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Stephen Palacios

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Let's Revisit Good Intentions

Posted: 09/07/11 08:34 AM ET

Let's consider unintended consequences and the growing Hispanic market: Laws and regulations that start out with the very best intentions for Hispanics may now actually be impeding their progress. Take for example, a recent meeting I was in with a major financial services company. I was with a group of execs going through a presentation of market data, competitor reviews and overall Hispanic consumer category attitudes and usage behavior. At the end of the meeting, one exec came up to me and said "we have the same problem as I had in my last company, it's hard to make the business case with CRA regulations limiting our ability to measure the market". What did he mean?

Corporate America's efforts to market to Hispanics, particularly in Healthcare and Financial Services, are being complicated despite their good intentions. Today the American Hispanic market is one of the fastest growing markets across many key indicators, including spending power and population size. In categories like home buying, extension of credit, and food and beverage, Hispanics represent all--or nearly all--organic growth for some major corporations and geographies.

But as Hispanics come of age as dependable consumers in the United States, unintended consequences are causing structural cracks in the ways businesses can reach out to them. These cracks make it hard to serve Hispanics well.

One impediment to growth, as referred to in the meeting I was in, is a set of well-intended regulations created to stop discriminatory practices - The Community Reinvestment Act of 1977 (CRA).

CRA, as described in a Hispanic Business Magazine article, "provides a framework for depository institutions and community organizations to work together to promote the availability of credit and other banking services to underserved communities. Under its impetus, banks and thrifts have opened new branches, provided expanded services, adopted more flexible credit underwriting standards, and made substantial commitments to state and local governments or community development organizations to increase lending to underserved segments of local economies and populations."

This Federal Government mandate created a regulatory obligation for financial services companies in part as a response to Red-lining - the practice of drawing a red line around certain geographic communities and designating them high risk, making it difficult or impossible to obtain credit. Red lining would often put investment credit out reach for Hispanics and African Americans, as well as other ethnic minorities.
Since CRA was passed with such good intentions, what could possibly go wrong? Well, two things in particular, two unintended consequences:
First, we now have a generation of senior executives in financial services who grew up assuming that minority lending and financial product offers come under the CRA umbrella of mandated corporate responsibility. This mindset comes with several bad attitudes:

  • "Let's meet our requirement, but this effort is not going to grow our business and please Wall Street"
;
  • "Serving minority populations is necessary, but more ancillary to our core business strategy";

  • "This is more of a cost center than a revenue generator".

Therefore, the unintended consequence for some was to reinforce a negative, e.g. that Hispanics aren't viable or good customers.
Second, CRA can also get in the way of many financial executives who don't see the market through this lens and are, indeed, quite bullish on developing Hispanic-focused marketing programs, community efforts, branch specific hiring plans and other such tactics. How?
CRA limits how financial services companies are able to view their customers on the basis of ethnicity. Retailers like Macy's or Kmart can mine their customer databases for Hispanic surnames and create targeted store merchandising programs. They are allowed to have direct mail programs that are either in language or in culture more responsive to their Hispanic customers. Banks can, too, but with a great deal of complexity and cost, and not without the risk of lawsuits or fines.

The unintended consequence of trying to protect Hispanics is serving as a logistical and financial disincentive for financial services companies trying to create or expand their efforts to reach the market.

Various results of CRA include:

  • Some banks are reliant on executive talent that grew up under CRA, not multicultural marketing, and therefore hire people who hold or are influenced by the belief that Hispanics are not "real" customers;

  • Some banks place the Hispanic marketing function outside of P&L areas, and/or do not empower Hispanic marketing with budget or authority sufficient to impact change or be accountable for results;

  • Some senior executives lump CRA, Diversity and Hispanic marketing into one bucket, in a manner that confuses their distinctions and does not strategically take advantage of their commonalities.

  • Progressive banks with sincere interests in serving Hispanics well are saddled by higher costs, higher risk of regulatory compliance, and have a harder time assessing the market effectively.

In an influential article from 1936 titled "The Unanticipated Consequences of Purposive Social Action," the American sociologist Robert K. Merton outlined five sources of unanticipated consequences. He called one source the "imperious immediacy of interest," referring to instances in which someone wants the intended consequence of an action so much that he purposefully chooses to ignore any unintended effects.

It is clear that social policy decisions originally intended to help Hispanics (and other disenfranchised minority groups) might, today, actually be thwarting their progress. The time has come to reevaluate CRA as it was written in 1977 and create new opportunities for financial institutions to embrace the Hispanic market.