Banking while black: How a new generation of leaders is overcoming a legacy of discrimination and mistrust

In 1865, the United States chartered a hopeful, new bank—the Freedman’s Savings and Trust Co.—that was intended to help newly liberated slaves get on sound financial footing.

Less than a decade later, in 1873, amid a financial panic marked by railroad speculation and bad investments, the woefully mismanaged business shuttered. More than 60,000 depositors were left out in the cold, many never receiving compensation for their losses. (The Federal Deposit Insurance Corporation, which backstops savings in qualified banks up to a $250,000 limit, was established later, in 1933, during the Great Depression.)

For as long as banks and black people have interacted in America, the relationship has been marred by discrimination, failure, and misfortunes, said Jennifer Tescher, CEO of the Financial Health Network, a nonprofit financial research group that, among other initiatives, partners with JPMorgan Chase on a program mentoring financial tech startups trying to improve underserved communities’ access to financial services. Tescher spoke Wednesday during a Brainstorm Finance Community Conversation, a virtual event hosted by Fortune.

“If you’re a black person whose family experience is that”—getting thwarted by the American financial system, such as in the case of the Freedman’s bank—“you’re not going to feel really great about banks,” Tescher said. “It really just creates a tremendous amount of mistrust and lost wealth. And then came redlining,” she said, referring to the since outlawed practice of denying loans and services to people based on their race or neighborhood.

Crossing a red line

While the U.S. made redlining in the housing market illegal in 1968, discrimination persists. Unsavory practices like this have kept people of color from enjoying the same prosperity as the rest of America.

Entrenched regulations around residential zoning keep wealth-building opportunities out of reach for lower-income families. Less fortunate people are prevented from owning real estate in single-family areas, thereby perpetuating inequality, said Jeff Hayward, executive vice president and head of multifamily at Fannie Mae, the mortgage giant. “Zoning is still, I think, racist, in general,” he said.

While redlining used to be “more overt,” it continues today in subtler ways, agreed Everett Sands, CEO of Lendistry, a small-business loan lender. One example happened recently as the government distributed loans to small businesses for pandemic-related relief through its Paycheck Protection Program (PPP).

Rules related to supplying loans to sole proprietorships—a category of businesses that overwhelmingly encompasses black and brown owners—came out last, Sands said, putting these demographics last in line for needed aid. “Things like that are the new version of redlining,” he said.

“We looked at PPP and we said, ‘Whoa, wait a minute, you forgot the black people,’” said Kevin Cohee, CEO of OneUnited Bank, the largest black-owned bank in the U.S. Flanked by large portraits of Martin Luther King Jr., and Malcolm X on the call, Cohee said his bank “went the complete opposite way” and sought to help individual members of its community and customer base, including by giving its first PPP loan to an Uber driver.

“That’s why OneUnited Bank has the heart of the black community. That’s why it grows,” he said. “The reason people like us is we’re real.”

Beating the system

All the experts on Fortune’s panel pointed to education as a necessary part of the equation to fix what perpetuates systemic racism and financial exclusion.

“The biggest problem I face in working with our community is just the lack of knowledge or lack of literacy,” said Bola Sokunbi, CEO of Clever Girl Finance, a personal finance education firm. “That in turn impacts their belief in themselves to be able to overcome these challenges around their debt. They are so overwhelmed and so afraid of what they don’t know, and knowledge is real power for them.”

People understanding and fixing their credit “is really important for long term stability,” Fannie Mae’s Hayward said. Otherwise, people will be preyed upon by subprime lenders, exacerbating inequality. “Everybody should be educated about financial choices that they make,” he said.

The problem extends beyond race. “Our school system is not only failing African-American children, and robbing them of the opportunity to better manage their financial future, I think society as a whole is being undereducated about finance,” said Jacob Walthour, CEO of Blueprint Capital Advisors, an investment firm.

Walthour’s No. 1 piece of advice was for people to own real estate. Forget hot stock tips, he said; owning a house is the best way for people to build equity and, later, gain greater access to capital, breaking the cycle of wealth disparity.

“It’s not a secret—it shouldn’t be a secret—these educational things, but somehow they seem to be a secret,” Hayward said.

Toward progress

Rectifying centuries of racial injustice and exclusion in finance is no easy task, but it is one where banks could have a much greater impact.

Being a bank is privilege, one that entails great deal of social responsibility. As stipulated in their charters, banks get access to cheap funds from the Federal Reserve and, “in exchange, you’re supposed to then lend that money in the communities in which you do business,” Tescher explained.

“Unlike a lot of other industries, banks have a special responsibility to focus on the credit needs of everyone, including black and brown people,” Tescher said.

Some financial firms are seeking to rally together to make amends. Jon Stein, CEO of Betterment, an investment “robo-adviser,” which automatically invests people’s wealth in various assets, called for his peers to come together, to formulate and sign an industry commitment letter designed to “support black Americans.”

Though details were scant, Stein said he looked forward to continuing conversations with members of the call to nail down specifics. “By standing together we believe that we can make a much stronger statement than we could individually,” Stein said.

Ryan Williams, CEO of Cadre, a fintech firm that manages a platform for investing in real estate, put it best when he shared his perspective as a black entrepreneur. “I’ve never really felt that it was fair or right, in the land of liberty and justice for all, that the odds seem to be so stacked against my community, or people, because of the color of their skin,” he said.

Banks have a long, dispiriting legacy of perpetuating inequality. But as pressure mounts for more financial firms to make progress, there’s hope the story doesn’t have to end like the Freedman’s Savings Bank.

“We need ambitious action commensurate with the depth of the problem,” Williams said. “And that means a lot of CEOs and leaders are going to have to put themselves in uncomfortable and unconventional positions.”