Transforming Our Economic Empowerment Strategy from Thrift Banking to Money Service Businesses

Old school Black empowerment cats love to babble about pooling Black people money together and invest in ourselves. These same Gil Scott Heron and Roy Ayers listening cats also gripe about how the non-Chinese Asian immigrants are able to pool their money and build up Asian-operated businesses in the Black community. The truth of the matter is, setting up banks where Black people pooling their money together to make loans and investments is basically a failure with few to zero success and that’s the reality. Today, the Black community needs to rethink and reshape our economic empowerment strategies and look at 21st century financial institutions models as alternatives. There is no disputing the fact we had too many Black banks failed over and over again in our community using the thrift banking model and we continue to keep saying that BS about pooling our money together and invest in ourselves. However, I’m looking at Africa and emerging countries using new business models with financial institutions and their communities and their people GDP are going through the roof! So in this article, we going to explain the thrift banking model and the money service business model and hope the African-American community get it in their head how we need to move forward from pooling our money and create real successful economic empowerment solutions. Thrift Banking Thrift banks are small local banks that take deposits and offer checking accounts, savings account and basic banking services for account holders. Their primary business is making loans and hence the term savings and loans or S&L bank. Local businesses and people of the community would make deposits and the thrift bank would use the money, up to a certain percentage to make loans that are repaid with interest. The whole gamble of the thrift bank is the fractional reserves component part. The franctional reserves is where the bank relies on account holders “saving” money in the bank and keeping it there long term. The worst case scenario is known as a “run on the bank” when every bank customer panic and demand to pull all of their money out of their account. Of course the bank does not have all of the account holders money because it was loaned out. Now, let’s say the global recession kicks in and the loans cannot be repaid – the bank loses that money they lent out and now they operating at a loss. Now let’s get real about the Black community and Black-owned thrift banks – the Black community do not save money and most likely have about $8 in savings in their account. They put money in the bank and live check to check, balling and clubbing and paying bills and shopping until they only have $12 in their checking account or negative $35.00 from overdraft fees before their next direct deposit paycheck kicks in. So the thrift bank in the Black community can barely retain available funds to lend money out because Black folks keep spending and withdrawing, doing a perpetual run on the bank. So what happens is the thrift bank cannot invest or lend out money because only a few Black account holders are keeping money in the bank to be lent out. And even if the bank can lend out money, guess who the thrift bank wants to lend the money too? The Black-owned bank only want to lend money to their account holders who keep money in the bank! Yeah, the bank want to lend money only to people who already got money in the bank! That’s the whole cornball scenario of dressing up to go get a bank loan with lending officer stuff - politics and connections and first impression crap. Here is the real problem with thrift banks and why they fail so much with the Black community. The cornballs sitting on the bank board only invest in weak business models in the Black community that sound safe. They give out loans to crap like a fast food franchise or real estate development that only produce broke jobs or temp work jobs. These same bank board members at the Black-owned bank would quickly turn down the 30 Rotten Dissidents in a heartbeat because we are not bougie and have next generation business models for the Black community that appear too novel and outside of their square box. So after the Black banks lent out money to real estate and food franchises, the market crashed and real estate bubble went bust and those loans cannot be repaid. Now the fast food franchises that were built with Black bank loans cannot compete with Y&K Fried Fish and Spaghetti on the corner block. Now the Black-owned thrift bank are holding toxic loans on their books. Let’s explain how the loans are now toxic. See, the latest trend was banks don’t want to wait the 5 years for the loan to get repaid, so they sell the loan or pass the buck to another bank and get a lump sum that is cheaper than the full maturity amount of the loan. Now after the global recession, no one want to do credit default swaps anymore so the thrift bank is stuck with the loans they gave out and cannot wait 5 years because they are losing money right now with bad loans. So the Black-owned thrift bank is screwed and has to get taken over by the FDIC and shut down. So the whole thrift banking model is a squeezing the balloon game with air slowly escaping because their business models has too many unpredictable what-if scenarios that one cannot forsee and control. All of this talk about taking Black folks money to pool it together and then try to invest in safe business ventures sounds good on paper. But the reality about thrift banking is Black folks are not “pooling their money” they are just doing direct deposit and paying bills and got $2 in the bank until their next paycheck. And the loans the Black-owned thrift banks put out are not risky - they are cornball loans given to friends or political connects. So in essence, the thrift banking model has proven to be a dismal failure and absolutely ineffective to Black economic growth. Money Service Business As you walk around in your old hood do you wonder why that currency exchange over there still up and running? Why those cats doing the currency exchange still in business 40 years later? Why are there long lines of brothas and sistas on the 1st and 15th of the month cashing their government and payroll checks and you can get your money orders and stuff like that. Wait a minute, I noticed Wal-Mart opened up a check cashing and money service part in the front of their store and it’s a long line of Black people cashing checks and sending money through Money Gram and Western Union. Why is that? Why is that?! The reason why is the money changers of Asia, Middle East, Africa and Europe knew for thousands of years – you establish an operation to make money off the transaction of money. You facilitate the transactions of money and charge a fee to handle the transaction and that is how you create money, by operating on top of money. This business model is known as the money service business of MSB model. According the US Government, a money service business is a financial institution that operates in the capacity of a currency dealer, check casher, issuer or seller of money order or stored value cards and providing money transmission service. These services helps people move their money around and there is a fee to move the money, usually a fixed fee or a percentage of the total money involved. Let me put you cats in on a little secret – why do you think they targeting the hood with those fee-infested prepaid card like those Rush cards? Because they want to take your direct deposit and nickel and dime you cats on every TRANSACTION that you make off that prepaid card, don’t they? That’s the transaction-based financial model in case you cats haven’t realized. The money service business focus on getting paid at the transaction level every time money is being moved around. Now, instead of pooling money, the real concept of money service businesses is what cats like Minister Farrakhan and the Nation of Islam has been preaching about which is the RECYCLING of dollars in the Black community. Someone in the Black community go to a money service business in the hood and cash their check and get charged a $3 fee and get a prepaid card. Then the cat use their prepaid card to spend at a local merchant who has a card processing account with a money service business that charge 2.7 percent to process the prepaid card payment. That money was recycled 3 times in the Black community and the money service business make money making that transaction happen 3 times. Transaction-based revenue is generated and money service business revenue is solid money being compounded and multiplied as more and more people recycle and move their money through collaborative money service businesses in the hood. Stacks and stacks and stacks of real money made from transactions conducted in the hood. Also, businesses can be started by instead of loans by helping startup facilitates payments. This is how mobile payment services like PayPal and Square are becoming so big and popular fast. Because what we are looking for is not raising capital or giving out loans - we want transactions where customers are buying and merchants are selling in the hood and that's the bottom line. Thanks to technology such as mobile payments, it is easier to create money service business models to facilitate transactions and recycling money in the hood among each other. Funny part is some of these same churches, if they check their state laws would realize they have exemptions to start their own money service business but they too holy and stuff (to be fair, Nation of Islam is also in that group that can start a MSB but they just talking too). There is no need for Black people to pool any money because Black people will do what they supposed to do and that is buy and sell, creating transactions in the hood. Once transactions are made in the hood, money is exchanged and financial institutions make solid money and then businesses can startup, hire real people and do real deals and then we are making true economic growth in the hood as a result. The Takeaway for Brothas and Sistas In the 21st century, the Black community should say the hell with thrift banking and pooling money together and see to the establishment of money service businesses that can facilitate transactions in the hood. Ain’t nobody got 5 years to wait for a loan to get paid back and giving a hood entrepreneur a loan is nothing but an extra layer or pressure and stress when that entrepreneur need to focus on getting money and profits to stay in business in the Black community. The entrepreneur has to pay that loan back in installment payments as soon as they get it - come on now, don't tell me that is good when they struggling to stay cash flow positive. By shifting the focus on transactions in the hood, we empower entrepreneurs to start accepting transactions immediately to accept payments and put that money to work by hiring cats, paying distributors and paying for the lease and other services. By creating money service businesses to facilitate transactions, we keep the cost of doing business in the hood cheaper and transparent and control the flow of funds to keep the money recycling in the hood. How many entrepreneurs are now in the game thanks to Square? Now cats can buy and sell and now money is being exchanged right? How many people in Africa who get remittance money or a prepaid card sent to them from America or Asia now have money to spend in their local African community? Nigerian cats in Singapore send $1,000 back to Lagos to their relatives who spend the money in Lagos, creating jobs in Lagos and that's real and right now happening. Do you now see of the instant economic growth and flow of money thanks to money service businesses facilitating transactions to be more efficient and simple and charge a fee on top? By controlling the transfer of money through facilitating transactions instead of the outdated unproven thrift bank model waiting on loans to mature is the best decision hands down to how we need to approach our economic empowerment. With that said, we at Dream and Hustle and the 30 Rotten Dissidents already figured this out and why we focusing on mobile payments, prepaid stored value services, remittance, exchanges and remittance services as the solution to growth in the hood.

5 thoughts on “Transforming Our Economic Empowerment Strategy from Thrift Banking to Money Service Businesses

  1. Good post Ed. This is the best post on this subject that I’v seen. Often I think about the money movement game and couldn’t figure it, in a way that is less complicated. And here it is or at least the right direction to pursue it. One thing, my eyes are tired of seeing them every where, seeing folks are lined up to conduct their business– on the customer side of the glass. On the other hand most of the mobile payment companies are doing well. These models can definetly work in community based businesses.

  2. This is an interesting post. I always felt like those check cashing/currency places were more predatory in nature though. I guess this is a good idea IF all the money stays in that particular neighborhood or area. And personally, those pre-paid cards have never interested me especially with all those fees. I always seen them more so for people with bad credit who can’t get real credit cards.

  3. Ed,

    There is mostly truth in your post. However, the missing part, is recognizing that there are no “investment banks” functioning in black communities. Investment banks, not savings and loan companies/banks, put together people with money to invest with people with business plans for a decent rate of return.

    This is the point of pooling money together . Money is pooled together not to LEND to businesses, but to INVEST in businesses. No one is ever going to invest in a business that could possibly fail to get an annual 5% return – people would rather keep their money with a regular savings bank.

    While there are no investment banks rushing to serve minority communities, other than these check cashing places, there is hope on the horizon with these much talked about crowdfunding websites:

    http://www.hongkiat.com/blog/crowdfunding-sites/

    I hope this was helpful.

    Tpackage14.

    1. Tpackage14,

      According to Black people, thrift banks were “investment banks” because of their premise – telling all of us to “pool” our money in the guise of account holders, and they “invest” that money in the bank board handpicked ventures in the form of debt financing and loans. That was their slick way of doing it under the guise of a bank which was not bright either.

      Warren Ballentine pulled that same nonsense on his radio show, telling Black folks to make deposits in banks and they will give loans to “invest” in local businesses. So Black folks for years and decades been saying we need Black-owned banks to pool our money and invest in ourselves and that’s the propaganda that’s been going around.

      Crowdfunding ventures is also considered part of the new financial institutions and appear to be the only thing that is legit for our community for raising capital. I will talk about this later but I’m waiting on Obama and his new SEC pick to do something about the JOBS Act he signed into law last year and will discuss this later.

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