When we think of “banks,” most people in the United States think of the private kind – like Wells Fargo, Chase, or Bank of America. Although these private banks are the main source of banking for individuals and business owners in the US, practices like high checking account minimums and high interest rates for people with little or no credit have historically made it difficult for people – especially entrepreneurs – to use their services. Over the years, there have been many instances of the large private banks acting against the interest of the residents who live in their jurisdiction.
Because of these barriers to access, people turn to check-cashing stores or payday loans to meet their financial needs. Unfortunately, these lenders are often predatory, charging unbelievably high interest rates on these loans, which leads to a repayment cycle that keeps people in poverty. In addition, one out of five neighborhoods in Los Angeles County does not even have one financial institution, like a bank or a credit union, available to them.
The result of all of these practices is a lack of access to banking for low income neighborhoods and the businesses in those neighborhoods. It also means higher financial penalties for the same services that higher income people use.
One solution? Public banks. Public Banks keep taxpayer money within the local economy, saving money on private bank fees and interest traditionally paid out to these banks. Because they are not for-profit institutions, the money saved from fees and interest can instead be used for projects that directly benefit the local community. And most importantly, Public Banks are able to provide lower cost loans to people and businesses with low income, giving them the financial tools to get out of the cycle of payday lenders and high interest debt.
However, there are challenges to getting Public Banking off the ground that prevent it from being an immediate solution. Issues like higher initial start-up costs, creating an oversight board, and completely re-envisioning the banking norm (casual!) all have to be conquered for a public banking system to be effective. While we wait for these larger structural changes, we at FOUND/LA wanted to provide a local solution for Los Angeles’ invisible entrepreneurs – those who have been overlooked or underserved by traditional systems.
One of these solutions is through our partnership with Opportunity Fund. Together, we created a “loan bank,” with dollars set aside for underserved entrepreneurs here in Los Angeles. With these loans, local business owners have the opportunity to build their credit and access the capital necessary to grow their businesses.
There’s a quote: “The definition of madness is doing the same thing and expecting a different result.” Here at FOUND/LA, we want to try something new: supporting the entrepreneurs who are the fabric of our community. Maybe one day our banking system will join us.