Historically, financial institutions have played a strong role in the development of communities. While the 2007-09 Great Recession may have caused mistrust among the power players in our economy, financial institutions have rebounded over the past decade.
The appetite to lend capital is greater than ever, and communities all across the U.S. have seen substantial investments, including ours.
However, “business as usual” in the banking world has been insufficient in building a community in which everyone thrives, so there has to be some deep reflection on how financial institutions can take an active role in changing their approach.
Thankfully, community development financial institutions have taken on the role of providing capital to underserved communities to aid in their revitalization.
These institutions were created to focus on personal lending and business development efforts in local communities in need of revitalization, and are defined as institutions that serve the needs of the poor and working class within urban and rural communities, many of whom are underserved by traditional commercial banks.
Lancaster has three such institutions out of the almost 1,000 in the United States: Assets, Community First Fund and Lancaster Housing Opportunity Partnership. But as we see in our community, more needs to be done.
Traditional financial institutions need to play a more active physical role in underserved communities, and by doing so, can bridge a large portion of the gap.
Yes, a portion of the “lack of access to capital” gap is due to poor credit, lack of credit history, lack of collateral, or not enough business history. However, there are other key factors that contribute to this inaccessibility: physical location of banks, educational resources offered to underserved populations and community outreach.
Banks know that a physical presence in a community can have positive effects on its residents. That’s why, despite declining foot traffic, brick-and-mortar branches are still being opened and remain a big part of banks’ strategies. Physical locations are still where people go to seek financial guidance.
So, when marginalized communities don’t have access to a physical location, where do they go for financial guidance? When we take Lancaster city as an example, there are limited branch locations outside of the downtown area.
That is why Assets and Community First Fund focus on providing technical assistance when business owners access capital. Lancaster Housing Opportunity Partnership requires borrowers to go through training prior to receiving down payment assistance when purchasing a home.
Lack of access to capital also affects those who may qualify for credit, but are outside of the bank’s reach.
Many financial institutions invest in community outreach personnel. Their focus is to build relationships within the community. This allows these organizations to proactively inquire about financial needs and make sure their customers’ needs are met.
However, many business owners in underserved areas don’t hear from or get a chance to meet representatives from their bank. Because of this, business owners often believe that lenders don’t represent or understand the community. This can result in lowered trust, or a total lack of trust.
As banks look to hire, making sure that their lenders reflect the community they serve can lead to important business development in areas that typically haven’t been given attention. For example, many of Assets’ banking partners have made great strides in community outreach by serving on our board and committees.
By working directly with community development financial institutions, these relationship managers are able to build stronger connections with their customers, even if they can’t immediately meet their financial need.
A great example of a community-focused bank is Fulton Bank. Their Fulton Forward initiative provides programs and financial tools that help with areas such as housing assistance and down payment and closing costs assistance.
The world of banking is changing, and traditional institutions are facing challenges from declining foot traffic, new financial technology companies making it easier than ever to borrow money, and strict government regulations.
However, these organizations will benefit greatly from investing in their entire community and not just the areas that may be immediately profitable. Banking should be seen as a “service for good.”
A shift in focus from the shareholder to the stakeholder will allow the entire community to win, which will also have positive effects on the banks’ bottom lines.
This post originally appeared in LNP + LancasterOnline.