Capital in the 21st Century Bank

Since summer, there has been an interest wave of shared experience started by a largely unknown French economist that produced “Capital in the Twenty-First Century.” Written by Thomas Piketty, the tome has become the conversation piece du jour among bankers. In case you missed it, the book is about economic inequality. This is no Fifty Shades of Grey, as considering the book is 700 pages packed with data, French economic history and obscure references to Jane Austen, it is wonderment that it is a bestseller. The main thesis of the book is that savings from the upper middle and top income earners is put into equities, real estate and startups and will grow faster than income. If you play the thesis forward, what happens is the wealth divide between rich and poor continues to increase and the middle class, the lifeblood of any economy, is in a state of significant decline.

The Gini Coefficient

This has been enough of an issue that Fed Chair Yellen spoke on the issue last month. In case you categorize the above as liberal academia, consider real world implications of our recent election. The Gini coefficient is exhibit one. The ratio measures the difference of income equality of a population. True to Piketty form, the coefficient has been increasing which means the wealthy have increased their holdings while the lower income levels have decreased theirs.

Falling Labor Participation

Exhibit number two for consideration is the continued declining labor participation rate. It has been falling for the past 15 years as productivity continues to increase and public policy changes such as expanded unemployment benefits and permanent disability further fuel the trend. We are now down to levels not seen since the early ‘70’s.

The Impact

If you look at the mid-term election voter turnout, the only energized cohort was the upper-class white male. This is a small, shrinking and aging demographic. While this cross-section voted, the lower bounds of the Gini coefficient stayed home in apathy and disfranchisement.

The most dangerous part of this equation is the statistical erosion of the middle class. For more than six years, this huge demographic has largely received lip service from Washington while wages have lagged and investment returns have declined (due to the larger percentage in fixed income). The surge of deposits and loans that community banks have experienced has, in part, come from this sector of society. This group voted Republican because as voter sentiment exit polls showed, they wanted change. The disparity in income will continue to create more instability in society. It is clearly an issue now and will be even more of an issue in 2016.

The conclusion to all of the above is the fact that American society will quickly find themselves in a cross-roads and the direction of travel from here has a direct impact on the banking industry. No matter how you sugar coat it, unless you levy overdraft-like charges, poor people are not profitable for banks and are largely subsidized by the middle and upper class. While the upper class has had an amazing post-recession recovery, the middle class and poor have not. As the middle class disappears, that doesn’t leave community banks with much in terms of a profitable customer swath.

Community banks would be wise to understand the movement and take steps into reversing the wage inequality divide. Banks are already doing many of these tactics, so the change here would be to tie it into the wage equality movement in order fuel a cultural change and give your bank a vision. To this end, here are six things banks can do to help support greater income equality:

1. Small Business Education - Consider offering small business education, as business ownership offers one of the greatest ways to build wealth. Provide more sponsorship of events and more hosted education about starting and growing your small business.
2. Link Capital to the Small Business – While a startup business may not meet your lending criteria, banks can facilitate credit through peer-to-peer lending facilities, trusted finance companies and venture capital/seed investors.
3. Reduce Loan Processing Costs – By dropping costs, banks can afford to make the sub - $200k loan, which is the most common type of loan for small business and one that currently loses banks money. By increasing technology, banks can drop their loan processing cost from $12k to $4k, making a variety of smaller loans profitable.
4. Wealth Management / Consumer Education – Targeted at the middle class, there is a need for wealth management assistance from basic retirement strategies to estate planning. Another area banks can help is in tax management. More than a million Americans, often low-income workers, don’t claim their refunds which is un-American. That is $760mm in refunds that banks can assist households in obtaining by teaching them about Earned Income Credit and other programs. Finally, financial education for children is always needed in order to raise basic money management skills.
5. Saving Programs – Combined with education, banks can offer specialty accounts to help promote savings. Rewards savings and goal-oriented savings (particularly for higher education) are a great way to attract low-interest rate sensitive liabilities and have a social purpose.
6. Raise Awareness – Americans in the upper 20% earn almost 17x more than the lowest 20%. That is the most of any of the top 10 advanced countries. However, less than half of Americans polled perceive wage/wealth equality is important. Community banks can do their part in highlighting the issue.

We live in an economic environment that is starkly unequal. The popularity of Thomas Piketty, the recent election and the economic data all point to a growing problem that can only end in either self-arrest or hitting a tipping point where the strength of our society is tested. Community banks can make a difference and are in the perfect position to do so. As they say in the activism business: If not us, then who? If not now, then when?