Where Does Your Money Sleep?
Excerpt from the forthcoming book “Just Money: From Ego-system to Eco-system Finance”
by Katrin Kaeufer
Where does your money sleep at night? There are a growing number of financial institutions around the world that invite their customers to ask this question and think about the impact money has when it is deposited, and what impact the bank has where they deposit their money.
Recently I was walking on the streets of Madrid looking for a place to have lunch, so I opened an app designed by Triodos Bank and found an organic restaurant just two blocks away. Trio-dos Bank, based in five different European countries, finances exclusively social and green business and projects. And because the Triodos business model is based on the objective “knowing where your money goes,” this app allowed me to locate all of its business custom-ers. Transparency is a core operating principle of the bank that lifts the curtain between de-positors and loan clients and supports networking and connections between its clients. Let’s jump to a different continent and open another app. We are now in Vancouver, British Columbia, on the West Coast of Canada. The app is called the Vancity Fair & Fast. Since the 2008 financial crisis hit North America, payday loans have become an increasingly popular credit option for families living paycheck-to-paycheck. These loans are quick and easy to ac-quire and often have short terms of no more than a few months. However, payday loans have been widely criticized for their predatory nature (sometimes charging up to 600% APR) and their potential to exacerbate cycles of extreme debt for low-income individuals and families. In fact, the Canadian government has taken steps to crack down on payday lenders and give provinces the right to set caps on interest rates.
In 2014, Vancity Credit Union in Vancouver, Canada, launched the Fair & Fast Loan as a payday loan alternative after finding that many of its members were using payday lenders. At the time, there were no other banks in Canada offering payday loan products Vancity could look to as models. Vancity undertook a six-month research process to better understand the pay-day loan market, the needs of its members, and the gaps in the loan services it was offering. Through Fair & Fast, members can receive loans of up to CAN$1,500 with terms of up to two years. The loans are considered fair because the payment terms are flexible, the language is simple and transparent, there are no fees, and the APR is only 19%. An added benefit of the offering is that, unlike payday lenders, Vancity reports to the credit bureau, meaning Fair & Fast can help members boost their credit scores or build a credit history. Says Archana Anan-thanarayan, one of the creators of the loan:
Where Does Your Money Sleep?
Excerpt from the forthcoming book “Just Money: From Ego-system to Eco-system Finance”
“We conducted an analysis and were shocked to see how many of our members are using payday lending. That is when we decided that we needed to develop an alternative to payday lending, and the result is the Fair & Fast Loan. To develop this product we used a user-centric design process. That means, we stepped into the shoes of those who use payday lending in order to understand how we need to build this loan product. We learned a lot! One thing we learned and that was surprising to us was that even when our members had the credit history to qualify for a traditional and cheaper loan they go to a payday lender because they were embarrassed to take out a loan. You can go to the payday lender at night when the family or neighbor would not see you. That’s when we decided we needed to create an app that our
members can use at home at any time of the day.”
Interview, October 2017
And for our last stop, let’s step into a branch of BRAC bank in Bangladesh. Sir Fazle Abed founded BRAC, the world’s largest nongovernmental organization (NGO) in terms of its num-ber of co-workers — the word Brac Bank uses for its employees. Brac not only operates as a micro-finance institution but also runs schools, health centers, crisis relief operations, and in-stitutions of higher education. While microfinance, if done well, can be a first step to securing an income, growing a business requires access to financial tools that go beyond microfinance. This next loan size is often called the “missing middle” because there is a systemic gap in our financial system in providing these medium-sized loans. The main reason is that potential bor-rowers in this medium range tend to be local, in new or diverse markets, and the loans are therefore difficult to standardize and thus costly.
But it is these small and medium-sized loans that are important for job creation and innovation and therefore for society as a whole. This is true not only for Bangladesh but around the world. In Bangladesh, Abed founded Brac Bank to address this challenge.
Banks Define Our Future
Why do the banks in the above four stories exist? What makes them different from other banks? What is their origin? Why are they not being scaled up? Why have they not grown beyond their current niches? And can the larger banking system learn from some of their prac-tices?
Where Does Your Money Sleep?
Excerpt from the forthcoming book “Just Money: From Ego-system to Eco-system Finance” Since the invention of banking, we can find examples of banks that combine their banking business with a mission. Credit unions and co-operative banks were founded to support groups who were excluded from accessing financial services, such as Irish immigrants in the United States and farmers in rural areas.
Image by Kelvy Bird
After the financial crisis of 2007–08, the public debate about the role and impact of banking and finance changed. Banks were rescued by taxpayer money, and a discussion about banks’ responsibility and accountability to society intensified. One example is the action plan for sus-tainable finance published by the European Commission in 2018, which includes a regulatory proposal to support sustainable investment. In 2018, the chief executives of the world’s larg-est public companies received a letter from one of the most influential invlarg-estors in the world, Laurence D. Fink, the CEO of BlackRock. In the letter, Fink states that companies need to do more than make profits — they need to contribute to society in order to receive BlackRock’s support. In 2017, Standard and Poor’s announced that environment and climate risks need to be factored into global corporate ratings. And at the 2017 Global Economic Forum, Ant Finan-cial, the world’s largest financial technology (fintech) company, launched the Green Digital
Where Does Your Money Sleep?
Excerpt from the forthcoming book “Just Money: From Ego-system to Eco-system Finance” Finance Alliance, an initiative that uses digital technologies to support sustainable develop-ment.
These recent examples illustrate a debate about the role of business and especially of finance in addressing the daunting social and environmental challenges we face as a global community today. The rationale is simple: financial institutions shape our future when they decide which projects, initiatives, and businesses they will finance and which they will not. The criteria banks include in their decision-making processes matter. The principles of Just Banking are part of a growing movement of businesses that use triple-bottom-line reporting, which combines fi-nancial profitability with social and/or environmental impact.
Image by Kelvy Bird
Today there is a small but growing community of banks that use finance to address the social and environmental challenges facing our society. These banks use their unique position as intermediaries in the economy to fund people, organizations, businesses, and communities working to build a more just, equitable, and sustainable society. Says Thomas Jorberg, CEO of GLS Bank in Germany in an interview, March 2016:
Where Does Your Money Sleep?
Excerpt from the forthcoming book “Just Money: From Ego-system to Eco-system Finance”
The founding idea [for GLS Bank] that was developed at the end of the ’60s was to use and invest money in a way that initiates positive social, ecological, and cultural developments in our society. The founding idea really was to use money to shape society. . . You can use money in a conscious way to shape society in a social and ecological way. A lot of people want this today, and we invest their money in a way that they know they’re financing an educational project, or regenerative energy, or an organic farm. I can connect my intention, my ideals, and my ideas with the way I invest my money and with that I can shape society.
Impact can come in many forms — poverty reduction, reducing carbon emissions; increasing affordable housing stock; growing local, sustainable food systems; or providing banking ser-vices for underserved markets. Ultimately this mission is enabled by the shareholders of the bank and requires the bank to be not only deeply embedded in the communities and move-ments it serves but also transparent about what it does and does not finance.
The role of banks in the economy differs from that of any other business. Access to financial services is the entry card into the economic system, and without it no consumer or entrepre-neur can participate in our economy. We find underbanked and unbanked communities and individuals in most regions of the world. The reasons are manifold: it might be that the costs of maintaining and running a bricks-and-mortar branch in sparsely populated rural areas are too high to make banking profitable; or the business model of specific sectors might be too risky. But there are also structural and social issues that limit access to financial services. A well-documented example is a practice called redlining, which has existed in the United States for decades. In 1935, the U.S. Federal Home Loan Bank Board actually drew lines on maps around neighborhoods and shared these with banks. Redlined neighborhoods were consid-ered more risky than blue neighborhoods. Those lines were drawn based on the racial makeup of the neighborhoods and created a self-fulfilling prophecy. Occupants of a redlined neighbor-hood could not get access to credit in the form of a mortgage or a loan to start or expand a business. The result was a cycle of disinvestment in urban neighborhoods in many cities. This is one prominent example, but forms of redlining exist everywhere in the world. The result is regions, areas, and groups that don’t have access to financial services or are underbanked, which has an immediate impact on their ability to participate in the economic system.
Banks play an exceptional role in the economic system. As intermediators they provide access to participation in the economy. Money, as a legal construct, is the entrance ticket for this
Where Does Your Money Sleep?
Excerpt from the forthcoming book “Just Money: From Ego-system to Eco-system Finance” participation. Every business has an impact on societal well-being and the future of our soci-ety. Tamara Vrooman, the CEO of Vancity Credit Union, summarizes this in one sentence: “With every decision, banks define our future.” Because of their importance for a functioning economy, banks are highly regulated and may be rescued in times of financial turmoil. But their unique role in society is also the reason why we see Just Banking emerge around the world, and why the Presencing Institute has been working with impact-driven banks around the world for the past nine years. We believe that Just Banking is an essential part of societal transformation and a cornerstone for moving towards a more just and equal society.
If you want to know more about this topic, please connect with the author via the Precensing Institute (https://medium.com/@presencing.publications).
