Banking On Urban America Led by a hometown executive, BankBoston is proving that banks can make money in low-income urban neighborhoods. Is this a model for the revival of America's cities?
By Roy S. Johnson Reporter Associate Elizabeth Smith

(FORTUNE Magazine) – As a young girl, Gail Snowden wanted to be anywhere other than in Freedom House, the community center founded by her activist parents in 1949 as a gathering place for residents of Boston's Grove Hall neighborhood, where her family lived. Folks of all colors, faiths, and nationalities came to Freedom House for educational workshops, social functions, and career-development seminars. Otto and Muriel Snowden believed interaction among people from different cultures was critical to the future of a changing nation. Yet their only child wanted nothing to do with their dream. She longed to be riding the swan boats on the lake in the Public Garden rather than serving cookies and punch at yet another high-minded affair.

Most of all, Gail simply wanted to spend more time with her parents. Alone. "[The center] was definitely uncool with me," Snowden says, laughing at the memory. "It was difficult to compete with a sibling that was an idea--an ideal. The community took precedence over everything."

Like any young adult determined to carve her own way, Snowden rebelled--taking a job as a trainee in Bank of Boston's management program a year after graduating from Radcliffe. On hearing the news, Muriel asked herself out loud, "Where did I go wrong?"

Nowhere at all, as it turns out. Snowden today is every bit the activist her parents wanted her to be, albeit with a capitalist twist. Now in her 30th year with the bank (which was renamed BankBoston in 1996), she is the force behind its Community Banking Group, a sweeping effort to build a profitable business in New England's underserved urban markets. With $1.6 billion in deposits, 44 inner-city branches, a real estate finance and development unit, and an "urban investment bank," the CBG is perhaps the most ambitious and radical urban banking initiative in the nation. And it's making money: In 1997 the CBG had an operating profit of $17 million and a return on equity of 19%, beating BankBoston's 18% companywide goal.

Most of the major banks abandoned America's urban centers long ago, either by closing branches outright or by the shameful practice of redlining, rejecting loan, credit, and mortgage applications from blacks and other minorities at a greater rate than for whites. But the BankBoston effort has worked so well that some people are calling it a blueprint not just for banks but for any company that wants to do business in urban markets. "They are one of the national leaders, a pioneer," says Harvard professor of business strategy Michael Porter. "They've seen beyond the misconceptions and silly assumptions about the inner city and embraced the notion that if you approach the urban marketplace as a business opportunity and serve it with a tailored strategy that reflects the needs of the inner-city consumer, then you can actually make an attractive profit." Adds U.S. Comptroller of the Currency Eugene Ludwig: "This is a bold and innovative move by BankBoston, and it can make a real difference for low- and moderate-income Americans--and for our cities. There is a great deal of opportunity, a lot of potential businesses in our cities. But it takes a special key to unlock it."

By all accounts the key to the success of BankBoston's urban effort has been the homegrown Snowden, whose formal title is group executive of the CBG. Her knowledge of Boston's poor neighborhoods helped ensure that the initiative didn't become just another well-intentioned flop. Her strategy was simple and quite similar to efforts made by the bank over the years as it penetrated emerging markets in places like China and Buenos Aires: Build a diverse management team that learns the unique needs of local citizens, respect their language and customs, explore and address the challenges of doing business in economically depressed areas, and offer high-quality products and services that fill a void. Additionally, Snowden emphasizes her three A's: attitude, access, and accountability. "This isn't social work," says Ira Jackson, a BankBoston executive vice president. "It's market capitalism with a conscience."

When the bank decided to take a serious look at its urban banking business eight years ago, what it saw wasn't pretty: seven underperforming branches scattered in parts of the city one BankBoston executive calls "Siberia." A study at the time noted that while two Boston inner-city neighborhoods--Roxbury and Mattapan--had 17% of the city's population, they had only 4% of its banks.

"It didn't take long to embrace the belief that we were looking at a tremendous opportunity, an underserved market. But we knew we had to be guided by a desire to raise shareholder value or the venture wouldn't get the kind of top-to-bottom support it needed in order to succeed," says CEO Chad Gifford. "Gail agreed, then went out and quickly proved that we could do well by doing good."

Snowden had ascended through the ranks at the bank from trainee to director of the loan officer development program when she was asked to rescue the woeful seven in 1989. She set out to create a "bank within a bank," called Boston First Banking, not as a separate institution but as a unit that would work with several of the bank's divisions. A member of her original team, Donna Wilson--now a senior vice president at the Dime Savings Bank of New York--recalls, "She told us we had a responsibility to the people we serve and said, 'We do not have the luxury of failure.' "

The group held focus groups with potential customers and analyzed local demographic trends. They offered First Step products, like an entry-level $500 loan, to consumers who had not used banks before and had no credit history. They created one-page credit and loan applications, and an advisory board of local civic leaders. They acquired more branches, first in Boston and then in other New England cities. (The group's name was changed to First Community Bank, since it was no longer restricted to Boston.)

Snowden also persuaded bank officials to begin including people of color in its ad campaigns and to advertise in local ethnic publications--including Spanish, Vietnamese, and Chinese newspapers. At the same time, Snowden's team hit the streets, preaching the values of banking to urban groups one at a time. "We worked like dogs," recalls Wilson with a smile. "Once Gail called me in and said I needed to go out on a date and get married."

Soon the hard work began to show results. In 1991, Snowden opened a branch in Codman Square, anchoring the newly renovated landmark Lithgow Building, which was partly financed by Bank of Boston. A year later she opened a branch in her old neighborhood in Grove Hall, which had not had a bank in 23 years. Then last year, First Community Bank completed the $1.5 million renovation of its Dudley Street branch in Roxbury, one of Boston's most impoverished areas. The branch was designed by a local black architect; a painting by the architect's father, an artist, hangs majestically above the fireplace mantel that dominates the lobby.

On a recent rainy afternoon, Snowden stood in the branch as customers waited patiently for tellers, ATMs, and meetings with bank officials. "This is great for the bank and shareholders," she said. "But look around. You see the vitality of economic renewal. That's what's real."

Inspired by FCB's success, BankBoston green-lighted Snowden's next initiatives. Her team created a real estate development unit three years ago and has since committed in excess of $55 million to finance several urban commercial and private building projects.

The newest arm of the CBG is the BankBoston Development Co., an investment bank created last year with a unique approach to urban revival: Rather than offer small business loans, it provides $250,000 to $5 million in equity capital to midsized businesses. All told, the BBDC plans to invest $100 million over the next four years. Why take on such risk? Snowden figured entrepreneurs would be encouraged to open businesses in low- to moderate-income areas if they could obtain the necessary capital and not have to worry about making regular loan payments. Also, as an equity partner the CBG can provide technical assistance in other areas--such as extending credit lines or offering access to expert accounting or legal services. Says Snowden: "It's easier to get involved when you have a seat at the table and a real stake in the future of the business."

While the First Community Bank branches remain vital to BankBoston's urban mission, the BBDC might be more influential in the long run because it can close the gap between urban entrepreneurs and the critical capital that has long eluded them. "Entrepreneurial talent is not limited by race. It's dispersed throughout the spectrum of our society, but access to capital and resources isn't," says Elyse Cherry, president of the Boston Community Capital Venture Fund, which also invests equity capital in urban small businesses. (BBDC invested $250,000 in the fund.) "If we can redistribute some of those resources, we can change the face of success in our cities."

Twenty years ago, Congress sought to address the problem of discrimination in banking by passing the Community Reinvestment Act, which required banks to serve the loan and credit needs of residents in low- and moderate-income neighborhoods in their market. The act was toothless until the mid-1980s, when bank regulatory agencies began grading banks every two years on their compliance efforts and making the results public. The designations were Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance. (BankBoston has received three Outstanding ratings.) Banks that regularly received low grades may suffer severe restrictions.

The ratings and potential sanctions forced banks to get off the dime, but most approached compliance requirements with the enthusiasm of someone on his way to the dentist. America's declining cities were not worth the trouble, many bankers believed. The perception was that residents of inner cities had little money to invest and were bad credit risks. Nonetheless, to ensure that they were able to report that loans were being made to low-income consumers, many banks went to ill-conceived extremes. Some actually lowered credit standards, which led to self-fulfilling crash-and-burn scenarios. Many debts went sour. Losses on these bum loans were written off as "just part the cost of doing business," laments Jackson.

Additionally, some minorities seemed to believe CRA had created a pool of "black money" that could be tapped without a rigorous application process. "Changing that perception was just another challenge," Snowden says.

What clobbered American cities, of course, was the flight of many industries, including banking, to the suburbs. But over time, many business people seemed to conclude that cities had brought this plague upon themselves. In time, the perceptions have become reality to the business community. Professor Porter believes this "perceptual gap" still causes bankers and other business leaders to view America's major cities "through the wrong lens," thus discouraging real investment and commitment to reaching the market.

Today, Porter, who made his mark as a global business strategist, is a missionary for urban revival. He estimates America's inner cities possess $85 billion in annual retail-spending power. His voice rises when he talks about the $70 million of purchasing power per square mile in the cities, vs. $15 million in the 'burbs. He cites other advantages: less competition, lower real estate costs, access to a vast work force. "This market is ripe," he says.

Muriel Snowden passed away in 1988; Otto died seven years later. Today their daughter doesn't have much time for the swan boats on the lake. Besides tending to her extensive urban mission at BankBoston, she is chairman of the board of Freedom House, which remains a hub of community activity in her old neighborhood and a critical gathering place in a changing world.

REPORTER ASSOCIATE Elizabeth Smith