After the coronavirus hit, Minneapolis small-business owner Rosemary Ugboajah applied for a small business relief loan. She first applied with her local credit union, but they didn’t have the tools to process these relief loans. After reaching out to other banks, she found one able to help her apply, but the stimulus money was running out. In mid-May, Rosemary still had not heard back on the funding.
To get to the core of why so many Black and Latino owned businesses like Rosemary’s are being left out of the government relief process, it’s essential to understand the underlying, systemic inequities faced by communities of color.
Since the Great Recession, more than 6,000 bank branches have closed across the country. Eighty-two percent of the closures were in urban areas with high densities of communities of color. The result: 86 new banking deserts popped up across the U.S., disproportionately impacting communities of color. Without access to capital, communities of color have a harder time growing small businesses and were left financially vulnerable to the economic crisis hit as a result of COVID-19.
In March, the government passed the Paycheck Protection Program (PPP). While big businesses and those with access to mainstream banking institutions quickly applied for and received PPP loans, Black and Latino business owners were largely shut out. Our weak financial and technology infrastructure is a big reason why.
Many Black and Latino business owners run payroll and keep their financial books on their own. They also rely on what I call the ‘capillary banking system’ — community development financial institutions (CDFIs) and minority-owned depository institutions (MDIs). These institutions go where commercial banks refuse to and provide essential financial services like mortgages, microloans and venture capital for small businesses. However, these organizations typically don’t have the capital of mainstream commercial banks to invest in updating their digital infrastructure to scale their services for something like PPP.
While a majority of Black and Latino business owners reported requesting less than $20,000, they were turned away from commercial branch banks where they didn’t have existing relationships; they struggled to compile the financial data needed to complete the PPP application since many lack financial software; and CDFIs and MDIs were often hamstrung by a lack of robust technology that made it time-consuming and costly for organizations to submit PPP applications. In total, just 12 percent of Black and Latino businesses reported receiving a PPP loan. Overall, two-thirds of Black and Latino businesses report that they’ve received no assistance or are still waiting to hear back.
To help pandemic-hit Black and Latino businesses, we need a fintech revolution. This means ensuring that every single Black and Latino business and every community lender is equipped with robust digital infrastructure to help them better withstand future crises like this and better position small businesses to thrive in good times.
The $10 billion of PPP loans dedicated for community lenders is welcome, but rather than just expending billions of dollars to bolster these small businesses in the short term, let’s focus on their long-term survival by investing in the financial and digital infrastructure of CDFIs and MDIs to better support underserved communities in accessing capital, mobile banking, and commercial loans. Let’s require a portion of PPP loans be dedicated to upgrading and modernizing the “fintech” infrastructure of these small businesses to allow them to operate more efficiently and effectively, create more room for growth and better fortify them in times of crisis.
Our response to COVID-19 can’t just tinker around the edges. Black and Brown small businesses face hurdles well beyond lacking financial technology. While societal racism, educational disparity and poverty are much bigger issues to address, there is a simple solution to help these small businesses have a better chance to survive and thrive after this crisis. And it is within our reach to revolutionize the way we support our businesses and bring them, and the capillary banking system that serves them, into the modern age. Let’s build a banking system that is more fair, resilient, and useful in sparking economic growth for the long term.
Robert F. Smith is the Founder, Chairman and CEO of Vista Equity Partners.