A report by the Committee for Better Banks published earlier this year found “racial bias [still] runs deep” through America’s largest banks.
This bias has caused the racial wealth gap in the US to grow consistently year on year.
According to McKinsey and the US Federal Reserve, it has risen from about $100,000 in 1992 to $164,100 in 2019.
As of the start of 2021, Black and Latino Americans still pay twice as much in bank fees as white customers do, according to a survey by Bankrate.
Coupled with the fact that Black and Latino borrowers pay, on average, more in interest than white borrowers on mortgages, it’s clear that more needs to be done across the industry to start closing the wealth gap and supporting underserved communities.
Reversing the trend
There is a growing number of fintechs looking to show traditional banking institutions the way when it comes to supporting financially underserved communities.
B.C. Silver is CEO of ChangeFi, a digital bank and financial services provider. Its current mission is to lend over $2 billion towards Black and Latino homeownership and provide “equal access to the American dream”.
In his role with ChangeFi, B.C. leverages what he calls a drive for equality and financial empowerment to lead a business dedicated to providing banking services to the “underbanked”.
“I’ve always been passionate about the underserved community partly because that’s the community I come from,” he tells FinTech Futures.
“And again now being on the opposite side of the table, I am even more aware and passionate that things can be done differently because I can see the opposites.”
B.C.’s roots were established in Atlanta, Georgia, where he was orphaned at a young age. Growing up, he saw systemic inequality and constant inequities in the Black and Latino communities.
Flaws in the traditional banking system
Speaking about where the traditional system has gone wrong, B.C. explains: “They aren’t in touch with the communities.
“The approach that many folks have done in the past is show up and buy billboards and do all types of stuff in the community, but then just take that money and profit and just take it out of those communities.
“We have to be on the ground with our people, with the communities. We need to be reinvesting money, resources, jobs back into those communities.
“If banks chose to stay true to their customers and supporting them and helping them along wherever they are along their financial journey, I think this country will be in a much better place and underserved communities and ethnic communities would have more support and more trust for those organisations.”
The focus on profits, high overdraft fees, high onboarding fees and high interest rates for loans and mortgages makes it increasingly difficult for poorer communities to gain financial inclusion.
“You can get derailed from staying true to the customer because you have different investors and outside noises,” says B.C.
“It’s not about market share and it’s not about profit, it’s about the mission first.”
However, with the conversation around equality and fairness growing louder, B.C. says he does see some improvement coming from the sector.
“I think more people and organisations have been made aware of some inequalities. And so I do think on a positive note there’s awareness starting to happen.
“Organisations are making monetary commitments, but those are short-term bandages.
“The future is not only big investments made at one point in time, but we need to start to do more structural modifications that help people, you know, every week.
“Those types of decisions have a ripple effect much broader and wider than one-time investments.”
The role of banks and fintechs
Financially underserved communities cannot bridge the wealth gap without access to credit, access to loans and mortgages and infusions of capital. This is where banks can do more, and where fintechs come in.
“We are true to our mission in terms of closing the wealth gap and serving all people — that’s African-American, Hispanic and low-income communities no matter what ethnicity you are — and we want to help give you tools and resources for financial inclusion,” says B.C.
“The reality with the wealth gap is in the future, African-American families as well as Latino families will have an average wealth of zero dollars.
“In the future that’s about $60,000 less than the average white family. Homeownership closes that gap.
“Lower fees, giving people loans, helping people improve credit and building them to homeownership is what could potentially close the wealth gap, and so that’s what we do and try and that’s what makes us very unique from a systematic approach.”
Less red tape, fewer outside influences and a clear focus on mission gives emerging fintech start-ups an advantage over traditional banks when it comes to disrupting the current system.
“We have lower operating costs, a lower expense structure because we don’t have physical branches, so there’s already a profit differential that we can relay back to the customer. Cost per acquisition is different as well too, which is more that we can do for the customer.
“So from a structural or organisational standpoint then you have a unique opportunity to be more disruptive in the marketplace.”
Working together for the better
With the importance of bridging the wealth gap front and centre, B.C. also supports the idea of banks and fintechs working together to achieve their mission.
“I think more of the big banks will say that they’re interested in trying to help. And I welcome it all, you know.
“I would just say the underserved community and lower-income folks, they need help, and so the more fintechs, the more big banks are willing to lend a hand, then we should all embrace it. Especially if it’s authentic and it’s real and they’re taking systematic approaches to help.
“There is no reason that other people couldn’t come along on this journey. To actually help. It’s just a strategic choice. So, you know, how much profit do you want to make off of these people versus supporting a group of people that need you.”
An opportunity for change
With growing awareness of the disparities being caused by the current system, technological advancements and the growing number of fintechs looking to disrupt the system, B.C. believes we could be reaching a turning point.
“I feel like we’re at a unique moment in time now to make a difference – because of technology, because of awareness and because of people’s compassion for quality and for helping.
“I would also challenge other fintechs and banking solutions, if you truly are genuine in helping the underserved community, let’s find ways to help each other and let’s find ways to actually make material differences.”