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.
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 than us, but they can act like us and they might choose to as their growth strategy. Where the big banks can’t change very readily, the mid-size banks need always new strategies for growth, and we think we’re giving them sort of a playbook on that.
Klein: Are your branches based only in low-income communities? How do you think about where they are located and where you would want to expand?
Taylor: The whole branch model is somewhat up to inquiry at the moment because of the arrival of technology to banking like every other industry. We feel like we still need to have a physical presence, and where possible we choose for that to be in low-income communities. The preponderance of our branches is in low income-markets with some exceptions. We’ve bought four banks, so sometimes we’ve inherited their branch decisions.
But two banks that we just merged with in June gave us seven new branches. Five are in the Central Valley of California, which is a very important area for us to serve. One is in East L.A. and one is in North Hollywood, and they are very much aligned with low-income community service. The whole question of branch banking is one of not only what is the user experience that people are looking for, it’s also a chance for us to improve the ecological footprint of banking.
“If we are crowd funding on behalf of our stakeholders, then we should lend with respect to their values.”
I sometimes think it would be nice if we converted all of those corner bank branches of old that are not so necessary anymore into low-income housing, to reinsert needed affordability into the urban core. But that might be a pipe dream at this point.
Klein: You’ve been in business nearly 10 years. What are the important lessons learned?
Taylor: In the beginning we had to begin. We had to experience what it was like to be a bank, what the opportunities and challenges are in the banking landscape, and understand them deeply. We probably thought we were going to change the banking system in an incremental fashion by just becoming a bank that better serves the public interest.
I think now we’ve grown to realize we need to redefine the category writ large, that we should expect more from our banks. We should understand the enormous publicly derived prerogatives that they have, how impactful they are on societal outcomes and make the banking system work for us. There’s $12 trillion in deposits in the American economy alone. If we make choices and align them with our own values, we might get better outcomes out of the banking system.
At this point we really need to because it overwhelms a lot of other industry’s ability to address those large societal problems. I was told recently that all of the philanthropic capital in the United States put together would fund about 15 months of the public school budget. If we can get business models fundamentally right in the first place, especially banking, so that they don’t cause a lot of negative externalities or problems for us, then we don’t have to spend so much time and resource cleaning things up. That’s the main insight, I think.
We have made our share of missteps along the way. Acquisition and integration is tricky. Culture is massively important. A lot of young companies ignore culture until they have an accidental one. These are things the blocking and tackling of every single day that we have to keep working on, and we still need to grow. Half of Californians live south of Ventura Boulevard, and we’re not really present there. We have more wood to chop.
Klein: You have this larger mission of not only serving your customers and communities but transforming the banking system. How do you get there?
Taylor: We were just revisiting some proof points that were derived from a rebranding process we went through to become Beneficial State Bank. Buying four banks, growing the initial one and moving into three state markets, we had to change our name a fair bit along the way. Beneficial State is a name that’s meant to suggest the beneficial state we should all be in as a result of our banking system being in alignment with our values.
The proof points that we call out and use to identify if we are getting closer to changing the banking system for good are, No. 1, making sure we’re deploying capital for its highest purpose. That means helping our borrowers attain their highest purpose, helping B corporations that have a very explicit high purpose be successful and grow that community.
Second is to make sure that the banking system is generating healthy transactional services for people, banking services that make them better off the day after than they were the day before. Not payday loan debt — that is a debt trap. Not the overextension of products that no one wants or needs. But banking services that literally allow someone to be healthy in their life.
“Mid-size banks need always new strategies for growth, and we think we’re giving them sort of a playbook on that.”
The third, which is based on our profit-taking model, is that we need the banking system to reinforce the communities that they serve and the earth upon which we all depend. The fact that we are putting profit back into those communities and the planet is an important proof point for us.
We have not issued a dividend because young banks, especially that are still acquiring, are encouraged by the regulators to retain all earnings for growth. But the strongest lever we have to achieve healthy communities and a healthy planet is the bank, and it’s really the lending practice that does it. So, we would always preference lending over grant making. Nevertheless, we did capitalize Beneficial State Foundation so that it can grant into our communities about 5% to 10% of the equivalent of our profit every year, which is much higher than other banks.
The last is that we need to be true advocates. We need to be a voice for change. It isn’t enough to quietly labor on our own. We have to join trade associations, like the Global Alliance for Banking on Values and the Community Development Bankers Association, to advocate with our regulators and stakeholders and the public for a better banking system. The best way we can do that is to show that a bank aligned with those values, that’s resiliently profitable, is a viable alternative to some of the other models in the system. But we also speak with as loud a voice as we possibly can.
Klein: I would love to hear more about your practices, specifically with regard to workers. Some years ago, a study got a lot of attention pointing out that nearly a third of all bank tellers in the United States qualified for and received some form of public assistance. How do you pay your workers? How do you try to not be those banks?
Taylor: We call that part of the train of misery. That one-third of bank tellers qualify for public assistance shocks people because banks are among the most profitable corporations in the world. Why they would not pay their workers enough to avoid needing public assistance is a quandary.
In our case, we proactively make an affirmative commitment to them that we will pay 150% of living wage in all markets, fully benefitted. We don’t tolerate piecemeal, part-time work that disqualifies people from benefits. We use the MIT Living Wage Calculator to make sure that we have a credible source of what that living wage should be in our markets. The 150% is what is suggested for one adult and one dependent, so we’re trying to make sure that the wage contributes to the household income adequately. We would love to increase that amount and will strive to over time, but it represents to us the minimum that we would ever pay anyone, and it’s always above $15 an hour. We also adjust for other salaried and wage earners to make sure there’s rationale across the whole group of people.
We are big advocates for Fight for 15, national standard minimum wage, no exemptions. But we also do worry a lot about other non-salary, non-wage conditions and benefits for our employees. We try to make sure we’re creating a culture that’s healthy and respectful for our fellow colleagues. We have run a lot of employee-driven committees on wellness, on the green team, etc. We recruit them to design their own sort of work life. We work with a benefits provider that’s forward-thinking about new things we can do. We choose diversity. If you don’t choose diversity you don’t get it.
Klein: I’m curious how others respond to your practices, especially paying 150% of a living wage. Do they look at that and say, “Well, that’s all very nice. You’re a small bank, you have a social mission. Good for you. We couldn’t possibly.” If that’s happening, what’s your response?
Taylor: Being a small bank should make it harder for us to pay that because we don’t have the same scale economies that the big banks do. We don’t have the bargaining power. We don’t have the concentration of power.
It’s somewhat of a chimera to say that we’re too big to pay our employees fairly. It’s more likely capital market pressure. We also need to be profitable. That is part of our business model, and it is certainly a regulatory requirement. We target a 6% to 10% return on equity in a very stable way. We feel that’s enough to fuel our growth and be resilient, but not so much that we’re overcharging or underpaying somewhere. In our experience, high returns from overcharging and underpaying are not only not part of our mission, but they’re not sustainable over time. They set off other second-order effects. If people aren’t making enough in their basic wage, then you’re going to have a very strong sales culture if that’s the only other place that they can pick up some income.
Klein: In what ways is leading a triple bottom line business more difficult than leading a business that has a more singular focus? Are there ways in which it’s less difficult?
“A lot of young companies ignore culture until they have an accidental one.”
Taylor: I am sort of a glass half-full gal, so I think it’s easier. It is more complex because it’s an optimization model, not a maximization model. But I don’t have a categorical mind. I prefer an optimization model. I think it’s more reflective of reality. If you put a maximization model into the world, you’re solving for one outcome that isn’t truly sustainable in the world that we know. Diversity and optimization are both perceived as being harder to manage, more complex, but they lead to better decisions. I think the studies are starting to show this
Klein: Can you give an example of what diversity and optimization means in practice and how it might influence your decision-making?
Taylor: Diversity in decision-making means that you are inviting more points of view into the decision process. You will have less common ground at the outset, but you will have a richer consideration of all the real factors that are influencing the best decision to make. Optimization is a harder process to manage because you can’t take a linear approach. I’m not explaining this well, but I think there’s just more things going on at once that you have to keep track of.
Klein: You’re trying to balance multiple goals and find the way that those are synergistic. Is that accurate?
Taylor: Yes, and mutually interdependent. I think what we’ve done for a couple hundred years now is insist on a maximization model that isn’t eliminating those second-order and interdependency effects. It’s just ignoring them. We’re opening the aperture of the camera lens and looking at everything that’s going on. I keep a list called “these things also happened.” Just because you aren’t noticing them doesn’t mean they aren’t happening.
Klein: Given what your bank is trying to do, you are managing lots of different goals and connecting with lots of different constituencies. What do you think makes you particularly successful in doing that? If somebody else is aspiring to this, is there something that allows you to achieve this?
Taylor: It’s not me, it’s us. We believe that we do better together than apart. That’s a basic philosophy of the bank, and that means we also manage better when we listen to all of the voices and when people have agency and accountability and authority.
We’re trying to delegate our decision making, not in a disorganized way, but we’re trying to get more heads into the process. I often say, let’s put more and different people in charge, let’s get those new points of view, let’s get the diversity, let’s get the optimization minds in there, and let’s get as many as we can. If I think about the world, we sort of bemoan 7 billion people because it seems like such a challenge, but that’s 7 billion hidden geniuses. If we could find an organized way to harness all of that mental energy and imagination and vision, I think we would make better choices and come up with better institutions. That’s what we’re trying to do on a mini-scale. That means a lot of emphasis on succession, on how do we help people develop their skills and opportunity set to the highest that they could possibly be so they can take a leading role in the organization.
