Robert Smith (Vista Equity Partners Founder) – Black Banks and Black Economic Empowerment (Jun 2021)

Chapters

Abstract

The Economic Empowerment of Black America: Navigating Challenges and Harnessing Opportunities

In an era marked by significant economic shifts and technological advancements, the African-American community faces unique challenges and opportunities. The decline of black-owned businesses, stark wealth disparities between college-educated blacks and whites, and the dwindling number of black-owned banks are pressing issues. Concurrently, the emergence of technology-driven financial solutions and the potential for black banks as viable investment opportunities offer a beacon of hope. This article delves into the multifaceted economic landscape affecting Black America, highlighting key insights from industry leaders John Rogers and Robert Smith, and exploring the role of technology, investment, and regulatory clarity in driving economic empowerment and community independence.

Decline of Black-Owned Businesses:

John Rogers of Ariel Investments has raised alarms over the precipitous decline of black-owned businesses in major cities like Chicago. Once a hub for black businesses, Chicago now has zero African-American businesses among the top 150 privately held companies in the city. This decline is further compounded by a worrying trend in wealth disparities, with college-educated blacks experiencing a 10% drop in wealth from 1992 to 2016, while their white counterparts saw a staggering 96% increase.

The Critical Role of Black Banks:

Robert Smith, the founder of Vista Equity Partners, stresses the importance of access to capital for black businesses and communities. A startling 70% of black neighborhoods are bereft of a branch bank, severely limiting financial accessibility. The closure of nearly half of the black-owned banks in the last decade, coupled with a 25% reduction in their capitalization since the 2008-2009 period, exacerbates this issue. Smith also underscores the need for technological modernization in these banks to enhance capital delivery to small and medium-sized enterprises.

Addressing the Digital Divide:

The COVID-19 pandemic highlighted the importance of technology in accessing financial services. Black businesses have been disproportionately impacted by the pandemic due to their concentration in sectors heavily affected by the economic downturn. Rogers points out the shift in the U.S. economy towards service, financial, and technology sectors, urging black businesses to adapt. He advocates moving from supplier diversity to business diversity, encouraging participation in high-growth sectors like technology and venture capital. This transition is crucial for creating equitable economic opportunities in wealth-generating fields.

Upgrading Bank Technology Infrastructure:

Smith discusses the potential of cloud-based solutions in modernizing black banks. A collaboration with Microsoft and a proposed $524 million investment aim to revamp these banks’ core systems. This modernization is expected to increase lending velocity, significantly benefiting small and medium-sized businesses in black communities. Upgrading the technology infrastructure of black banks is essential for improving their competitiveness and meeting the needs of their customers. A cloud-based core banking and lending management system can provide black banks with increased efficiency and lending velocity. Modernizing black banks would require an investment of approximately $524 million, which could be funded through government programs or partnerships with large technology companies.

Investing in Black Banks for Economic Empowerment:

Black banks present a lucrative investment opportunity, particularly in community-focused investing. Investment opportunities for black banks include expanding into wealth management, investment banking, and money management. Collaboration among African-American and Latinx communities is vital for fostering these investments. Diversification is crucial for black banks to thrive and compete with larger financial institutions.

Modernization and Capital Injection:

Modernizing banking infrastructure and injecting tier one capital into black banks and Community Development Financial Institutions (CDFIs) can amplify their lending capacity. Notably, CDFIs and Minority Depository Institutions (MDIs) have shown lower default rates than the broader group of FDIC-insured banks, indicating robust creditworthiness. Modernization and Capital Injection: Modernizing banking infrastructure in underserved communities increases access to financial services for small and medium businesses. Enterprise software solutions in small businesses yield a significant return on investment. Injecting capital into CDFIs and MDIs in the form of tier one capital enables them to lend more effectively. CDFIs and MDIs have lower default rates compared to the FDI insured overall group of banks.

Infrastructure and Regulatory Clarity Needs:

Developing infrastructure to cater to the unique needs of minority communities is essential for the growth of black banks and CDFIs. Clarity from regulatory authorities on the use of the $12 billion CDFI fund expansion is crucial for effective deployment in modernization and lending. Unclear language in the $12 billion carve out regarding capital deployment for modernization versus lending is an obstacle. Clarification from the administration on capital deployment would facilitate the flow of capital into underserved communities.

Economic Empowerment and Independence:

Investing in black banks and CDFIs aligns with the broader goal of economic empowerment and community independence. Efficient, accessible banking services empower small businesses and entrepreneurs, driving job creation and economic growth. Collaboration between private and public sectors is imperative to address the challenges faced by these institutions, thus promoting financial inclusion and economic justice. This comprehensive examination underscores the complex economic landscape facing Black America. Addressing these challenges and leveraging emerging opportunities is pivotal for fostering economic empowerment and ensuring equitable participation in the economy’s dynamic sectors.

Notes by: datagram