The Rise of Impact Banking

A few weeks ago, I came across a Bloomberg article on millennials and their investment habits. As a demographic, millennials currently hold the smallest sum of funds set aside for investment. This is coupled with the burden of college debt, making the likelihood of large investments in the market quite unlikely. However, an important factor will soon change the funds these young adults have access to. Baby Boomers carry with them the largest inheritance that the United States has ever seen- a total of almost $30 trillion that will soon be passed down. Millennials, even with an average outstanding college debt of $30,000, will unexpectedly find themselves with a considerable fortune. A fortune that will need to be invested.

As tech trends have shown us, millennials approach the financial industry quite differently than their predecessors. Young investors feel comfortable leaving funds in the hands of robo-advisors. We have witnessed the rise of mobile payments and the inception of peer-to-peer lending. These changes are driven by a different attitude- one that calls for more transparency and quicker access to information.

Undoubtedly, this attitude will spread into other areas of banking. Savings accounts are the simplest form of investment deposits. Retail banking consumers place funds in a savings account and earn marginal rates on the money. Unfortunately, in today’s system, the depositor fails to see where those funds are being lent. The bank is the final adjudicator on this decision and the retail investor has no say. In fact, until the millennial generation, the every-day retail investor never considered that they might be able to question that decision.

Enter- Social Impact Banking. When I place my funds in a saving account, where does the money go? Who exactly are the creditors accessing these funds? Aren’t I inherently an investor in the bank and shouldn’t I share in this decision?

This is an attitude that is beginning to originate at the periphery of the retail banking industry and is driven by two core behavioral traits.

1: A sense of community responsibility

“Millennials are a highly values-driven generation, specifically in terms of the values that authors Winograd and Hais call “civic” values: the values that relate to good citizenship.” [4]

2: Fiscal caution

“This long era of bank failures and scant job security has forced millennials to look after themselves.” [5]

It will become critical for banks to hold sustainability firmly at the core of the business model, rather than a secondary consideration. These beliefs go beyond the notion of positive branding and social responsibility. Banks must take a broader approach, acknowledging their opportunity to create social and economic value within communities. Lending operations are dependent on two central pillars- risk and return. Given the beliefs of their investors, banks will be forced to accept this vision of investment as a vehicle to both fiscal success and positive civic impact.

This implies broad implications on the transparency around investment risk profiles. Banks will be unwilling to disclose all information, but will be forced to provide, at least, the net positive social impact or investments, the general risk profiles of creditors, and their proportionate allocations across different areas of civic progression.

Sources:

http:// www.bloomberg.com/news/articles/2015-03-03/wall-street-has-its-eyes-on-millennials-30-trillion-inheritance

https:// s3.amazonaws.com/www.newamerica.org/downloads/Millennials _and_Student_Debt.pdf

http:// sustainability.standardchartered.com/our-approach/company-profile/introduction-to-the-social-impact-of-banking.html

http://www.forbes.com/sites/micahsolomon/2014/12/29/5-traits-that- define-the-80-million-millennial-customers-coming-your-way/#683b642d2a81

http://money.usnews.com/money/blogs/my-money/articles/2016-04- 14/how-millennials-are-changing-the-way-we-save