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Oct 13, 2021
Personal Finance

Ethical Banking In The USA: Understanding Socially Responsible Banking

By holding the purse strings, banks have helped finance the built world around us for centuries. Banks and other financial institutions have helped determine what businesses and households get access to funds and set the cost of those funds. In playing this critical role in allocating capital around the economy, banks exert a tremendous amount of influence over society. 

Banks, however, were not originally structured with the purpose of benefitting society. Many of the banks in the USA (there are about 5,000 now, though there were as many as 14,000 in the 1980s) are structured as corporations and run to maximize financial return to their shareholders, period. With this fundamental disconnect between their purpose and effect, it is not surprising that economic disparity and environmental destruction continues to grow while many companies and industries contributing to these divides continue to thrive, banks included. 

That is not to say that there aren’t banks and financial technology companies that view their role in society from an ethical and values-based lens. With the active financing of climate destruction by many of the largest banks in the country, ethical banking has been a concept that is gaining significant attention in the USA. Financial technology (fintech) companies in particular have sought to close the wealth gap, help alleviate income inequality, and finance a clean-energy future.  

By understanding ethical banking, the role of banks and other related financial services companies and how they interact with and mold the economy, and by actively choosing to work with financial services providers that are creating positive impact, you can help contribute to a brighter future for all.

If you want to learn more about these topics, you’re in the right place!

What is Ethical Banking?

Ethical banking can be a fairly broad term used to describe banks that operate around a set of principles governing how they interact with their clients, their community, and the world in general. It broadly refers to banking practices that seek to engage traditionally under-served communities through various products or services. Under-served communities might include groups of people with low and moderate income, for example, but could also include groups of people that align specifically with environmental values or those that seek to support local economies.

A few quick examples:  Atmos is an example of a banking services provider that keeps positive environmental change as its core focus while many community banks and local credit unions seek to serve their local geographic communities. 

Terms are often interchangeable. Ethical banking is sometimes used in place of socially responsible banking. No matter what the term is, it’s describing a set of values that help dictate the direction of the bank that is greater than profit. 

That isn't to say that ethical banks don't want to make a profit. Like all companies, ethical banks need to make a profit to keep running. However, they do it in a way that does not jeopardize their values or negatively impact society or the environment. 

The most important way a bank can demonstrate their ethical standards is by ensuring the lending and investing decisions they make align with the values they claim. For example, if a bank claims to help low-income communities that have few banking options, a key driver of whether or not this bank is indeed living up to that claim is to understand what loans they are making, and what percentage of their loans are actually helping that community. A bank that makes a few loans into low income communities but derives the vast majority of their business from other, non-values aligned business lines is not practicing ethical banking. 

The other way a bank can practice ethical banking is by designing their deposit products to be accessible for all. Deposit products with inordinately high minimums or high monthly fees are not accessible for large portions of the population. 

There isn’t a label or certification specifically for ethical or socially responsible banks, but there are a few accreditations out there that help consumers recognize those banks with high ethical standards. Here are a couple of them. 

Certified B Corporations 

A Certified B Corporation is a business that incorporates both purpose and profit into their business model. B Corps cover all sorts of industries, including banking, but also food and clothing, insurance or professional services firms. To get accredited, companies must undergo a rigorous certification process that assesses how seriously they incorporate the interests of all of their stakeholders – not just their own.

There are a handful of existing certified B Corp banks. While the B Corp certification is not without its own challenges and gaps, it’s a great sign that a bank or financial services company is taking the high road.

Global Alliance for Banking on Values (GABV)

The Global Alliance for Banking on Values (or GABV) is a global network of banks that self-identify as values-aligned. GABV banks seek to use finance to deliver sustainable economic, social and environmental development. Like the B Corp Certification, there are challenges among the GABV community and not all members approach impact in the same way, but a GABV bank is typically one that is trying to build a more transparent banking system.

Types of Ethical Banking In the USA

Banks and financial services companies that are socially and/or environmentally responsible are known as ethical banks. If you think all banks are included in this category, you are sorely mistaken. 

These financial companies are making conscious decisions to create positive environmental and social benefits with their deposit capital and lending decisions. Ethical banking is just banking, but with a moral compass to use money as a force for good in the world. We could all use a little more of this.  

There are several categories of banks that are deemed socially responsible, or ethical. 

Credit unions

A credit union is a financial institution similar to a bank, but with a few distinct differences. Credit unions are nonprofit, member-owned cooperatives. So while they accept deposits and make loans just like banks, credit unions usually offer fair rates on loans. 

While you’ll know you’re not contributing to the profits of wall street, credit unions have some downsides too. Credit unions tend to be very conservative in lending and often are very slow. With low profit margins, the technology offered by credit unions also tends to be weaker than other alternatives. If you’re looking for a user-friendly mobile banking app and continuous product development to bring convenience and effortless banking to your life, a credit union is probably not the right place to be. 

Community Development Financial Institutions 

Community Development Financial Institutions, or CDFIs, can be banks, credit unions or non depository loan funds. They are recognized by the federal government as financial services providers that help revitalize and invest in underprivileged economic neighborhoods. 

The program is a Treasury Department initiative, and certification requires that financial institutions help improve access to vital financial services for economic development. Benefits of being a Treasury-designated CDFI are access to technical and financial assistance from the federal government. Common lines of business supported by CDFIs include nonprofits, affordable housing, LMI-designated geographies. Foodshed Capital supports regenerative agriculture. 

Financial Technology Companies

Increasingly, technology companies are entering the financial services sector. Technology companies often seek to develop and utilize software solutions to create efficiencies in operations to better serve communities of underserved people. A few examples of financial technology companies doing this are SoFi, which offers cheaper student loans, or Atmos Financial, which uses banking as a means to reverse global warming.

You’ll often find a much higher level of customer satisfaction and usability at FinTech companies since they are often focused on customer convenience. Consumer-friendly policies like no or low fees, minimum balance requirements, or minimum deposit amounts are common among fintech companies.

The pros of ethical banking

Ethical Banks take a stand for social, environmental, and economic good

It is easier to complain about all of the things wrong in today's world. There are so many things that need to be improved to fulfill a just, equitable society!

If you are seeking positive changes in the world, it’s critical you’re using a socially responsible financial services company. When you deposit your money in a bank that does good, they’ll be able to do more good. Conversely, when you deposit your money in a bank that does bad things or just doesn’t incorporate a broader perspective of the world, they’ll do more of those things. 

Many ethical banks have pledged to support social or environmental causes and refrain from investing in harmful industries such as fossil fuels. If you’re passionate about climate, consider a bank that is actively investing in industries such as renewable energy.

Invest in local and underserved communities 

The majority of ethical banks are committed to investing in local communities, especially in underserved economic areas. Make sure you peak under the hood though! If you’re passionate about supporting local economies or low-income communities, make sure you ask your bank what they’re doing to help these stakeholders specifically. 

Emphasize transparency and accountability. 

When compared to larger national banks, many ethical banks place a premium on transparency and accountability. Banking doesn’t need to be the mystery it is for so many people, and you definitely want to question the bank that won’t tell you where your money is going.

What to watch out for 

Practices and principles that encompass ethical banking can be subjective

There is no universal rubric or certification for “ethical banks” in the USA. It is personal and can always be viewed from different perspectives. If a bank is claiming to be socially responsible or ethical, make sure you dig into the details. 

How to choose an ethical bank 

There are plenty of ethical banks out there to choose among. Of course, you'll need one that checks all your boxes regarding ideals and working style. Here are some things you should ask yourself when looking for an ethical banking services provider:

  • Is there a history of the bank "doing the right thing"? Is it environmentally friendly, and does it treat its employees well?
  • What level of technology and convenience do you require? 
  • Is the new bank transparent enough for you to stay abreast of its investments, donations, and impact?
  • Is the bank investing in projects that are both sustainable and non-wasteful?
  • Has the bank gone beyond simply not funding the bad stuff and increased funding to the good stuff? 
  • Does this bank have a culture of ethics that starts at the top and works its way down? Is everyone working in the company dedicated to social responsibility?

Why do you need to switch to an Ethical bank?

It is no longer news that banks in the USA hold too much power and influence over society. One of the more frustrating aspects of it is that they wield this power with our money!  

Ethical banks promote good causes and generally work with businesses making a positive impact on the environment and the world. They make sustainable investments that deliver strong societal benefits and avoid harmful industries. Working with a sustainable or ethical bank ensures that more money is going to the good things and less is going to the bad. Deposit aggregation is a zero sum game, so if you keep your money with an ethical bank, there is less money being held at those institutions doing harm.  

Moving your money to a values-aligned provider is one of the most impactful things you can do to create a more just and equitable world, and because of their values and customer focus, you may find that they’re even better for your financial lives too! 

New financial technology companies are going beyond the typical banking product set to bring greater mission and values-alignment to their customers. 

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