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How MDIs can enhance the economy in low-income communities

It’s often said that small business is the backbone of the U.S. economy — but for minority small business owners gaining access to capital to get a business running is difficult to attain. According to Aron Betru, managing director of the Center for Financial Markets at the Milken Institute, many minority-owned businesses are forced to rely on credit cards to get the funding they need.

Betru joined Yahoo Finance’s “The First Trade” to discuss the need for increasing access to capital in underserved communities. 

“When you look at minority-owned small businesses across all small businesses, I would say the first source of startup capital is usually your friends-and-family round. The second one, nationally, is usually bank credit, but within minority-owned small businesses, the second source is actually a credit card, which is a very inefficient source start of long term growth capital,” he said.

Betru, the author of “Empowering Communities and Their Banks: Strategies for Enhancing Minority Depository Institutions,” also pointed out that minority-owned businesses got hit particularly hard by the 2008 financial crisis.

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“In some zip codes, we had more than 50% of home values wiped out. So when you put all those pieces together, supplemented by the fact that the banking sector has had an unconscious bias history for a long period, you had minority-owned small businesses not being provided with all the ingredients they needed to really fuel their growth ... A lack of access to capital, you can see that it actually contributes to a lack of access to the American dream.”

How fintech firms can help

Betru believes that fintech firms can play a significant role in empowering underserved communities through minority depository institutions (MDI), one in which at least 51 percent or more of the stock is owned by one or more socially and economically disadvantaged individuals. Betru says that the work done by fintech firms matters in these communities because they are actually using technology to provide a lower cost of serving the population. He noted that this is not true for all fintech players, of course, but believes that there are a few firms that are doing a good job. 

The German headquarters of the electronic payments division PayPal is pictured at Europarc Dreilinden business park south of Berlin in Kleinmachnow, Germany, August 6, 2019. REUTERS/Fabrizio Bensch

“When you look at who’s actually then remaining in these neighborhoods that had a lot of the bank closures happen ... In these communities where these financial institutions have been pretty much a big part of their providing access to capital. 

When asked whether the burden to help solve the issues of access to capital within underserved communities lies with the Trump administration or big banks, Betru said that it’s a mixture. 

“It’s a mixture of actual policymakers that need to make compliance costs lower for serving the exact part of the country that needs access to capital. And then the financial institutions themselves, they are doing exactly what they need to do, which is create a much more efficient way of providing access to capital, and unfortunately, that means consolidating, consolidating, consolidating,” says Betru. 

“I think this is where the government has a part to play because there’s a considerable amount of regulation with regards to how banking institutions and third party players engage in collaboration. … We need to find a better way of balancing consumer protection, regulatory compliance on one side. But increasing access to capital to the very segment of the country that actually needs it because then that translates to more jobs, more income, more wealth accumulation for the group that actually is the backbone of this country,” he said.

Reggie Wade is a writer for Yahoo Finance. Follow him on Twitter at @ReggieWade.

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