A Guide to Ethical Banking

If money makes the world go round, SMEs keep it spinning. Without their ‘engine room’ contributions to growth, employment, and trade, the global economy would slow — if not grind to a halt.

Every single one of these small and medium sized enterprises (30 million in the US, 23 million across Europe) needs finance to launch, run, and grow.

Yet more than half of British SMEs have struggled to get the finance they need from the big banks.

As such, many are looking beyond the tried and tested (but perhaps no longer trusted) routes, towards financial models that don’t put profit over people.

What is ethical banking?

The principle behind ethical banking is this: what banks do with their money (and how they treat people in the process) matters.

But ethical banking doesn’t just refer to the way in which a bank invests its profits. Typically, ‘ethical’ banks also:

• Have strong sustainable credentials. Triodos, Europe’s leading ethical bank, measure all policies and performance against the UN’s Sustainable Development Goals.
• Commit to transparency. Many — including Charity Bank — publish ‘follow the money’ guides, allowing customers to track their impact. Charity Bank was also the first bank in Europe to become a B Corp.
• Practice ethics from the top down. In the Netherlands, all bankers swear a pledge of responsibility towards society.

What are the business benefits of banking ethically?

A wave of smaller, ethical, ‘challenger banks’ are attempting to solve SMEs’ capital crisis with specialised lending solutions that make it easier for business owners to access finance. Meanwhile, Charity Bank’s business savings account tops the ethical consumer lists.

Financial incentives aside, many business owners make the ethical switch so they can put their money where their values are.

When ‘banking’ is ‘bank-less’

Others are going elsewhere entirely. To paraphrase Bill Gates: while banking is necessary, banks — at least not in their traditional sense — are not.

In the last two years, equity-based crowdfunding has grown by almost 300 percent. Meanwhile, Islamic banking has seen a surge in popularity due to its guiding principles of sustainability and social responsibility.

Fintech too, has disrupted traditional banking to the benefit of SMEs, replacing high street branches with 24 hour digital business banking. Nonetheless, 83% of finance directors would still rather seek funding through traditional bank lending, citing a knowledge and experience gap in alternative finance options.

So where are the most ethical banks in the world?

For the third year in a row, US Bank has been named a 2017 World’s Most Ethical Company, thanks to its practices built upon trust and transparency, as well as commitment to equality and diversity.

Over in Canada, Vancity (the country’s largest credit union) offers specific financing for green businesses, recognising potential where others may only see risk.

In the US, more than half of small business loans are made by community banks. All over Europe too, community banks are thriving; providing flexible finance and a personal service to SMEs that are founder-led, emerging, and on a growth trajectory.

In the UK, the Community Savings Bank Association (CSBA) — itself backed by the RSA — is building a network of independent, customer-owned, local banks, where bankers make lending decisions based on their own experience with the local economy.

This return to personalisation — and withdrawal from an algorithmic, centralised approach to small business lending — is something that I believe very strongly in; as such, I am an advisor to Avon Mutual, a community bank within the CSBA initiative. More on that another time.

As business owners and entrepreneurs, where we put our money counts.

If you favour innovation and and ideals over interrogation and high interest, perhaps it’s time to take a look at the alternatives.

Want more thoughts on doing business ethically? Here’s where you can sign up for my weekly Firm Ethics update.