- Minority-owned businesses are disproportionately affected by chronic market failure.
- This won't change unless more established players commit to innovations.
- Economic equality could mean a $1.5 trillion boost to the economy, which is a no-brainer investment.
- Michael Froman is Vice Chairman of Mastercard and Former US Trade Representative.
- Wole Coaxum is a Founder and Chief Executive Officer of Mobility Capital Finance, Inc.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider's homepage for more stories.
America is a global leader in business and innovation. And yet despite this reputation we haven't put that ingenuity to work to tackle one of our country's most critical economic challenges: how expensive it is to be poor.
America's financial system systemically fails low income families and communities. As our country faces both an unprecedented public health crisis and a struggling economy, those who were already financially vulnerable now find themselves without the means to meet their basic needs and at risk of falling further behind.
Communities of color, particularly Black families and Black business owners are disproportionately impacted by chronic market failure. The median net worth of white families is ten times higher than that of Black families and Black consumers spend 50% more per month for basic banking services. Over a lifetime this adds up to a staggering burden which can reach about $40,000 in elevated interest costs, surcharges and excessive fees to access money through payday lenders, auto title loans and other alternative financial arrangements.
In New York City, there are, on average, three times the number of bank branches per 1000 residents in areas with majority white populations, compared with areas with majority-minority populations. And traditional credit scoring models effectively exclude vulnerable communities from accessing the financing they need to build their business. Without economic access, efforts at improving social justice will sound like one hand clapping.
Making our financial system work for everyone
Achieving equal access to financial services requires established players to bring a new mindset to the table and new players to challenge the status quo. We need innovation that is both commercially sustainable for businesses and can foster trust amongst cautious consumers.
For example, allowing people to use digital technology to receive money and send money to relatives affordably or make real-time bill payment and check deposits by phone can go a long way toward addressing this need. It may start with a simple mobile app, but soon enough, savings, insurance, credit building start becoming a reality for far more people.
Progress in expanding digital financial tools has historically been glacial. As important as they are, philanthropies and nonprofits, cannot solve for these challenges alone.
Our organizations, Mastercard and MoCaFi are coming together to explore a digital-first approach, to create affordable, sustainable, and scalable solutions that can create a more level playing field.
There is a long history of overly high interest rates and extractive fees charged to underserved communities by payday lenders, pawn shops and other alternative service providers. Alternative financial services is a $180 billion industry. Low-income people don't have fewer needs than affluent consumers, so reaching them with better products makes commercial sense for entrepreneurs and established companies alike.
Making business work for minority-owned business
The need for innovative finance doesn't just apply to individuals. This year has also put a much-needed spotlight on the need for secure, reliable and digital access to capital for micro and small businesses across the US, as many have struggled to survive through the pandemic and move their services online.
Community Development Financial Institutions (CDFIs) have been a lifeline, particularly for minority-owned and women-owned businesses that have been disproportionately adversely affected and have struggled to get support through traditional channels.
CDFIs have had to undergo their own innovation curve this year – processing more digital applications and issuing loans electronically at scale. One organization, Community Reinvestment Fund, USA (CRF), created the online Spark Platform to address the increasing demand. The platform helped ease the application process and enabled more than one hundred small lenders to disburse $6 billion of loans from the federal Paycheck Protection Program.
For many underserved entrepreneurs, having a support network like that provided by CDFI's enabled them to ask questions about federal funding, ensure deadlines for applications were met, and allowed for secure, digital access to capital during the darkest times. We need to ensure these organizations receive the technology, tools and support they need to scale operations.
Creating a more equitable future is the right thing to do and makes business sense. The only truly sustainable growth is inclusive growth. Should we succeed in bridging the wealth and opportunity gap faced by Black Americans, the benefits would be felt by all. It is projected that should progress be made on economic equality, we would see not only greater social cohesion in the United States, but an additional increase in economic activity of over $1.5 trillion over the next 10 years. That is a worthy investment.
Coaxum is a Founder and Chief Executive Officer of Mobility Capital Finance, Inc. ("MoCaFi"). MoCaFi is a start-up financial technology company that leverages mobile technologies, data analytics and digital strategies to improve the financial behaviors of underbanked communities.
Froman is Vice Chairman of Mastercard and Former U.S. Trade Representative
This is an opinion column. The thoughts expressed are those of the author(s).
Learn more about the financial services industry.
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