Great Timing for LA's Small Business Community?
The LAFC announced a naming rights partnership with BMO, for what will be now known as BMO Stadium. BMO’s (Bank of Montreal) stated their commitment to growing the game of soccer across North America and supports the U.S. expansion pillar of BMO’s North American growth strategy, where BMO currently serves clients through over 500 branches, access to 42,000 ATMs, more than 5,000 employees, and digital banking services in all 50 U.S. states.
This announcement came just two days after the United States Federal Reserve approved BMO’s $16.3 billion acquisition of Bank of the West. This combination will create the 15th-largest US lender.
What is being overlooked in the headlines is the fact that this deal and others like it - BMO/Bank of the West, US Bank/Union, First Citizens/CIT, and RBC/City National (2015) - are offering a rare window of opportunity to better guide significant capital pledges - mortgage, consumer and small business - to LA’s communities of need.
Research has shown that the ability to create pathways to economic opportunity for low-and middle-income individuals and families, is rooted in neighborhoods and a willingness from the public and private sectors to invest in neighborhood infrastructure. This includes affordable housing, small businesses, parks, health and educational services, to name a few.
Research also shows that small businesses (one to 249 employees) create an even greater share of jobs in high poverty, high unemployment inner city neighborhoods and they serve consumers (e.g., restaurants, retail, and local services, such as dry cleaners) and create amenities that make neighborhoods more attractive places to do business.
Data shows that Latinx and Black residents only own 11% and 2% of small businesses, despite representing 49% and 8% of L.A. County’s population, respectively. Business owners of color were also overrepresented in deeply and immediately impacted industries during the pandemic.
That needs to change as the significance of small and medium size businesses to LA’s economic future is clear.
Los Angeles is a region of small businesses. There are 250,000 local small businesses and nearly 1.1 million sole proprietors. These businesses account for 43 percentage of the local workforce and make L.A. County the country’s largest small business economy. (link)
Though some would argue otherwise, there is a significant interest from leading financial services institutions operating in Los Angeles in serving small business owners. What many people do not know is they face challenges in getting their services into the hands of the communities that need them. Below are a few:
Local distribution: Bank branches have significant breakeven costs to open and operate, particularly during a time when more business is being done digitally.
Limited data sets: SMBs must shift their data practices to help generate more accurate underwriting.
Mitigating the risk of regulatory rules. Government’s growing bureaucracy continues to place more and more demands on banks; which in turn produces an environment that mitigates for risk, in order to avoid a WSJ headline.
Generating profits are difficult. Regulators make it expensive to manage and track the program spending for special lending programs.
Additionally, small businesses have their own challenges:
They are running their businesses from 8-8 and have limited time to fit into banks’ and government’s 9am-5pm schedules.
Dealing with the day to day distractions of running a business
Tend to rely upon their personal network of advisors
They are not necessarily finance and accounting people
Prefer experiences that are streamlined and efficient
The good news is technology is making it easier to set up new businesses. The COVID-19 pandemic saw an acceleration of new digitally-powered small businesses across the US and an aging population means small business ownership is primed for a generational shift. Tech allows for easy integration with other operations and finance tools, embedded insights to monitor performance and lots of content and training materials to expand within the platforms’ ecosystems and partnerships.
Today, Americans have the most faith and confidence in small businesses, out of all major US institutions, and the time is now to do more for them.
Other steps can also be taken to support small businesses in LA.
Expand access to financial education and tools to improve operations (Note: most financial literacy programs are consumer rather than SMB-oriented)
Continue to Make it Easier for Small and Minority-Owned Businesses to Do Business with City and County Governments. This can be done by streamlining the process – and expand eligibility – for small and minority-owned businesses to receive certification with the city and county, and build more partnerships with community organizations to assist small businesses through the process. Most importantly, make it simpler for minority, disadvantaged, LGBT, women and veteran-owned businesses to do business with any private and public entity procuring goods and services.
Building a More Collaborative EcoSystem: Develop networks of business services and capital providers to promote improved outcomes and policies favorable to small business owners of color. It would also further expand access to business networks to support entrepreneurs throughout their various stages of growth. This includes fostering peer-to-peer networking among small business owners of color so that they can share best practices.
Better Coordination: Leaders must figure out ways to further coordinate banking initiatives with federal government programs like the OCC's Project REACh for historically underserved communities.
Develop Investment Cooperatives: Community leaders in the twin Cities of Minneapolis and St. Paul are using investment cooperatives to help encourage small businesses to have local ownership of the property in their communities. City Hall could step up any and all efforts to help community leaders connect with nonprofits and philanthropic leaders to encourage this model, or ones like it, to incentivize investors to invest dollars to strengthen South L.A.’s neighborhood infrastructure, i.e. – laundromats, supermarkets, childcare centers, parks. The key to an investment cooperative is the ability to set a lower initial member investment threshold for local residents/businesses, then have the philanthropic community match them dollar for dollar, or at an even higher ratio to get projects moving on key available public and private parcels or blighted properties. (This may require incentives to deter long-term land speculators.) The fact is there are more than enough federal, state and local government economic development programs and resources to spur economic development, such as New Market Tax Credits, Empowerment Zones, Tax Increment Financing, etc. Let’s use every available tool we have.
Mayor Bass’ plans for the small business community are very encouraging, as referenced during her campaign. A great first step should be the standing up of a Small Business Team in the Mayor’s Office to streamline city regulations to encourage and assist business growth, while leading the effort to attract and sustain small and medium-sized businesses. The goal should also offer technical assistance around real estate, business financing and loan programs, marketing, and other services.
Step two, ordering a Full-Scale Review of Regulations Within 180 Days, Cut Burdensome Regulations and Create a Tax Holiday for New Businesses: As Mayor, Bass will meet with every General Manager and direct them to do a thorough review within 180 days of all the taxes, fees, fines, licenses, and regulations that may impede the creation, investment, and growth of businesses in L.A. While we will always maintain regulations that protect workers and consumers, we need to get rid of outdated or unnecessary rules and regulations that stifle entrepreneurship.
Addendum
FDIC released its 2021 National Survey of Unbanked and Underbanked Households and found
National Unbanked Rate Drops to Record Low. An estimated 4.5 percent of U.S. households were “unbanked” in 2021, meaning that no one in the household had a checking or savings account at a bank or credit union. This represents approximately 5.9 million U.S. households, compared to 7.1 million in 2019.
National Underbanked Rate and Use of Nonbank Financial Products and Services Declines. An additional 14.1 percent of households, or 18.7 million, were underbanked in 2021, meaning they had a bank account but used nonbank financial products and services during the year. Banked households’ use of key nonbank financial products and services that classify a household as underbanked declined by about one third between 2017 and 2021.
Unbanked and Underbanked Rates Remain Higher Among Minorities. In 2021, 2.1 percent of White households were unbanked, compared with 11.3 percent of Black households and 9.3 percent of Hispanic households. While this gap is sizable, it is notably smaller than just two years prior when the unbanked rate in 2019 among White households was 2.5 percent compared to 13.8 percent and 12.2 percent among Black and Hispanic households, respectively. In 2021, 9.3 percent of White households were underbanked, compared with 24.7 percent of Black households and 24.1 percent of Hispanic households.
Importance of Bankable Moments. Among recently banked households that received a government benefit during the pandemic, almost half (45 percent) or 1.9 million households said that the payment contributed to their opening a bank account. For recently banked households that started a new job, about a third (33.1 percent) said it contributed to their decision to open a bank account.
Mobile Banking use Continues to Increase: The use of mobile banking increased sharply among banked households between 2017 (15.1 percent) and 2021 (43.5 percent), and was the most prevalent primary method of account access. Use of a bank teller declined but remained prevalent for certain segments of the population.
Reasons for Not Having a Bank Account. About 21.7 percent of unbanked households cite “Don’t have enough money to meet minimum balance” as the main reason for not having an account. “Don’t trust banks” was the second-most cited main reason for not having an account. The proportion of unbanked households citing fees or minimum balance-related reasons for not having a bank account fell from 38 percent in 2019 to 29.2 percent in 2021.
Use of Check Cashing and Nonbank Loans (e.g. Payday or Pawn Shop Loans) Decreases. Use of some nonbank financial transaction services, such as check cashing, and nonbank credit products, including payday or pawn shop loans, continued to decline. Unbanked households’ use of nonbank check cashing fell from 30.2 percent in 2017 to 21.8 percent in 2021. Similarly, use of nonbank credit also declined. In 2017, 7.4 percent of households had used at least one nonbank credit product tracked by the survey. In 2021, that share fell by 40 percent to 4.4 percent of households using those same products.
Use of Nonbank Online Payment Services Increases Overall. Nonbank online payment services such as PayPal, Venmo, and CashApp have quickly become a common tool for many households—banked and unbanked—to conduct financial transactions. Nearly half of all households (46.4 percent) used a nonbank online payment service in 2021, including two-thirds of households younger than 35.