Banking With A Public Benefit

Kat Taylor discusses how her triple bottom line company enhances economic sustainability in low-income communities.

The mortgage crisis that precipitated the Great Recession of 2008 and the federal bailout that followed seemed to burnish the longstanding, negative image of bankers as selfish fat-cats. But not all financial institutions and the people who run them should be painted with the same broad brush. Kat Taylor is the co-founder and co-CEO of Beneficial State Bank, a triple bottom line business focused on enhancing the prosperity, and economic sustainability, of low-income communities. Taylor spoke with Katherine Klein, Wharton’s vice dean for social impact, about her group’s long-term vision to set a different example for what a bank can be.

Image source: The Blue Diamond Gallery

An edited transcript of the conversation follows.

Katherine Klein: Others with your level of professional achievement and passion for social justice and environmental change would say, “Let’s start a charitable foundation.” You said, “Let’s start a bank.” Why a bank?

Kat Taylor: So often, people don’t even want to talk about banking because it’s boring and complex and has some negative affiliations. But banks are extremely important in the way not only the economy works, but also in what we drive in terms of societal outcomes. The way we think about banking is that it is the original and most powerful form of crowd funding. Not that a specific deposit funds a specific loan, but all deposits fund a lending practice. And they do it with enormous prerogatives granted by the public, starting with FDIC insurance that allows banks to gather deposits at very low cost because they are insured risk-free up to $250,000.

Also. we are a leverage business model. Banks enjoy leverage of at least 10 to 1, so we have exponential impact. We recycle the capital; it goes out in loans and comes back to us in large part so we can loan it again. The impact accumulates over time, and it’s an extremely disciplined business model. We have 13 exams a year and three separate regulators, so we are constantly monitoring and understanding what that capital is doing.

We did look at other models before starting the bank: venture philanthropy, traditional private foundation, etc. But we kept coming back to the bank model because of its influence and centrality to most people in their lives. It’s where a lot of people get their mortgage, where they transact their business. It used to be a pillar of the community. It’s less that now, but it can be a really important part of the whole ecosystem in which families and individuals, and communities and people we care most about live.

Klein: Give us a picture of Beneficial State Bank. What’s different about it, and how do we understand its scope and size?

Taylor: We started in 2007. Some might have considered that an inauspicious time to become a bank, but by the luck of the timing of our birth we made it through the Great Recession. We hadn’t lent much money out yet…. We honestly didn’t have many assets at all other than cash.

“Banking is the original and most powerful form of crowd funding.”

And we got enormous insights looking at that maelstrom, what caused it, what the repercussions were, how it amplified over time. At this point, we have grown to be $800 million in assets. That sounds like a big number, but it’s actually quite tiny in the banking landscape. The biggest banks in the world are now well over $2 trillion in assets. That’s many, many zeroes away. But our size is now getting to be an asset for us in terms of coverage. We have 18 offices and 225 employees in the three West Coast states. We’re starting to get the geographic info we desire.

We’re not attempting to be a national bank in large part because our model depends on accountability, and that requires responsiveness. But we’re getting to a scale where we can have influence on the banking system, and we also are getting a product set that more fully answers what people could and should expect from a bank. We’re now a consumer lender as well as a commercial lender, offering auto loans and credit cards, but also scaled finance for social enterprise, nonprofits, etc.

The difference in the bank is our design features that we intentionally laid in to make sure that our bank model would be in alignment with the public interest and the values of our stakeholders. We define our stakeholders much more broadly, much more like a B corporation like we are. They include not only our customers, borrowers, transacters and equity shareholders, but also our communities, the environment and the public at large.

In order to have true alignment with those stakeholders, the first thing we changed was the ownership structure of the bank. One hundred percent of the economic rights of Beneficial State Bank are held and owned by Beneficial State Foundation, which is a public charity. Public charities are governed permanently in the public interest. They can never be controlled by a private individual. The bylaws of that foundation require that when it receives profit from the bank, through the dividend process, to reinvest those profits back into the communities that we serve, which are primarily low income.

The second design feature has to do with that lending practice. If we are crowd funding on behalf of our stakeholders, then we should lend with respect to their values. We count the loan dollars and at least 75% should be in the hands of change makers who are either providing something that we desperately need, like affordable housing, renewable energy, sustainable food, or they’re unique ownership structures like us as well — B corporations, worker cooperatives. Or they are simply communities and actors who have been deprived of capital in the past and have a very valid point of view to bring into the main economy. That would be small businesses at-large, women- and minority-owned businesses, low-income communities, nonprofits, etc.

Design feature number three is radical transparency. We not only report out on what our loans are doing, who is holding them and the warrant that they aren’t undermining our triple bottom line that you described, but we’re also taking affirmative commitments about how we act as a corporation.

We are a B corporation. We are also a Community Development Financial Institution, which is a U.S. Treasury Department designation that’s hard to get and hard to keep. We have a living wage policy. We pay 150% of living wage in all markets, full benefits. We don’t finance fossil fuels. We measure our greenhouse gas and water and landfill footprint, and drive it down every year.

We signed a Small Business Bill of Rights. What we’re trying to do is hold ourselves accountable to third-party auditable standards so that we act and fly right, and the purpose of that is double because our mission is to change the banking system for good. We’re not going to do that as one bank. It involves migrating over time deposit equity and human capital into these kind of warranties, into banks that act like us. They will always be bigger