Skip to main content

THE FLIGHT OF BANKS By Sari Lesk, Milwaukee Business Journal. Comments and summary by Creative Investment Research

NOTE: We spoke with this reporter on Nov 30, 2021, This article was published almost a year later, on Oct. 21, 2022. A related article* published in the New York Times on the same day, 10/21/22, seemed to reflect our comments and research.

 Morgan Phelps faced a business conundrum in the summer of 2020.

Phelps is the founder of Colorful Connections, a Milwaukee firm that helps businesses attract and retain diverse employees. She formed her business model in 2017 while working in the communications industry. After completing accelerator programs, such as through BizStarts and gener8tor, Phelps took Colorful Connections live in fall 2019.

Although demand slowed at the start of the Covid-19 pandemic, Colorful Connections faced a new problem after the murder of George Floyd by a Minneapolis police officer.

That event energized calls for racial justice and equity across the country. Phelps suddenly had a rush of clients, but the cash flow from that work wouldn’t come until later – sometimes months later – when clients started paying their bills.

She said she turned to banks for a loan or line of credit to get through that period. Initially, she said a banker told her banks weren't lending in general because of the pandemic. When those opportunities reopened, Phelps said the response she encountered was that “by no means were they going to lend to a small business like mine and someone like me. They needed more,” given the young age of Colorful Connections.

“Even seeing what was in the pipeline, what was going on, even given the market, the climate, everything, it wasn’t enough for numbers,” Phelps said.

Phelps is one of several local entrepreneurs who told the Milwaukee Business Journal they struggled to access funding to start or scale their business. Many of those small business owners said they found themselves rejected by traditional banks, unable to overcome the underwriting criteria used to determine how loans are doled out.

As the industry consolidates, banks close branches and more banks adopt automation, industry stakeholders are raising questions and concerns about how entrepreneurs like Phelps will finance their businesses. Those concerns are not limited to individual entrepreneurs. Whether small business owners can access adequate capital has implications for the community as a whole, rippling into the number of jobs firms can create and economic development in neighborhoods throughout southeast Wisconsin.


Colorful Connections was high-risk for a bank, Phelps said, and she had to find operating capital elsewhere. The business received a ThriveOn loan from the Greater Milwaukee Foundation, for instance. She also received a loan and a line of credit through Legacy Redevelopment Corp., a community development financial institution (CDFI), in Milwaukee that lends to underserved clients – particularly minority-owned businesses.

Phelps said after a year of stability, PNC Bank offered Colorful Connections a small line of credit. She attributed her newfound access to capital – not all she sought, but something nonetheless – to a continued relationship with the officer overseeing her business account.

“What I’ve learned from other companies … (is) what’s helping them advance is having a good banker relationship,” Phelps said. “Someone who will advocate for you or just counsel you.”

Evolution in the financial ecosystem could make opportunities for such relationships harder to come by.

Larger banks are buying up smaller competitors, and banks across the nation are shutting down offices as they say customers are opting for digital services. Nationally, the number of full-service branches as of 2021 had decreased 17% since 2009, when branch banking peaked.

In Wisconsin the drop was larger — 23.5% — according to a Milwaukee Business Journal analysis of federal data. On a percentage basis, Wisconsin ranks seventh in the nation for branch closures between 2009 and 2021.

The analysis examined which neighborhoods in southeast Wisconsin were without a bank branch as of last year. The figures show that nearly 80% of people who live in high-minority census tracts are in a neighborhood with no bank branches, compared with 40% of people living in predominantly white census tracts.

The income level within a tract reduced but did not eliminate the disparity. According to the data, about 80% of people living in high-minority neighborhoods that are low- or moderate-income are in tracts with zero branches. About 56% of people living in low- and moderate-income neighborhoods where most people are white are in tracts without branches.

Meanwhile, new online-only platforms are entering the small business lending marketplace, and stakeholders are deeply invested in how financial regulators are implementing rules that could reshape the lending landscape. How these events will affect entrepreneurs and, more broadly, community development remains to be seen.

For Phelps, operating cash flow has improved over the past year, but capital remains an obstacle to growing Colorful Connections. She has yet to find herself in the position to complete a planned digital platform and bring it online.

“If I had surplus cash, capital, then fine, I can invest in this thing that will make us grow and scale as we need to,” Phelps said. “Until you have that, you’re just dealing with the same challenges and trying to make it through.”

Bankers’ take

The findings come during a time when banks have been expressing a greater commitment to racial equity. After Floyd’s murder, several national banks asserted they would do their part to address racial wealth gaps, pledging to help minorities access capital for a variety of purposes, including small business lending.

Chase Bank’s parent company, for instance, said it committed $30 billion by the end of 2025 to support Black, Hispanic and Latino communities. Within that pledge was a plan to provide 15,000 loans to small businesses in those communities and to mentor entrepreneurs.

(See: https://blacklivesmattercorporatepledges.com/ Also see: Corporate Donations to Black Lives Matter Total $67 Billion https://www.prlog.org/12874879-corporate-donations-to-black-lives-matter-total-67-billion.html )

Bankers defend their branch patterns, saying they reflect current customer habits. Rose Oswald Poels, the president and chief executive officer of the Wisconsin Bankers Association, said lending volume remains strong and that customers are still fulfilling their baking needs despite branch closures.

Oswald Poels said banking regulations impede lending to new businesses, no matter who the owner is. She said most businesses without a few years’ worth of a track record must obtain their initial financing elsewhere, such as from a CDFI – as Phelps did.

“When you do your credit underwriting analysis, you’re looking for a history,” Oswald Poels said. “Any startup doesn’t typically have a history, unless perhaps the individual has a pattern of starting new businesses and can demonstrate experience and success that way.”

A review by the Federal Deposit Insurance Corp. of banks’ small business lending practices found otherwise, though. According to the 2018 survey’s results, more than 70% of both small and large banks say they’re willing to lend to startups. Some banks reported they use different underwriting procedures for those young businesses.

Oswald Poels said she encourages the owners of businesses of all ages to foster a lending relationship, such as by inviting a lender out to their operation to show what it’s about. She added that anecdotal evidence from association members indicates Wisconsin banks are diversifying their staffs, which she believes in turn will help more people develop a banking relationship.

Staff diversification has been among the ways banks pledged to help close the racial wealth gap after Floyd’s murder. Other commitments have involved diversified lending.

U.S. Bank, for example, started a program called U.S. Bank Access Commitment. The Minneapolis-based firm, which is the Milwaukee region’s deposit market share leader, said its program would support business owners of color, as well as communities of color. 

(NOTE: Creative Investment Research has filed a comment objecting to a set of proposed banking mergers. US Bank is included in this set. See: https://drive.google.com/file/d/1jWBxbggqJrhh3pLqBvrCNLJqelxpuWX1/view?usp=sharing)

U.S. Bank earlier this year also established a community benefits plan as the firm acquires MUFG Union Bank. The bank developed the $100 billion plan in coordination with the National Community Reinvestment Coalition and the California Reinvestment Coalition. Among other tenets, the plan calls on U.S. Bank to open five new California branches in low-, moderate- or middle-income communities where most people are minorities.

BMO Harris Bank, the second-largest deposit holder in southeast Wisconsin, was another bank that pledged to address racial equity. The bank’s $5 billion commitment over five years is called BMO Empower and is billed as a way to address barriers facing minority families, communities and businesses. Part of the pledge included $300 million in lending for women-, Black- and Latino-owned small businesses.

(Creative Investment issued a statement in favor of this merger; See: https://drive.google.com/file/d/1EbJMk0KFbjyez6nPfKUWKzHPClDP9hZ2/view?usp=sharing )

Anthony Hudson, the bank’s regional president for retail banking in Wisconsin, was an architect of BMO Empower. He said the bank determined how it would make investments based on introspection and feedback from customers.

In tracking the results of the program, he said, BMO has found success in lending to Black- and Brown-owned commercial companies and that it has ground to cover in its mortgage lending to minorities.

Similar to U.S. Bank, he said BMO started a special purpose credit program, which it piloted in Chicago and northwest Indiana. The program expanded to Wisconsin last year. Hudson said that product has served hundreds of minority-owned small businesses.

“We’ve had our fair share of wins without having to do anything with the credit criteria or underwriting practices,” Hudson said. “What was different is how we approach those businesses that I think oftentimes in the past were overlooked.”

BMO has built new relationships in an untapped segment by setting it as a priority, Hudson said. Overall, he said BMO made more than $4 billion in investments about two years after Empower began.

Not everyone is convinced of the potential for banks’ racial equity pledges to move the needle. Economist William Michael Cunningham, for instance, has been tracking the Black Lives Matter pledges on the website for his Creative Investment Research business. He tallied a total of $70 billion in corporate pledges as of the end of September, including Chase Bank’s $30 billion pledge.

Cunningham said the banks’ pledges are disingenuous, because “they don’t require that you do anything extraordinary.” They served as an expedient solution and a recruitment tool, he said.

“They don’t require that you change these biases,” he said. “All they require you to do is pledge some portion of your current business activity.”

Cunningham said he sees some value in entities signaling their interest in making a social impact. He also said he expects to see some increase in lending to minorities, because the publicity around the pledges will increase applications.

But if the criteria used to determine credit risk don’t change, Cunningham said, the long-term economic impact will be limited.

Seeking transparency

Rachaad Howard says he counts himself among entrepreneurs who haven’t accessed bank capital, including through a program targeting Black-owned businesses. Howard owns Cream City Print Lounge, an interactive screen-printing business he opened in 2019 after about a decade working in the industry.

Previously, he said, he had a different screen-printing business that sold to major retailers, such as The Bon-Ton Stores Inc. When the department store chain went under, Howard said, he had to close the business and start fresh. After taking a year off, Howard pitched Cream City Print Lounge to a contest running in West Allis meant to attract new businesses.

Using his savings and winnings from the competition, he opened the business and said he has shown a profit since.

Ready to grow and expand, Howard said he began approaching banks that were publicizing programs for Black entrepreneurs. He said he met the criteria listed on programs’ promotional materials, but his requests for a line of credit were rejected. The reasons, Howard said he was told, reached into his past, such as student loan debt or a disputed medical bill.

Since then, Howard closed his storefront and is focusing on mobile operations while he continues exploring opportunities to expand Cream City Print Lounge. He said he’s interested in bringing on an investor or crowdfunding rather than borrowing from a CDFI, because he is concerned about the interest rate he’d face.

“We have everything that shows that we’re on an upward path,” Howard said. “Getting denied, and then that affected my personal credit, (which) is not OK. Our goal is to franchise eventually, but we have to get these lines of credit and financing in place before we can even look at that.”

He said he hopes banks will be more transparent about what they need to approve a loan or line of credit.

‘Without a bank’

Other entrepreneurs say their experiences with banks have turned them off from further engagement.

Aureal Ojeda said she was rejected by four banks after she started Outwoken Tea by bootstrapping the business. The sustainability-focused merchant sells tea from farms around the world.

Ojeda said she was surprised to find herself rejected given her high credit score, a clean payment history and strong income from working in construction. Bankers, she said, told her they couldn’t lend to her because she lacked business credit history – which she was trying to establish with her application.

Although he turned her down, too, Ojeda said a BMO Harris Bank representative referred her to the Wisconsin Women’s Business Initiative Corp., another CDFI.

Industry experts say CDFIs such as Legacy and WWBIC serve a critical purpose for those underserved by traditional finance. As smaller organizations, they can be a more expensive source of capital, and their collective impact has its constraints.

But they’re a resource for the would-be bank borrowers who say they’ve been shut out from mainstream finance.

Through WWBIC, Ojeda obtained her first business loan, which allowed her to buy inventory and a computer. With improved cash flow, she said she has since acquired multiple business credit cards for Outwoken.

Ojeda said she is unlikely to seek bank financing for future expansions.

“I’m not saying that banks aren’t good, I just feel there’s so many other opportunities to grow your credit, grow your lines of credit, build your business credit,” she said. “I’ve done them without a bank.”

Research shows

Little concrete data are available that illustrate banks’ small business lending patterns. The Paycheck Protection Program offers some recent insights. Lenders of all natures originated the fully guaranteed loans under the Covid-19 stimulus program.

A February study from researchers at New York University and the National Bureau of Economic Research examined all PPP loans made by Aug. 15, 2021. The authors found that despite the program’s explicit mandate to serve disadvantaged businesses, many traditional banks’ PPP originations did not demonstrate they had served Black-owned firms proportionately. Rather, technology-based lenders served those borrowers and accounted for more than half of the PPP loans made to Black-owned businesses.

The researchers said they found “suggestive evidence that preference-based discrimination helps to explain lower rates of lending to Black-owned businesses among smaller conventional lenders.”

(See our survey from 4/24/20: "Black American Business Owners Sound Off in New Survey of PPP Programs" - https://www.blackenterprise.com/black-american-business-owners-sound-off-in-new-survey-of-ppp-programs/ )

Another hint at lending patterns comes from the SBA and its flagship 7(a) program. A prior Business Journals analysis of SBA data found lending under the program overall decreased 54% by 2019 since peaking in 2007. During that same time, loans to Black-owned businesses fell 84%.

In Wisconsin, the data show the number of SBA loans overall fell 57% in that timeframe, while loans to Black-owned businesses dropped 91% to 12 loans in 2019.

‘More than just some numbers’

That was the type of lending Taj Pearsall was after as he sought to open Wisconsin’s first location for chicken wing restaurant Buffalo Boss. His cousin started the brand – which has attracted an investment from rapper Jay-Z – in New York.

Pearsall planned to open a location inside the Sherman Phoenix Marketplace, a development filled with small businesses in Milwaukee’s Sherman Park neighborhood. Because he was joining the hub, Pearsall said he readily accessed certain grants, using the guidance of the project’s developers. But he still had a gap to close.

After facing rejection from banks and investors, Pearsall said he turned to city government to inquire about how to access other grants and SBA funding. He was referred to Legacy, the same lender that helped Phelps.

While waiting for Legacy’s loan to come through, Pearsall said he took out a high-interest loan to cover his continuing bills. His first priority after he received the loan from Legacy was to pay down that debt.

He opened Buffalo Boss in March 2019.

“Once we got the funding, we couldn’t be stopped,” Pearsall said.

He’s now working to open the state’s first stand-alone Buffalo Boss restaurant, which will be on North 27th Street in Milwaukee. Rather than revisit a bank for funding, he said, he stuck with Legacy to fund his expansion. The CDFI had been a friend to Buffalo Boss, Pearsall said, and it looked at him holistically when considering him as a credit risk.

“They gave me the money. I did exactly what I said I was going to do with the money,” Pearsall said. “It worked, and everybody’s happy. The bank looks good. The business looks good. We have a relationship. We prosper.”

Pearsall said he understands banks’ aversion to risk, but he felt their review of his application didn’t recognize his tenacity to accomplish his goals. He said he hopes banks will give people who don’t fit their model the “opportunity to be looked at as more than just some numbers.”

Closing time

The Business Journals’ analysis of branch data demonstrates the distribution of remaining branches continues to reflect disparities in access. Almost 90% of bank branches in the Milwaukee region are in census tracts where minorities make up a low or moderate portion of the population.

Drilling down, the figures show about 78% of the region’s branches are in low-minority census tracts, while 64% of the population lives in such neighborhoods. On the opposite end of the spectrum, just 6% of branches are in high-minority areas, while 16% of the region’s population lives in those tracts.

About 80% of the Milwaukee region’s bank branches are concentrated in middle- and upper-income areas.

The analysis also found an uptick in the pace of branch closures during the pandemic. From 2010 to 2020, an average of 14 branches in the Milwaukee region closed each year. Last year, though, 22 branches in the area shut down.

Across the country, the pace picked up from an average of 1,212 closures per year to almost 3,000 in 2021.

The FDIC’s study of small business lending practices found both small and large institutions identify themselves as heavy users of relationship lending, but small banks’ approach might be distinct from that of large banks.

“If that is the case, the decreasing number of small banks in the country may disadvantage the small businesses that prefer a less transactional approach,” the FDIC concluded.

The agency said in the report its interest in banks' practices stemmed from how the decline in the number of smaller institutions overall and the closure of branches by banks of all sizes could have an adverse impact on small businesses.

The survey also found that large banks are more likely to rely on standardization to make small business loans, creating an economies-of-scale business model. Even still, banks of all sizes reported that relationships with borrowers were a top reason to allow exceptions to loan policies.

Hard data, soft data

Economist Mitchell Petersen, a finance professor at Northwestern University who has researched banking, relationship lending and access to capital for nearly 30 years, said his research highlights the value of a banking relationship for borrowers.

His work has explored the roles of hard and soft information in lending. Hard information, he says in his research, deals with factors that are “easily reduced to numbers.” Soft information refers to those considerations that are best understood within their original context.

Petersen said his research demonstrates that the value of a relationship is mutual. A lender might know valuable soft information about a borrower who doesn’t necessarily look like a quality credit risk on paper, and that could improve a borrower’s access to capital. Because of that relationship, he said, the entrepreneur is more likely to stay current on payments out of a sense of obligation.

“Part of the ability to pay back is financial,” Petersen said. “And part of it is effort. … Is this a person that when things don’t go well, they will work 80 hours a week and do everything they can to save the business? Or are they going to throw in the towel and give up?”

Beyond individual entrepreneurs, Petersen said, what’s at stake in lending decisions and alternative efforts to raise capital is community development.

"The strength and health of our communities is going to be whether the right small businesses can raise capital,” he said.

‘A lot more dreams coming about’

That’s a sentiment that resonates with Twisted Plants co-owner Brandon Hawthorne. With his wife Arielle, Hawthorne owns two southeast Wisconsin locations for the vegan restaurant.

Hawthorne said he used credit cards and his 401(k) from a previous job to begin with a food trailer. He sought financing to open a Cudahy location for the restaurant but was unable to close a deal. One bank, he said, inquired as to whether he had a life insurance policy he could put up as collateral. He didn’t at that time.

Although nervous after what he called an “off-putting” experience with banks, Hawthorne said he approached WWBIC, where he received loan funding. That capital helped Twisted Plants weather the pandemic, and he has now expanded the business to Milwaukee’s east side.

Hawthorne said he understands that banks need to protect against losses, but he felt the underwriting process he faced was too stringent. Unable as a startup to produce a few years’ worth of financial history, “that automatically cancels you out with the bigger institutions,” he said.

“I think if the financial institutions were less strict in regards to what they required to acquire a loan, there would probably be a lot more businesses and a lot more dreams coming about,” Hawthorne said.


Bank branch closures send signal to community

Observers and advocates find the disparities in bank branch distribution extend beyond small business owners’ credit access.

Researcher Scott Hegerty, a professor at Northeastern Illinois University, said banks might not invest in a community by establishing a physical office. Given the expense of operating and staffing a brick-and-mortar facility, Hegerty said banks might instead contribute to organizations that work with the community.

An urban economist who grew up in Milwaukee, Hegerty has researched banking deserts – including in the city. In a paper examining branch patterns in Milwaukee and Buffalo, he found underbanked areas tended to be “significantly poorer and less white” than other areas in the city.

Hegerty said he found income levels primarily were a driver of branch distribution in Milwaukee. Bank deserts exist because people are afraid to invest in a neighborhood, which Hegerty said creates a “signal.” Areas lacking bank branches lack other types of businesses, such as grocery stores.

“The banks don’t want to come in. Nobody wants to come in. The banks have abandoned us,” Hegerty said. “What that leads to is a disconnect between people who are unbanked, and then they’re never part of the financial system.”

Even with the pace of branch closures today, Hegerty said his concern is not about how far people have to travel to the next-closest branch. Instead, he worries about what is communicated when banks opt not to be present in a community.

“It’s really not a physical problem. It’s not really an economic problem,” he said. “It’s more a social and psychological problem.”

EVOLUTION OF BRANCH BANKING

The Milwaukee Business Journal’s analysis of bank branch data examined banking industry consolidation since branching peaked nationally in 2009. At that time, Wisconsin had 2,239 full-service bank branch locations, 714 of which were in the southeast region. On a percentage basis, the number of branches that closed in the region between 2009 and 2021 outpaced the nation, the analysis shows.

For the purposes of this analysis, southeast Wisconsin refers to the seven-county region that includes Kenosha, Milwaukee, Ozaukee, Racine, Walworth, Washington and Waukesha counties (M7).

2009 view of M7

In southeast Wisconsin, data show branching peaked in 2009 at 714 full-service bank offices as of June 30, up one branch from the prior year.

 

2021 view of M7

By 2021, southeast Wisconsin had 534 full-service bank branches, a net decrease of 180 offices since 2009. The state’s branch count dropped in that same time period from 2,239 to 1,714, a net decrease of 525 offices.

 

* Where $30 Billion to Fix Systemic Racism Actually Goes. New York Times (NYT). By Emily Flitter. Emily Flitter covers banking for The Times and is the author of “The White Wall: How Big Finance Bankrupts Black America.” The NYT article cited a law professor at the University of California, Irvine, saying “They’re willing and happy to do anything that goes into their regular business without sacrificing anything..” 

Popular posts from this blog

Maternal Health Financing Facility for Black Women: A Solution to an Urgent Problem

Maternal mortality is a significant issue in the United States, with Black women disproportionately affected. Research conducted by the Centers for Disease Control and Prevention (CDC) has shown that Black women are more likely to die from pregnancy-related causes than their white counterparts. However, the issue is not new, and despite the increasing amount of data available, the disparities have remained unaddressed for far too long.  Creative Investment Research (CIR) is among the organizations that believe there is a solution to the problem. Through our proposed impact investing vehicle , the Maternal Health Financing Facility for Black Women (MHFFBW), we aim to tackle the mortality gap and support Black women during childbirth, which will, in turn, benefit their communities. The Facility, based on legally binding financing agreements containing terms and conditions that direct resources to individuals and institutions capable of addressing supply-side conditions at the heart of

Projected Impact of Gun Laws on Corporate Profits in Texas

More Fortune 500 companies are located in Texas than in any other state. Texas successfully used low taxes and minimal regulations as bait to recruit companies like Tesla and Oracle. The state promoted these “advantages” in ads highlighting their “free-market” environment and criticizing the "tax and spend policies of liberal leadership" in Democrat-run states. Four million people migrated to Texas over the past ten years. Our economic models predict a reversal, however. State of Texas corporations on the Fortune 1000 list generate $2.2 trillion in revenue, $158 billion in profit. They have a market value of $3.8 trillion and employ 2.5 million people nationwide. We continue to believe this increased corporate presence in Texas imposes a tax on the nation as a whole. Texas allows anyone 21 or older to carry handguns without training or licenses, and maintains lower gun purchase age limits. Beyond the recent abortion bill, which allows people to sue those who "aid and abe

BRICS Summit 2023: Navigating the Transformation of Global Finance

Recent developments in the global financial landscape have captured the attention of the finance world, promising a new era of integration, transformation, and collaboration. Amidst the excitement, however, it is essential to acknowledge the formidable obstacles that stand in the way of realizing these ambitions. The 2023 BRICS Summit , slated to convene amidst this shifting landscape, is poised to be a significant juncture that could have profound implications for the future of international finance. The resurgence of Bitcoin, marked by an impressive, if smaller, year-to-date price surge, has underscored its enduring relevance. Similar concerns surround the exploration of central bank digital currencies (CBDCs). The UK's digital pound initiative, while forward-looking, raises questions about stability, security, and privacy and potential economic power imbalances. The notion of a BRICS digital currency, potentially extended to include several countries, reflects a desire to chall