Trying to correct banking’s racial imbalance
By Ellen Rosen
Wole Coaxum was a managing director at JPMorgan Chase in business banking when a police officer fatally shot the unarmed Michael Brown in Ferguson, Missouri, in 2014. The killing caused 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 Coaxum left JPMorgan to create Mobility Capital Finance, known as MoCaFi, a startup 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.
Now, the deaths of George Floyd, Rayshard Brooks and Breonna Taylor, coupled with the racial disparity in COVID-19 outcomes, have magnified the deep fault lines nationwide. Additionally, Black-owned businesses have been more affected by the economic fallout from the pandemic. The confluence of these crises have laid bare another underlying issue: income inequality and a resulting loss of access to the financial system among communities of color.
At the time Coaxum left traditional banking to become an entrepreneur, close to 30% of households in the United States had no bank accounts or, even if they had them, still resorted to significantly more expensive alternative systems like check cashing centers or payday loan businesses.
While those numbers have improved incrementally since then — as of 2017, roughly 25% 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% of Black households and 14% of Hispanic families lack basic financial services, compared with 3% of white households in 2017, the last year for which statistics are available from the Federal Deposit Insurance Corp.
The loss of access means that “Black and Hispanic people are spending 50 to 100% more per month for basic banking services, which, over a lifetime, can cost $40,000 in fees,” Coaxum said.
While the technology sector has been criticized for its lack of diversity, 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 startups 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.
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.
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.
Coaxum and 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% of consumers have insufficient credit history to secure loans from traditional means.
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, 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 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. 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.
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.”