If just 2 cents of every dollar earned by U.S. corporations was reinvested in Black communities, the racial wealth gap would close at a pace and scale never before seen in this country.
Referred to as “The 2% Solution,” this premise, championed by Vista Equity Partners founder Robert Smith is bold, yet simple. He proposes that corporations, which reap the benefits of America’s prosperity, take the lead in reversing centuries of structural economic racism by investing 2% of their net income over the next 10 years in Black businesses and financial institutions.
This proposal is good not just for direct beneficiaries of the investment, it is good for corporations and the entire nation. Analysis by McKinsey and Company found that closing the racial wealth gap would add between $1 to $1.5 trillion in economic activity over the next 10 years through job creation and income gains.
So how would this plan close the racial wealth gap? By investing in Black businesses and Black-owned financial institutions, which directly translates to jobs and economic growth in Black communities.
The evidence is clear. In a study of Minority Depository Institutions (MDIs), the FDIC found that Black-owned banks locate and lend in Black communities at significantly higher rates than white-led financial institutions. Likewise, research by the Association for Enterprise Opportunity showed that while the Black/white wealth gap is 13:1; the wealth disparity shrinks to 3:1 when comparing white and Black business owners.
U.S. banks notoriously underinvest in Black people and communities.
Unfortunately, the resources available to close these gaps are far too scarce. U.S. banks notoriously underinvest in Black people and communities: While 77% of white households are “fully banked,” less than half of Black households can claim the same status. Not surprisingly, the denial rate for mortgage loans for Black households is nearly twice the rate of whites. Even among Community Development Financial Institutions (CDFIs) — mission based lenders created to serve low-income communities — capital levels for white led CDFIs are, on average, twice the size of CDFIs led by people of color, a function of capital investment.
Even philanthropic support for these communities is woefully inadequate. The National Committee for Responsive Philanthropy reports that per-capita grant making in the Mississippi Delta / Alabama “Black Belt” — home to the nation’s most concentrated rural population of Black residents — is a woeful $41 per person, compared to San Francisco, where philanthropic investment is $4,096 per person.
Our experience at HOPE, a Black-owned credit union and CDFI serving the Deep South, has shown repeatedly that aligning resources with need enables people to climb the economic ladder. Nowhere was this more evident than in our work to help Black businesses access the Small Business Administration Paycheck Protection Program (PPP).
In a typical year, we make 40-to-50 business loans. However, the onset of the pandemic, the shutdown of the economy and disproportionate impact on Black communities mandated an extraordinary response. Anchored by substantial support from Goldman Sachs, HOPE redirected nearly half of its workforce to originate PPP loans. By the time the program concluded, HOPE had processed close to 7,400 PPP applications and approved 2,900 loans for $85 million. The majority of these loans were to mostly Black communities, with an average loan size of less than $30,000 — more than $70,000 lower than the average for the overall program.
Many of HOPE’s PPP borrowers were small businesses and nonprofit organizations run by Black leaders who could not even get a return phone call from traditional lenders. One of those organizations included a small nonprofit serving youth in the Arkansas juvenile justice system. After reaching out to its bank, the nonprofit learned the financial institution would no longer accept PPP applications.
The news was particularly devastating because, short on funds, the organization was experiencing an influx of teens in need of case management services. Youth formerly in the system were reaching out following their early release, a precautionary measure to prevent an outbreak of COVID-19. Before the organization had a chance to find another lender, the program’s first phase had ended. When the program restarted, HOPE made the loan. While maddening, the outcome was not surprising. What would one expect when a study commissioned by the Winthrop Rockefeller Foundation found that in Arkansas, where 15% of the population is Black, just 1.2% of SBA loans go to Black businesses?
Corporations and their shareholders have long benefitted from systems, policies and practices, all promulgated by law, that have facilitated and perpetuated the racial wealth gap. However, as HOPE’s PPP experience demonstrates, there is a better way. The health, economic and racial crisis facing America has crystalized the importance of transcendent action at this critical moment in history. Smith’s 2% Solution offers a guide for moving forward: Make substantial, sustained and targeted investments that equip Black communities to thrive. All it takes is 2 cents.
Bill Bynum is CEO of HOPE (Hope Enterprise Corporation, Hope Credit Union and Hope Policy Institute), a family of organizations that advances economic opportunity for disenfranchised populations in Alabama, Arkansas, Louisiana, Mississippi and Tennessee. Bynum serves on the boards of the Aspen Institute and NAACP Legal Defense Fund, and previously chaired the Consumer Financial Protection Bureau Consumer Advisory Board, and the Treasury Department’s Community Development Advisory Board.