The value of reciprocal partnerships
Mission-driven financial institutions lend where it matters most, delivering mortgages, small business loans and access to financial services to underserved communities. The reality is, however, that the minority depository institution (MDI) community is shrinking. Although assets have grown by 34% over the last 10 years, the number of MDIs has decreased by 20% to 148, according to the Federal Reserve Bank of Dallas.
What can we do to ensure that MDIs and community development financial institutions (CDFIs) thrive and remain relevant in their communities?
At the Forum client conference in June, a distinguished panel of MDI and CDFI leaders joined me to discuss this and other questions. In this article, I’m delighted to share insights from:
- Nicole A. Elam, President and CEO of the National Bankers Association (a trade association representing minority- and women-owned and -operated financial institutions)
- Robert E. James II, President and CEO of Carver Financial Corporation (an MDI and CDFI and the only Black-owned multi-state bank holding company in America)
- Carlos P. Naudon, President and CEO of Ponce Financial Group (an MDI and CDFI and the holding company for Ponce Bank)
- Evelyn F. Smalls, President and CEO of United Bank of Philadelphia (an MDI and CDFI)
This panel session was edited for length and clarity.
MDIs and CDFIs – and the role of CRA credits
Minority depository institutions (MDIs) are institutions that are either owned or directed by minority individuals. There are 148 MDIs, according to the Federal Reserve Bank of Dallas.
Community development financial institutions (CDFIs) expand economic opportunity in low-income communities by providing access to financial products and services. There are 1,000 CDFIs operating nationwide, according to the U.S. Department of the Treasury’s Community Development Financial Institutions Fund.
The Community Reinvestment Act (CRA) is a federal law enacted in 1977 to encourage depository institutions to meet the credit needs of low- to moderate-income communities. Non-MDI financial institutions may receive CRA credit for capital investment, loan participation, training, technical assistance and other ventures undertaken by the majority bank in collaboration with an MDI.
There has been an increased focus on underserved markets. How has this focus impacted MDIs and CDFIs?
Elam: Over the last three years, the federal government, private sector and philanthropic community have realized something very important: If you want to help the communities, households and small businesses that were the hardest hit by the pandemic, and if you truly want to close the wealth gap, then you've got to invest in the financial institutions that sit in and serve those communities.
The pandemic is now in the rear-view mirror, and the spotlight on racial injustice has faded. Are you concerned that motivation for collaboration and action on those serving underserved communities is waning?
Smalls: Well, I'm sure it’s waning some, but tragedies like the pandemic and George Floyd can create the perfect conditions for collaboration. That’s why I’m encouraged to see what might have been temporary or one-off responses to those tragedies become ongoing and institutionalized.
For example, early in the pandemic, I joined a coalition of leaders from about 20 large banks in the region, the head of the Philadelphia Fed, corporate leaders and fintechs. Our network came together to distribute loans, using money appropriated by the Pennsylvania legislature, and we actually got it done! And the group is still working together to better serve minority and low- and middle-income communities.
What do you see as the biggest threats to mission-driven financial institutions?
Elam: I think there are two big threats, and they’re connected to one another.
The first threat is the technology gap between MDIs and larger banks, including fintechs. Technology has completely changed the banking landscape, but the problem with technology is that it’s expensive. Big banks spend up to $12 billion a year on technology. Conversely, the median asset size of a minority bank is only $401 million. How can MDIs compete against that? And not only is technology expensive, but many MDIs don't have dedicated IT staff that can help them vet and integrate new technology.
The second threat MDIs face – as many community and small banks do – is whether they can capture the next generation of customers. This generation relies heavily on technology. If they can’t do everything on their phone, they’re not considering you. They’re not interested in visiting you in the branch or building the kind of relationship that has been so important to MDIs and their customers for generations.
Every dollar invested in MDI and CDFI equity capital can increase lending by 8-10x in minority communities, according to FDIC data.
Why is digital transformation so important to the MDI industry?
Naudon: If you look at the finances of MDIs, you'll see that most of us have higher operating costs than larger banks. In part, that’s because of our smaller sizes, but it’s also because it’s inherently inefficient to serve the communities we serve. Now, we know we need to lower those costs digitally, but it requires a different skill set than what many of our institutions have. The challenge that we have is how to make that transformation and reflect it in our bottom line. At the same time, digital transformation has to be aligned with our missions.
James: We think of technology in terms of our institution’s mission, which is to provide the building blocks of financial freedom. We define those building blocks as building money, building homes, building businesses and building community. Our whole business plan is organized around those four building blocks and delivering products and services to the communities we serve in a digital-first way. Digital transformation is critical, but we have to continue to touch people in the community. We also need to be efficient so we can scale and drive solutions to the community so that we can continue to pursue and expand on our mission.
What happens to communities most at risk, as well as the banking industry ecosystem, should we continue to see a downward trend of MDIs and CDFIs?
Elam: Look at the data if you want to understand what would happen. In 2022, only 20% of Black-owned firms applying for loans, lines of credit and cash advances were fully approved, compared to 58% for white-owned firms. In 2021, 8% of Black households and 8.4% of Hispanic households were unbanked, compared with 1.7% of white households (among households with income between $30,000 and $50,000). These are the communities that minority banks are serving, so if we're not in those communities and serving them, who's going to do it?
Many of our panelists sit on industry boards, regulatory committees, trade-group boards and the like. Regarding the mission and needs of the MDI and CDFI industry, what are you saying to your fellow industry leaders?
Naudon: One critical message is that we don’t address just ethnic or racial economic exclusion. We’re looking at exclusion more broadly, which also includes the immigrant community and low- and middle-income communities. There’s a big need for access to capital in these communities, and there are no incentives for the large institutions to provide that.
As for regulatory bodies, I sit on the Consumer Financial Protection Bureau advisory board. One of my key messages there has been that regulators need to better understand the underwriting processes for the non-qualified mortgage market. The issues facing our financial institutions are different than those facing bigger banks, and we have to educate regulators in how and why we often need to take a different approach to things like underwriting mortgages.
James: It’s really important for corporations and large banks to understand that we all benefit when MDIs and CDFIs get the investments they need. Closing the wealth gap isn’t just about feeling good. It's about the $26 trillion in additional GDP that the U.S. lost out on between 1990 and 2019 as a result of labor market gaps between racial and ethnic groups.
Right now, our banks need long-term low-cost deposits. We need liquidity so that we can leverage that equity capital that we’ve been able to attract over the last few years. To leverage up this new capital, we need corporate partners to help so that we can lend that money back into our communities. Then we can show them the impacts of making those loans and increasing home ownership and improving small business ownership and providing more access to capital.
How Fiserv supports mission-driven financial institutions
MDI Engagement: In Q4 2022, Fiserv leadership recognized the importance of strengthening partnerships with our MDI clients. In Q1 2023, we began engaging MDI leadership, seeking insights on their objectives for digital modernization, service and support, and community engagements focused on closing the wealth gap.
We learned MDIs want to improve their digital offerings and deploy capabilities that strengthen their competitive position; however, a lack of critical IT and project management resources is often a challenge for MDIs seeking to operationalize a digital strategy. We also learned MDIs are very interested in partnering with us on community engagements.
Fiserv MDI Advisory Council: Launched in September 2023, the council is a platform for expanding on earlier learnings, sharing direct feedback, exploring industry developments, exchanging ideas, providing input on technology strategies and development, and collaborating on our overall support of mission-driven financial institutions.
Digital Modernization: As of Q4 2023, we’re developing a framework for collaborating with and supporting our MDI clients’ digital transformations. The objective is to simplify how Fiserv engages with MDIs as they shape their digital strategies. We look forward to continuing our work with council members and ensuring our MDI clients grow and thrive.
Summing it all up, what is your call to action for the banking industry?
Naudon: Big banks, corporations and fintechs really have to help us maximize the impact that we can have. We can't do it without investments and partnerships.
Smalls: Our world has become so transactional, but for MDIs to exist, we have to form long-lasting relationships. We need to focus on transformation over transaction. Let’s make permanent the kind of collaboration that happened in the wake of the pandemic and George Floyd. Let’s institutionalize that coming together and keep it going.
James: As Evelyn said, let's not have this be a moment – let's have it become a movement. And as we’ve all been saying, we still need new capital, both in terms of equity and deposits. We need to improve our capacity as institutions, including finding the talent to implement the technology solutions and deliver more products and services. Finally, we need communication. We need more opportunities to tell our story. We need to make sure that people know our impacts and know what happens when you have a strong MDI or CDFI in the community.