Ottawa should require banks to share race-related data on services: business groups

Of note (expect banks are doing some of this already internally as part of understanding their client and potential client base):

Canadian banks should have to disclose data related to race, gender, income and neighbourhoods to ensure more equitable access to credit and loans, say organizations representing racialized and Indigenous business owners who want Ottawa to step in.

Nadine Spencer, president of Black Business and Professional Association, says Black business owners grapple with microaggressions, unconscious bias and discrimination in banking, and both tracking and releasing this data would help hold banks accountable.

“In order for us to move along, we have to look at the data, look at the gaps and address the issues,” she said.

Banks in the United States have had to keep track of applicants for business loans by race, gender, income and neighbourhood for more than 40 years through their obligations under the Community Reinvestment Act. Designed as a way to encourage banks to better serve lower-income neighbourhoods and racialized communities, it involves the U.S. Federal Reserve and other banking regulators evaluating their performance on this front, with ratings published in an online database.

Duff Conacher, co-founder of Democracy Watch, said the federal government should require something similar of banks in Canada as a way to fight systemic racism.

“Four of our six big Canadian banks own U.S. banks and have, for decades, followed the U.S. law in the U.S. but they have not done anything up here to track and disclose discrimination,” said Conacher.

He was referring to Bank of Montreal, Canadian Imperial Bank of Commerce the Royal Bank, and Toronto-Dominion Bank, which all own U.S.-based operations.

Herbert Schuetze, an economics professor at the University of Victoria, said disclosing such data would encourage more researchers to look at whether businesses owned by racialized people are getting the same access to credit and other services. He said U.S. studies have shown a discrepancy, but that research cannot easily be done in Canada.

“I wouldn’t be surprised to see that (here) but it’s something that, without data, we can’t identify how big of an issue it is in Canada,” he said.

The government announced up to $221 million for Black entrepreneurs in partnership with several Canadian financial institutions in September, but Conacher said this program is not enough to address the gap in funding for Black-owned businesses.

A spokeswoman for Finance Minister Chrystia Freeland said the Liberal government is open to adopting other measures, although did not commit to this one.

“The federal government is currently undertaking pre-budget consultations. We invite all Canadians to share their ideas and priorities,” said press secretary Katherine Cuplinskas.

“We absolutely know there is much more work to be done.”

RBC spokesman André Roberts said the bank does not collect information on race or gender when clients access services, noting the bank is participating in the Black entrepreneurship program.

Bank of Montreal spokesperson Jeff Roma did not say whether BMO would support the disclosure of data but said it is also participating in the federal Black entrepreneurship program. TD Bank and did not say whether it would back sharing data and CIBC did not respond to a request for comment.

“The banks are already collecting this data on all their borrowers, and can easily add one box on the form saying: do you want to identify as a visible minority?” Conacher said.

Vivian Kaye, who owns an online business selling hair extensions to Black women, said she has faced discrimination from her bank since she started eight years ago.

She said her bank’s agents repeatedly questioned money transfers she made and never offered her a line of credit, even though they could see her business had been growing.

Caroline Shenaz Hossein, a professor of business and society at York University, said disaggregating the data would show who gets access to banking services in Canada — and who does not.

She said many Black people, including herself, have turned to online banking, even before the COVID-19 pandemic, to avoid dealing with racism at bank branches.

“I hated the humiliation of going in to a bank, and them watching me up and down like I am some sort of like terrorist’s drug mule, because I’m of Black-Caribbean descent,” she said.

“We already know about systemic racism and it does exist. We do not need data to tell us that part. We want to know who actually gets the loans.”

She said also said minority communities often create alternative sources of funding.

“Chinatown and (Gerrard India Bazaar, in Toronto) have all been built on these informal collectives or co-operative groups that are really rooted in mutual aid,” she said.

Shannin Metatawabin, the CEO of the National Aboriginal Capital Corporations Association, which provides alternative funding for Indigenous businesses, said publishing data from the banks would allow organizations like his to create new products or advocate for better services.

“Historically, Black, Indigenous, people of colour have always been an afterthought,” he said. “The response to the needs of our community has always been after the mainstream population.”

He said policy-makers should change that, noting that banks are federally regulated.

“It’s integral for them to get involved to make sure that everybody receives equitable service,” he said.

Jason Rasevych, president of the Anishnawbe Business Professional Association, which supports Indigenous businesses in northern Ontario, said accessing race-based data would guarantee transparency and could prompt banks to make changes.

“It also puts the financial institutions in a position to explore a potential refresh (of their policies) and strategies related to Indigenous relations, or Black or people of colour relations.”

Schuetze, the University of Victoria professor, said creating a ratings system for financial institutions to encourage them to provide loans to minority-owned businesses, like the one in the U.S., would have a positive impact.

He said other policies could also help, including tackling discrimination in the labour market, reducing barriers to operating businesses and getting experience and providing startup grants for minority-owned businesses.

“If you can reduce those barriers then, obviously, access to capital from financial institutions will increase,” Schuetze said.

Spencer said governments and financial institutions should talk to business owners and ask them what they need.

“The No. 1 thing that the financial institutions can do is to look at each customer and client as a contributor to their revenue base and respect them in a way that they should,” she said.

Source: Ottawa should require banks to share race-related data on services: business groups

US: Trying to Correct Banking’s Racial Imbalance

Of note. Anyone have comparable Canadian data?

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.

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 Mr. Coaxum left traditional banking to become an entrepreneur, close to 30 percent 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 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.

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 Financein 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.

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.”

Source: Trying to Correct Banking’s Racial ImbalanceEntrepreneurs are working on new business models to address income inequality and a resulting lack of access to the financial system for communities of color.By Ellen Rosen