In February, the Lab hosted a unique workshop with leaders in purpose-driven banking – from credit unions, community finance organisations, building societies, mutual banks and ethical banks. Lab CEO, Jesse Griffiths shares what we learned about how to overcome barriers to the growth of these vital institutions, so that everyone can benefit from a banking system that puts people and planet first.
What does it mean for a bank to be truly purpose-driven? The Lab’s recent discussion paper, Barriers to Growing the Purpose-Driven Banking Sector in the UK, sets out a clear framework to answer this question, as shown in the diagram above. Being purpose-driven means putting a social or environmental mission at the heart of what you do. Financial returns will obviously be important, but they should not be the main objective of a purpose-driven financial institution. This mission is supported by having ownership and governance structures that support the mission, and by having mission-focussed culture and leadership.
As our discussion paper shows, there is a vibrant ecosystem of purpose-driven banking institutions in the UK, including credit unions, community finance organisations, building societies, mutual banks and ethical banks, but they are small compared to the mainstream institutions that prioritise financial returns and profit. If we want our financial system to truly serve people and planet, we need this purpose-driven ecosystem to grow so that it becomes the mainstream. The Lab brought together forty leaders in the field to discuss how to scale up purpose-driven banks – the lynchpins of the financial sector. Four key lessons emerged.
1. An overhaul of regulation is needed
Financial sector regulation is geared towards finance-driven and profit-driven organisations. Much of it is designed to control the big banks, and to constrain ‘bad’ actors. There is a lack of understanding amongst policymakers – in regulators, and central and local government – about many of the problems faced by purpose-driven financial institutions that are caused by a regulatory regime which does not suit their approach. As a result, policy and regulatory interventions are designed in ways that reinforce the existing system rather than stimulate or support systems change. One current example is how the package of coronavirus-support loans for businesses have been designed to work for big banks, and completely overlook purpose-driven banks, even though these institutions have strong track records in supporting small and medium businesses.
Regulators could seize the opportunity to design a bespoke regulatory regime that is tailored to the needs of purpose-driven banks. The government has already accepted the need for different kinds of regimes for different kinds of institutions by announcing plans to create a new regulatory regime for small banks, so this would be a logical extension. Competition law which potentially prevents networks of smaller purpose-driven institutions such as mutual banks from collaborating to achieve economies of scale in, for example, IT systems, could be reformed. This could be coupled with direct support to allow the ecosystem to upgrade its technology, marketing and other systems through pooled infrastructure. The government could also examine ways in which mainstream banks are made to support the growth of purpose-driven financial organisations to serve markets that they currently neglect, such as small businesses and higher-risk customers, as happens in other countries. Tackling these barriers would also create an opportunity to expand the minds of policy-makers to understand the importance of purpose-driven banks, and how to create fertile conditions for their growth.
2. Finding capital is key
The growth of most purpose-driven financial institutions is constrained by difficulties in accessing capital and raising finance. One key advantage of the purpose-driven ecosystem is that it prioritises longer-term impacts over quick growth, but this is at odds with an investment ecosystem in the UK that often does the opposite. High costs of capital can also undermine the purpose of many institutions as this cost is reflected in higher prices which would have to be passed on to the lower-income customers or small businesses being served. There is a diversity of needs, with different actors needing different types of capital such as regulatory capital or funding, from different sources. Unlike in other countries, there is no agreement on the different roles of public and private capital and funding for investing in purpose-driven banks. The smaller scale of the purpose-driven ecosystem creates a vicious cycle, with investors reluctant to provide funding because they see them as too small to scale, but they can’t get to scale without investment.
In many other countries, public finances support the growth of purpose-driven finance institutions, so increasing public investment will be important. For example, some of the new resources in the dormant asset fund could be used, or the cheap loan terms available through the public works loans board could be extended to purpose-driven banks. Incentivising private capital to flow to the ecosystem will also be important: tax breaks, guarantees or other incentives could be provided to encourage savers and investors to channel money to and through purpose-driven institutions.
3. A step-change in public awareness would drive growth
There is a low level of public understanding and awareness of the purpose-driven banking ecosystem. In fact, few people realise that the UK’s banking sector – dominated by large shareholder banks – is not the norm, with many other major economies having large purpose-driven banking ecosystems. This lack of awareness that there is an alternative is bolstered by the mainstream’s push for people to think primarily about financial returns when choosing products and institutions, and also the difficulty many have of believing that finance can be done differently. Within the ecosystem, there is too often a focus on competition among purpose-driven institutions, and a lack of understanding, incentives and mechanisms to work together to achieve the step-change in public awareness that is needed.
One bold solution would be to create a national brand to help everyone realise that there is a banking alternative that works for people and planet. This could be supported by a universal platform that explains purpose-driven finance and gives customers transparent, easy to access information about the products and services that are available from all the different organisations in the ecosystem. A ‘move your money’ campaign could drive people to make the change, by connecting to issues that people care about, whether solving the climate crisis or building local wealth and supporting local businesses. Indeed, 68% of UK savers want their investments to consider social and environmental impact, as well as financial performance. This push would need to be accompanied by reinforced efforts by purpose-driven institutions to make sure they offer excellent customer service.
4. The power of the mainstream should be confronted
The overwhelming market share of large incumbent banks obviously confers economic and political advantages, and creates problems for purpose-driven financial organisations. For example, attracting and retaining the talent and leadership to drive growth is difficult when mainstream careers offer experienced bankers far higher financial incentives. The mainstream’s move away from the kind of relationship banking that purpose-driven banks provide shrinks the talent pool further. The difficulties of grappling with a policy and regulatory environment that works to favour the mainstream, and of a customer base primed to use mainstream institutions, have been highlighted.
However, this bias in favour of mainstream institutions that don’t put people and planet first runs deeper. Business schools, MBAs, and universities don’t teach alternative business structures or models that are purpose-driven. These mindsets and power dynamics that hold the system in place extend into each of us that stays with our mainstream bank even though we know it is not aligned with our own values. This is why the Lab emphasises the need for building the power of those trying to change the system, and the importance of the kind of systemic, imaginative changes this workshop highlighted. Only through bold action and by working powerfully together can we create the transformational growth of purpose-driven banks that is needed to create a financial system that truly works for people and planet.
On 24 March 2021 we held a community event showcasing leaders from purpose-driven banking, and exploring further possible solutions to the barriers highlighted here. Watch a recording here.