Without an account we are lostby Andy Davis / October 16, 2018 / Leave a comment
If the financial crisis provided any lasting lessons, it is that banking and society are inextricably entwined. It is no coincidence that the decade since the crisis has seen an increasing emphasis among investors and civil society groups on the social impact of all businesses, including banks. This in turn forms part of a wider agenda: the effort to promote better environmental, social and governance standards for businesses.
Given the reputational mauling that banks received after the crisis, how can they show that their activities have a positive social impact? The vagueness of the idea of “social impact” itself presents a major challenge: there are so many ways that banks can affect the rest of society—from funding job creation and investment to closing branches and cutting posts—that it is hard to know where to begin. Is access to the essential services that make modern life work—to current and savings accounts, payments and direct debits, overdrafts, loans and mortgages—evidence that just by existing, banks have a positive social impact? If so, reducing the number of people without access to basic financial services could have a major positive social impact.
Combating financial exclusion is clearly important. The effect of being unable to access basic banking services can force financially vulnerable people to pay more for basic services such as household utilities, and make it difficult for them to receive wages and welfare payments. The growing recognition of problems like these lies behind efforts over recent years to promote so-called basic bank accounts, offering a no-frills current account service.
But to define banking’s social impact purely in terms of financial inclusion feels unsatisfactory: isn’t there more to it than this? Isn’t it also a question of what individuals and communities are able to achieve by having access to those services, and how it improves their material and mental well-being?
The social importance of banking’s central role, financial intermediation, was well understood by the founders of the building society movement. Local organisations enabled their communities to save, funded the building of new homes and provided loans to their members to buy them. Arguably, this model gained its strength from its links to particular communities and its mutual ownership model—factors that were lost as mutuals gained stock market listings and were absorbed into much larger organisations that centralised control. They also continually sought economies of scale through mergers and takeovers, and measured success purely in financial terms.
Milton Friedman’s 1970 article “The Social Responsibility of Business is to Increase its Profits” legitimises the view that the corporate world need do no more than prioritise shareholder returns. Under this doctrine, a bank could argue that it is fulfilling its social responsibility by profitably providing essential financial services, even if a large share of its revenues came from overdraft charges paid by a small minority of customers including the most financially vulnerable groups.
“Being unable to access banking services can force financially vulnerable people to pay more for basic services”
Banks cannot be held responsible for the ills of shareholder primacy but prioritising financial performance obscures deeper questions, argues Anna Laycock, Executive Director of the Finance Innovation Lab. “If you’re always focused on your quarterly figures, no one is taking a step back and asking, ‘what are we here to do? What are we creating in the world?’ And certainly that’s where I think a lot of things have gone wrong in finance.”
This is not to imply that banks have little positive social impact: a report by RBS in 2016 suggested that they provide far more funding to social enterprises and community businesses than specialist social investment organisations. Even so, the problem is that there has been so little effort to quantify the banking sector’s support for the social sector.
Where that impact is quantified, it is usually in terms of individual social projects that banks undertake as part of their sustainability or citizenship programmes. In some cases, these are ambitious, as for example in the case of Nationwide, whose members voted in 2007 to divert at least 1 per cent of the mutual’s pre-tax profits each year to such projects.
Social impact projects, which often target issues of financial inclusion or improving financial capability, are important, but also limited: they tell a specific story but reveal nothing about how the banking system’s day-to-day activities are contributing to positive social change.
Unpicking this question is the heart of the problem. Part of the answer is to define a broader purpose for the organisation than creating shareholder returns. The Economics of Mutuality project run by the Saïd Business School and the Mars Corporation offers a decent place to start. Bruno Roche, Chief Economist of Mars, said the project’s conception of mutuality is not just “sharing, giving or giving back,” but “an invitation to join a network of reciprocal relationships in an ecosystem.” The project’s aim is therefore to direct the purpose of companies towards “producing profitable solutions to the problems of people and the planet,” rather than “profiting from producing problems for people and the planet.”
A second key ingredient of any answer must be measuring the outcome. What could banks measure in order to demonstrate the social impact of their everyday activities?
In this context, financial resilience—the ability to recover from financial shocks -—is key. It is measured using both hard indicators (access to emergency savings, levels of unsecured borrowing, debt repayment problems and arrears, use of insurance products) and soft ones (financial capability and family networks). Banks have unrivalled access to information about their customers’ financial situations but do little with that information to help their customers become more financially competent, confident or secure. If they were both measuring and helping to improve the overall financial resilience of their customer base, the social impact would be significant.
Any effort in this direction may be aided by Open Banking, which will eventually allow automatic aggregation of a customer’s financial data across all the different accounts and products they hold to gain a more complete picture of their situation. Here again, it is important to recognise that issues of financial inclusion are important: Open Banking will do little for those who do not have access to the banking system.
“Banks have unrivalled access to information about their customers’ financial situations but do little with that information to help”
Ricky Knox, Chief Executive of digital start-up bank Tandem, said financial aggregation of this sort already enables it to help customers with timely nudges: “We’re able to look across the whole picture and see when they’re likely to be stretched and we can therefore recommend that they start saving more or they don’t spend as much for the next few days.” A more complete financial picture is also likely to make assessing the affordability of financial products for individual customers much more accurate than current processes. Doing more to make certain that people have enough disposable income after all other commitments to afford the product the bank is offering would also bring clear social benefits.
Social impact does not necessarily mean focusing only on the least well-off customers. Tandem also calculates “Customer Lifetime Benefit” to show how much value the customer is receiving, for example from prompts to switch utility or mobile operator, cash back on card purchases or savings on foreign exchange. “At the moment we’re saving about £109 per customer per year,” said Knox. The bank also measures “emotional benefits”: how in control of their money and now educated about it customers feel.
Measuring the social impact of banking will require new approaches from major institutions that have until now focused mainly on profit. But equally, any effort must also recognise that profitability will remain the central concern. “Social impact is absolutely connected to how you make money,” said Anna Laycock, “because if the two are misaligned, you can guess which one’s going to win out—the profit motive or the social impact motive.”
Banking on Change is a publication which examines how we can develop a comprehensive policy approach towards financial inclusion. The report features contributions from the likes of John Glen MP, Peter Dowd MP, Anne Pieckielon, Chris Pond and Guy Opperman MP.
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