March 22, 2006,
Out of the Ghetto
Demand is falling for minority-oriented businesses.
Last week, Washington, D.C.-area billionaire businessman Robert L. Johnson announced his purchase of a small, federally chartered Florida bank. He plans to build it into the nation's largest minority-owned financial institution. Johnson acquired his fortune after building Black Entertainment Television and selling it five years ago to Viacom for $3 billion. The Washington Post quotes Johnson as saying that the Urban Trust Bank will "bring more access to capital to individuals and families who need it, especially those that need help managing their assets and their wealth in a better way." According to the Post story, Johnson wants to reverse a long decline in the number and profitability of black-owned banks in minority neighborhoods.
The past business wisdom of this hugely successful entrepreneur notwithstanding, if Johnson intends to target minority neighborhoods primarily, this venture is not likely to be a resounding success. That, ironically, would be welcome news for the country.
Why? Because blacks, and, to a lesser extent, Hispanics and Asians, are becoming indistinguishable from whites in their consumption of most goods and services. Black-oriented businesses such as insurance companies, clothing stores, and funeral homes may have been successful and necessary ventures in 1956, but they are increasingly obsolete in 2006. This is not to argue that some businesses aren't correct in tailoring their marketing efforts to racial or language minorities, especially if their products are specifically used by blacks, Hispanics, or Asians. It would make little sense for Manishevitz Foods to target Asian consumers. But as ghettos and barrios continue to lose residents to multi-racial suburbs, and as inner-city neighborhoods are gentrified with young white professionals, the need for black-oriented businesses located in these communities is diminishing. Building a profitable "black-oriented" bank in communities that have limited access to banking facilities may be a big challenge for Johnson for many reasons, one of which is simply that his targeted customers are becoming more dispersed.
This is good news, not bad.
Moreover, does Johnson offer something unique to black banking customers because he too is black? It's unlikely. Blacks want the same things from a bank as everyone else does: the lowest interest rates available when they borrow money and the highest rates available when they deposit money. It's about that simple.
It is noteworthy that the number of women- and minority-owned banks has not been growing, according to a Minneapolis-based research institute. As of the middle of last year, there were 194 minority-owned banks, down slightly from the end of 2004. Since 1990 or so, the total has fluctuated between 180 and 200. On top of this, minority-owned banks tend to have lower returns on assets than the industry as a whole: 0.84 percent compared to 1.29 percent a significant gap.
That Afro-centric banks are not as successful as anticipated tells us how far we have come as a nation in our race relations since the early days of the civil rights movement. Just fifty years ago, residential segregation in America was an incontrovertible way of life. Now, however, whatever residential segregation still exists in cities like Houston, Charlotte, and Miami is, for the most part, voluntary.
African-American CEOs lead Fortune 500 financial services companies like American Express and Merrill Lynch, yet no one thinks of these companies as black-oriented. Nor should they. There's always room in America for another well-run business that's the genius of our system. But the days of businesses that cater to specific races may be coming to an end. Thank goodness.
Edward Blum is a visiting fellow at the American Enterprise Institute.