How Credit Unions Can Use Social Good (ESG Investing) to Their Advantage
The value prop for Community Banks and Credit Unions are changing. ESG could be the "next big thing" for these financial institutions.
Are the reasons why somebody signs up for a credit union or opens an account at a community bank changing? I think so.
From a competition perspective, their core value proposition of being a local bank is being challenged in big ways by both ends of the spectrum.
They compete against large banks and their technology budgets. Bank of America and JP Morgan Chase are spending north of $1B per year in technology and customer experience. Community Banks and Credit Unions spend a small fraction of that on technology. Just having the ability to deposit a check via a mobile phone still requires a big investment in security and technology that many community banks can’t afford.
They compete against well-funded digital-first and digital-only banks. More customers are getting used to not going to a physical bank establishment, even if it’s considered a “local” bank. The trust of digital banks is growing, and of course, these fintech companies are continuously pushing the limit.
Even though credit unions and community banks are actually getting bigger through acquisitions and consolidation, the question is how can they compete against the big players? The consolidation does make their technology investment budgets bigger, but they still are measly in comparison.
So, the question remains. Why would someone join a credit union or a community bank? Even though both are growing in size, their value propositions are changing quickly.
Be Good, Do Good. Is This the Right Path?
TOMS had one of the most interesting socially-focused models, which was the “buy one pair of shoes, donate another'' program. For every pair of TOMS shoes purchased, a pair of new shoes is given to a child in need in partnership with humanitarian organizations.
For a long time, they were the leading social good company to mimic.
They donated over 95 million shoes, but it turns out donating that many shoes is expensive. So they ended the long-standing campaign and instead opted to donate ⅓ of their profits to charitable organizations.
However, TOMS remains a truly differentiated shoe-seller than the rest of its competitors. If you want a company that does good, you turn to TOMS. If you want a company with unbelievable customer service, you turn to Zappos.
Credit Unions and Community Banks need a similar differentiating positioning since much of their value proposition has been turned upside down. Being your local bank doesn’t have the same ring to it as it used to.
Should this positioning be explored further? I think so.
ESG Investing is a solid differentiating path to attract millennial customers
Credit unions' major advantage is that they are designed to serve account holders rather than shareholders, and ESG Investing is tightly aligned with that goal.
Environmental, social, and governance, or ESG investing, is a form of sustainable investing that considers an investment's financial returns and overall impact. Nerdwallet has a great explanation:
Environmental: Environmental factors include how a company mitigates its greenhouse gas emissions, whether the products the company creates are sustainable, if it uses natural resources efficiently and how it deals with recycling.
Social: The social component includes factors both inside and outside the company. Does the business participate in community development, such as providing affordable housing or fair lending? Does it carefully consider diversity and equal employment opportunity in its hiring? Does the company prioritize human rights everywhere it does business, including other countries?
Governance: Governance (or corporate governance) refers to the company’s leadership and board, including whether executive pay is reasonable, if the company’s board of directors is diverse and whether it’s responsive to shareholders.
By tying your bank’s mission statement to social good through ESG investing, this could be a sustainable approach to growth. Of course, other large banks will claim to do ESG investing, and I’m sure they do but are they driven by this cause? Not anytime soon.
Therein lies the opportunity for differentiation.
Environmental, Social and Governance factors (ESG) may bring to mind feel-good stories about sustainability, diversity and integrity, but for credit unions, ESG goes far beyond stories. The values related to ESG align with a credit union’s mission of service to members, the community it serves, its duty to employees and interactions with other stakeholders. [src]
Millennials do, in fact, “care.”
The question I always ask is, “Do millennials care about your social mission?” Based on anecdotal evidence and some data, the answer is yes, they care, and it impacts how they spend their time and money. 83% of millennials want brands to align with them on values.
And in a 2018 survey, LinkedIn recently said that 86% of millennials would consider taking a pay cut to work at a company whose mission and values align with their own. And if you compare that against baby boomers, only 9% would do it.
There are plenty of ways community banks and credit unions can take action on this sustainability trend.
Take an oath to be closely tied to Social Impact. This could be through marketing and services offered.
Make ESG investing easier for your members through partnerships with ESG investing.
Here are 5 stories that show what’s happening in the growing fintech social impact world.
Investment firm Covalis looks to raise $1B for ESG fund
Green is the new black, according to firms like Covalis, who are going all-in on ESG funding. It will back stocks in sectors such as chemicals and industrials that it believes will be given higher valuations by the market. They try to improve their green credentials by actions such as cutting carbon usage or investing in renewables.
https://www.ft.com/content/14e6ba5c-0e1d-4bd2-831b-6b389380f05d
PayPal-backed money lender Tala raises $110M to enter India
Tala is a mobile app that helps severely underserved communities in emerging markets get small loans which they can use to pay for necessities or start small businesses. The app looks at consumers’ texts, call logs, purchases, and other behavioral data and uses ML to create a credit profile. The loan can be approved in minutes and can range from $10 to $500.
The app underwrites and gives credit to consumers who have little to no credit history. Tala has given out more than $1B of credit to 4 million customers across East Africa, Mexico, India, and more. One of the most notable investors in PayPal Ventures. In 2019, the company raised $110M to expand into India.
https://techcrunch.com/2019/08/21/tala-series-d-india/
Humaniq’s second charity pilot is underway: helping deaf children in Sierra Leone
Humaniq is a London mobile-based app that provides the unbanked with social and financial services. They create digital identities for those without government. This is significant because unbanked individuals lack of proper identification stops them from getting critical services.
Humaniq creates cryptowallets for people without access to the banking system and provides free and secure chats for individuals who don’t have access to private communication. Humaniq is working toward the mission of eradicating poverty amongst millions of people living in emerging economies. The mobile app boasts over 300,000 downloads. They also partner with nonprofits to raise fund for serious issues in developing countries.
NewRez and Shelter Mortgage Announce Launch of New Joint Venture Lender, Landed Home Loans
“As we seek out companies to join our growing network of joint venture partners, we were particularly impressed by Landed and how they incorporate a focus on community into their mission as a business,” says Randy Vanden Houten, SVP, Joint Venture & Retail Lending, NewRez. “We are thrilled to collaborate with Landed and help them expand their ability to provide more comprehensive support to local heroes at all stages of the homebuying process.” [src]
Ayco and CommonBond Partner to Help Employees Across the Country Tackle Student Loan Debt
CommonBond is a fintech company that helps students and graduates fund their education. They make loan requirements and expectations much easier for students to comprehend so aren’t taking advantage of them.
The company has help fund $3B in loans and has tens of thousands of members. The company also has an enterprise side where companies also use their services to help their employees. Additionally, the company has a one-for-one mission where for every loan they fund, they fund a child's education in need through their partnership with Pencils with Promise.