that your black bank will survive,” Cunningham says.

The complicated relationship between blacks and mainstream banks in the United States dates back to 1874, when The Freedman’s Savings Bank and Trust was founded to provide former slaves with an economic institution and elevate them to middle-class status. After it failed that same year due to mismanagement, fraud, and other economic factors, more than 60,000 blacks were suddenly left without $3 million.

Several private black-owned banks were established to fill the need for financial service institutions for blacks. The exclusion of black from mainstream banks led to the creation of black banks, but various societal and economic hurdles kept them from growing too large.

Eight black-owned banks were operating in the U.S. between 1900 and 1939, dropping to just two between 1940 and 1959, but rising again to 11 in the 1960s and 24 between 1970 and 1975, as records from the Encyclopedia of African American Business show. Though the banking industry as a whole was plagued by larceny and ineptitude, black banks in particular were weighed down by limited capital, poor loan practices, and some misappropriation of funds.

The discrimination that led to the creation of black banks also hindered them from significantly growing due to not having enough capital to withstand economic downturns, says Dan Immergluck, a professor in the School of City and Regional Planning at the Georgia Institute of Technology who researches housing trends including fair lending, foreclosure, and community reinvestment.

Black owned banks were “basically … self-help organizations that were formed because blacks couldn’t get business credit. Blacks couldn’t get mortgages. Blacks couldn’t get bank accounts,” Immergluck says. “There was a whole network of financial institutions and banks that served as a response to the exclusion from mainstream institutions.”

Along with a great deal of other banks, black-owned banks in the U.S. took a substantial hit in the wake of the Great Recession in the early aughts. Federal Deposit Insurance Corporation statistics show the number of black-owned banks fell from 48 in 2001 to 36 in 2009 and 25 in 2015. Though the #BankBlack campaign offers hope, an independent analysis by Creative Investment Research paints a grimmer picture for the’ future of black-owned banks.

There will only be about seven of them in 2028, based on factors such as black purchasing power within a bank’s geographic area, the history of the bank, and black relocation patterns, the company says. Cunningham declined to provide the exact algorithm used to make that prediction but says factors such as black purchasing power within a bank’s geographic area, the history of the bank, and black relocation patterns were used in CIR’s calculations.

While the recent calls to shift spending back into the black community began in the wake of recent police killings of blacks, this form of subtle economic activism is not new. Before Martin Luther King Jr.’s assassination in 1968, the iconic civil rights activist urged blacks to divert their spending toward black-owned banks and insurance companies in an effort to boost the black community’s economic base and simultaneously press for equality.

“Now, not only that, we’ve got to strengthen black institutions. I call upon you to take your money out of the banks downtown and deposit your money in Tri-State Bank,” King said during his famous “I’ve Been to the Mountaintop” speech, his last before his assassination. “These are some practical things that we can do. We begin the process of building a greater economic base, and, at the same time, we are putting pressure where it really hurts.”

The #BankBlack movement can remind consumers that minority institutions have their best interest in mind and not to view black businesses in general as subpar, says Teri Williams, president and chief operating office of OneUnited, a Boston-based black-owned bank, which has received more than $10 million in new deposits since the campaign heightened in July.

Given their close proximity to predominantly black neighborhoods, blacks and low-income individuals rely on black-owned banks for their finance management. A 2014 report from the Federal Reserve Bank of Boston found that black-owned banks were more than three times as likely to be located in black neighborhoods and serve low-income customers with limited assets. The report also cited black banks as a source of valuable jobs that provide potential long-term careers, suitable wages, and opportunities for training and skill development for tellers and loan officers mortgage originators.

Because black-owned banks are more likely to be located in black neighborhoods, have black employees, and give loans to black people, it is important that black-owned banks are successful in order to circulate funding within their neighborhoods.

“Part of this movement is not just moving your money; it’s moving your mind,” Williams says. “The black community is waking up to our $1.2 trillion in spending power. That’s why we’ve got to figure out how to use it in a more purposeful way.” A 2013 Nielsen report projected that black spending power will reach $1.3 trillion in 2017.

While #BankBlack has been changing consumer habits, the lack of seamless digital platforms have hurt community banks. Though mainstream banks like JPMorgan Chase, Bank of America, and Wells Fargo have offered mobile apps to their customers, community banks generally have focused on improving their overall infrastructure rather than building apps. Out of the 25 black-owned banks operating in the U.S. as of December 2015, 11 of them did not offer Apple iOS mobile apps, yet, according to a 2015 Federal Reserve Bank, the amount of consumers using mobile phones for mobile banking increased from 22 percent in 2011 to 39 percent in 2014 — and 66 percent of blacks own a mobile phone.

“Part of this movement is not just moving your money; it’s moving your mind.”

How technology relates to a new generation of customers has been part of the conversation with the Office of the Comptroller of the Currency, says Beverly Cole, deputy comptroller for Compliance Supervision at the OCC. The agency, which charters, regulates, and supervises all national banks, federal savings associations, and federal branches and agencies of foreign banks, has held workshops and forums for minority depository institutions, which cover topics such as strategic planning, cybersecurity, and collaborations with other banks.

The OCC also published a white paper in March of 2016 on responsible innovation, which addresses partnerships between banks and financial technology companies. The decision of whether to offer an app or partner with a financial tech firm ultimately lies with the institution itself, she says.

“Many of the customers that have been loyal in the past, just due to age and the passage of time, may not be here 10 years from now,” Cole says. “The [minority depository institutions] in particular, how do they compete with a generation that doesn’t want to go in a brick-and-mortar institution?”

The Chicago-based bank Seaway began holding focus groups for Millennials in the fall of 2015 to understand their banking needs. Social media will become a higher priority at the bank following the demonstrated power of the #BankBlack campaign. The bank is upgrading its software to offer a mobile app for customers in March of 2017. The decision to do so was driven by discussions with focus groups who say having a mobile app is essential.

“When we launch … we’ll have the exact same technology that larger banks do,” Dickens says. “I’ve done a lot of focus groups with young people, Millennials. One of the things that we always ask is: ‘How can we earn your business?’ The mobile banking thing always comes up.”

Some participants, like Brittany Carroll, a 30-year-old graphic designer and customer service representative in New Orleans, say they are willing to work with black-owned banks even if they lack a mobile app. Carroll, who kept her other accounts and recently opened an account with Liberty Bank and Trust, says moving a portion of her income into a black-owned bank was worth the extra effort to help keep the bank running. Liberty Bank currently offers a mobile app for customers.

“If you’re going to keep up in any market, you have to move along with the times,” Carroll says. “If you want to support black economic growth you have to do your part.”

While some black-owned banks are catching up with mobile technology demands, others are taking the plunge into the financial technology sector. City National Bank, a Newark, New Jersey-based, black-owned bank, which has received $1 million in new deposits during the campaign, has ventured into the financial technology sphere through its partnership with Clearshift Group to develop an international payments platform.

It’s not only in-bank technology that black-owned banks are navigating. Black-owned banks are trying to attract the underbanked and unbanked consumers who use alternative financial services such as payday loans. A 2012 Pew Trusts report found that the majority of payday loan borrowers are white, but blacks are more than twice as likely as whites and Hispanics to have used a payday loan. Often the payday loans are used to cover short-term expenses like car repair or emergency medical expenses.

That’s not surprising given evidence that shows people of color have been targeted by predatory lenders for some time. A 2009 report from the Center for Responsible Lending found that payday lenders are nearly eight times as concentrated in neighborhoods with the largest shares of African Americans and Latinos as compared to white neighborhoods, which has led to $247 million in fees taken per year from these communities.

FDIC statistics from 2016 show that about 20.5 percent of blacks are unbanked and 33.1 percent are underbanked, meaning they had a bank account but use alternative financial services. In comparison, 20 percent of the overall population was underbanked.

But Michael Grant, president of the National Bankers Association, says it is important for black-owned banks to educate consumers on why alternative financial services don’t offer the best deal. Some critics, like Cunningham, however, think that an emphasis on consumer education places too much responsibility of understanding complex financial products on the customers.

“Targeting the unbanked and the underbanked is a priority of the National Bankers Association years ago. This is not a new thing,” Grant says. “Others don’t care about your community the way black banks do.”

Black-owned financial institutions are still necessary, because they are more willing to provide home and business financing for blacks and they serve as an alternative to mainstream banks, which have exhibited discriminatory practices dating back to America’s Reconstruction period, Grant says.

And the #BankBlack campaign, and the multi-million dollar influx of cash, appears to be a sign that consumers of color want these institutions to stick around in their communities. It’s clear that black-owned banks are racing to modernize themselves and extend their relevance beyond the trending topic.

“This is not a boycott of white banks. There are times when you’re going to need a majority bank,” Grant says. “If our community is going to grow economically and be strong, we need to start putting our money in black banks, we need to get our money from black banks, and we shouldn’t make these banks of last resort.”