Will black Millennials save black-owned banks?

The connection between money and race became personal to Justin Garrett Moore in 2011. That’s when he first tried to get a mortgage to buy a foreclosed home in the Indianapolis neighborhood where he grew up.

Worried that black residents were getting priced out of Mapleton Fall Creek, a quickly gentrifying neighborhood on the city's north side, Mr. Moore sought to buy and renovate neglected homes there. He wanted to rent them out for half of market value to lower-income families. But even as white families snatched up Mapleton’s foreclosed Tudor and Colonial Revival homes, Moore, who is African-American, couldn’t get a mortgage from local banks. Black residents who already owned homes in Mapleton couldn’t get loans to fix them up, either, he says.

“I have a six-figure income, an 800 credit-score, cash for a down payment, and I’m trying to do a good thing in my neighborhood," says the architect and urban designer who lives in New York and is executive director of New York City’s Public Design Commission. “But the bank said no.... It was all just a very frustrating experience.”

His struggle with banks is not an anomaly. Although racial discrimination in lending is now illegal, racial disparities in who gets a loan are well documented. Historically, minority-owned banks have played a key role in reducing those gaps by serving low-income, minority communities. But the 2008 financial crisis, which disproportionately battered African-American and Latino homeowners, also disproportionately harmed the black- and Latino-owned banks that served them. Many black-owned banks, in particular, remain vulnerable.

Still, a turn in the economic cycle and the promise of deregulation could ease the pressure on small banks, including black-owned ones, bankers say. And the rise of black Millennials – a wealthier generation empowered by technology – offers the potential for desperately needed capital if Millennials align themselves with minority institutions. A spontaneous social media campaign last year that drew a surge of deposits in black-owned banks, called “#BankBlack,” suggests they just might.

Black Millennials “came of age only having experienced a black president, never having doubted the quality of service of black institutions, and that combination has really ignited this movement,” says Teri Williams, the African-American co-founder, president, and chief operating officer of OneUnited Bank, which has branches in Boston, Miami, and Los Angeles.

While minority-owned institutions make up only 2.6 percent of banks, they’re significantly more likely to locate in minority and low-income communities that often don’t have access to financial services, according to the Federal Deposit Insurance Corp. (FDIC), the agency that insures bank deposits. A quarter of the mortgages they make go to minority and low-income borrowers, compared with 9 percent from other banks. They also have special programs to help customers rebuild credit, take out small business loans, and buy homes without exorbitant interest rates.

“We have learned how to lend to our community because we understand the behavior,” says Ann Duplessis, senior vice president at Liberty Bank and Trust Co., a 45-year-old African-American-owned bank in New Orleans. “We can look at a credit report and just because it says 580 … I can look at other things than that report,” such as the bank’s relationship with the person and whether the person has a consistent income.

Numbers cut in half

But the number of black-owned banks has plunged. Even during the boom times before the financial crisis, black banks were consolidating with an asset base that was growing only slowly – in sharp contrast to banks owned by Asians, Hispanics, and Native Americans, whose numbers and assets were soaring, according to FDIC data. When the financial crisis hit in 2008, African-American banks saw the biggest decline in their numbers (from 44 in 2007 to 24 in 2016) and the second-biggest decline in asset base (a 24 percent drop during the same period) to $5.9 billion. Hispanic-owned banks saw an even steeper decline of 38 percent to $97.8 billion.

The decline isn't over. On Jan. 27, the FDIC closed Chicago's largest black-owned institution – Seaway Bank – and arranged its sale to the the State Bank of Texas, a Dallas bank owned by immigrants from India. One research firm forecasts there will be only seven black-owned banks by 2028.

The decline means that more African-Americans have to turn elsewhere for loans. Moore, the New York urban planner trying to buy property in Indianapolis, eventually got a mortgage from a community bank in nearby Frankfort, Ind. Now, he and his family own five homes and five lots they’ve converted into community gardens or green spaces. They run a community service organization called Urban Patch.

While the downward trends in black-owned banks are worrisome, there are reasons for optimism, bankers say. After years of slow economic growth, bank consolidation, and low interest rates that helped discourage any new banks from forming, the FDIC says it’s finally seeing new charter applications trickle in.

There’s also a strong possibility of deregulation in banking. President Trump has promised to dismantle the Dodd–Frank Wall Street Reform and Consumer Protection Act, which was enacted in 2010 to prevent the activities that led to the financial crisis. While that's not necessarily a win for consumers, small banks say that getting rid of these onerous and expensive rules that were designed for big banks would be a boost for them.

“A repeal of Dodd-Frank would be helpful,” says Ms. Duplessis from Liberty Bank.

And, perhaps most important, if African-American-owned banks can pull in a new generation of younger, wealthier customers, their businesses could get a significant boost. Recent events indicate this could be possible.

An old call – with a twist

The day after the fatal police shooting of Philando Castile in Minnesota this past July, Michael "Killer Mike" Render, an Atlanta rapper, urged a local radio audience to move its money to black banks. “We don’t have to burn our city down,” said a choked-up Mr. Render. “We need 1 million people in Atlanta to take $100 out of their existing accounts and put $100 into a Citizen's Trust account.”

Celebrities including Usher and Solange Knowles, the sister of pop singer Beyoncé, helped mobilize the #BankBlack social-media movement. And money started pouring in to Atlanta’s Citizens Trust and other black banks around the country, which were wholly unprepared for the flood of new customers.

“I’m in my 30th year of banking, and I can tell you that I haven’t seen anything like that, ever,” says Citizens executive vice president and chief credit officer Frederick L. Daniels Jr. The bank received 8,000 new account requests within days.

In New Orleans, Liberty Bank saw new account requests jump from 50 to nearly 1,000 per day in the month following Render’s radio entreaty. “In two days, you get a thousand people coming in," Duplessis says. "Nobody could prepare for that.”

The black banking movement is not new. In his last speech in Memphis, Tenn., in 1968, Martin Luther King Jr. urged people to move their money to black banks. While the message hasn’t changed since Dr. King, the world has, says Ms. Williams of OneUnited, which saw its deposits grow by $20 million last year.

“Back when MLK talked about it, you had to go to your bank downtown, take your cash out, and drive to a different bank,” to open a new account, she says. Now, online banking helps local banks compete with national chains.

The money that poured in last year from #BankBlack – mostly through small savings accounts, according to black banks – is not enough to dramatically boost profits. Thousands of small savings accounts are expensive to service, says Duplessis. To grow and be able to lend in their communities, minority banks say they need more checking deposits, especially big ones from higher-income African-American customers.

That's why black Millennials are so important. These 19- to 35-year-olds, who make up a quarter of the African-American population in the US, are wealthier and more educated, socially engaged, and influential than their parents.

Says Duplessis: “We need to find a way to communicate with more affluent black folks to say ‘When you look at your own practices, are you doing your business deliberately with a black-owned institution?’ If not, then why not?”