Minority-owned American banks are more generous with their customers when it comes to interest rates on certificates of deposit, according to a new study from the University of Wisconsin-Whitewater.
Researchers looked at CD rates from thousands of commercial and saving banks in the United States between 2002 and 2011.
During that time, minority-owned banks consistently paid higher interest rates to their customers than white-owned banks.
On a 12-month CD, black-owned banks paid on average .489 percentage points higher than white-owned banks. Asian-owned banks paid .308 percentage points higher, and other minority banks (with women, Native American and Hispanic owners) paid .354 percentage points higher.
“These are banks that proactively pursue deposits in order to serve their communities,” said Russ Kashian, co-author and professor of economics at UW-Whitewater. “Minority-owned banks are often located in less-wealthy neighborhoods with fewer thriving businesses to attract investment, so they need to be more aggressive. They need to provide financial options that reflect people in the neighborhood.”
Clients who don’t have a lot of spendable cash and assets are more likely to purchase short-term CDs as opposed to long-term CDs, according to Kashian. By offering higher rates, banks can increase their customer base and help attract wealth in communities where wealth doesn’t exist.
“This business strategy is very positive because it means the bank is serving as a real community partner,” said Richard McGregory Jr., co-author and assistant vice chancellor of multicultural affairs and student success at UW-Whitewater. “It’s a role that isn’t always highlighted when you look at business and economics reports. The focus is usually on profitability, not what most people think of as a social contract.”
Minority-owned banks sometimes face criticism because they often tend to be less profitable than white-owned banks.
“They’re able to give more money to their customers to attract deposits. However, this may result in smaller profit margins,” Kashian said. “They’ve been getting bad publicity due to a perception that they’re not as profitable as white-owned banks. It’s unfortunate because they’re playing an important role in getting minorities access to capital.”
There are census tracts where a minority-owned bank is the only bank. Without these branches, residents would more heavily rely on payday loans, check cashing services and predatory lenders, McGregory said.
In addition, minority banks offer solid employment in communities where living-wage jobs can be scarce.
“These are jobs with ladders,” Kashian said. “You can see someone going from teller to loan officer to bank manager.”
Kashian and McGregory will present their findings at the National Bankers Association annual conference in Atlanta in October. The study was published by the Review of Black Political Economy. Neil Lockwood, who graduated from UW-Whitewater in2012 with a bachelor’s degree in economics, also co-authored the report.