Social banks: What do they need to be successful?

The title begs a number of questions such as how one measures success in terms of banking and whether the requirements for success are different for social banks than for other types of bank. By any measure, social banks, as defined elsewhere in this forum, have enjoyed a successful period during which customer numbers, impact, income and profitability have all grown. However, we should not overlook that this period also saw the closure of South Shore Bank, United States, one of the early Global Alliance for Banking on Values members and the near failure of The Co-operative Bank plc, Britain’s first bank to brand itself an ethical bank. Although the judicial processes mean that it will be some time before we know just what did go wrong at both of these institutions, it may be that there are some initial learnings that we can draw upon.

Overall, the banking system has served society well at times when it was needed, such as during the Industrial Revolution and post-war recovery. However, as we transition to a knowledge economy, conventional banks have been found wanting, slow to innovate and way behind in technological development or understanding of customer needs. At the core of their business model, social banks follow a triple-bottom-line approach and offer exclusively sustainable or socially responsible products and services (Weber and Remer, 2011). These approaches are reflected in their mission statements. These are institutions led by a generation of people with the mindset and the courage to tackle the challenges of the future.

Yet, these are not values currently recognizable in the curricula of national bank training bodies whose programmes are still based on technical training and a neoclassical mindset. As social banks respond to growing consumer awareness and demand for their services, as they increase their environmental and social impact, so they need to grow. Consequently, experienced co-workers are recruited from the mainstream, where, for example, management by objectives may have a quite different meaning. How these quite different cultures are integrated is the key to the continued success of social banks.

In 2006, 10 European social banks came together to create the Institute for Social Banking (ISB), to act on two different levels. Its research programmes are aimed at examining both practical problems and successes of social banks and so support practitioners through the dissemination of best practice. These insights inform its training programmes and the design of education for sustainable development.

As regulators place ever greater responsibilities upon banks at executive, employee and director levels, those involved need to understand not only the relevant rule book but also the mission, values and philosophy of the bank, and how they underpin the sustainability of the business model. In the recent past, the ISB has offered a master’s programme in social banking and is presently offering a certificate course in socially responsible finance. In the near future, it intends to expand these programmes to cover the needs of employees, current and future managers and board members.

Another key requirement for success is capital. While the sums required have been more modest, those social banks structured to be able to do so, have found capital raising post-2008 perhaps less onerous than their commercial counterparts and without state intervention too. Rooted as they are in the real economy, perhaps social banks have a more persuasive story to tell when seeking new capital. As liquidity in their shares increases, however, more relationship management will need to be devoted in this direction. The banks also need to develop new investor sources as the capacity of existing investors becomes more limited as internally generated reserves are unlikely to meet increasing regulatory capital requirements.

Although social banks are also known as alternative banks, in reality, they are often the epitome of traditional banking, concentrating on savings and loan products. In some markets, however, social banks find themselves in a changing landscape with the emergence of disruptive forces such as crowd-funding, challenger banks using digital platforms and classic banks that recognize their licence requires them to make a commitment to the common good not just short-term shareholder value. To be even more successful, social banks must find the right pace of change while balancing what works in their current business models with new possibilities.

While social banks have come a long way technologically, their community may meet more often online via social media. How social banks use social media marketing tools such as Facebook, Twitter and YouTube to connect to the community at large and vice versa will be important. It also helps banks to learn more about their customers and vice versa, gaining insights into needs and preferences. Social banks need to ensure that management, technology and marketing are all behind social media efforts.

Observing what works is always useful but learning from what does not can be even more instructive. While it is early days, there is a common thread between South Shore and the United Kingdom’s Co-operative Bank. Daniel Tischer (2013) suggests that events at the Co-op resemble the high-street banking behaviour that alienated customers. Executives seemingly acted in their own interests, pursuing overzealous expansion overseen by less-than-zealous regulators. While it is easy to say that South Shore Bank was engulfed by the banking crisis, no single lens provides an adequate perspective to understand all that took place. Richard Taub (1994) described the internal challenges created by the Bank’s rapid expansion such as the difficulty employing future leaders who had top banking skills but also a commitment to social values and governance issues being raised by the lack of oversight of devolved decision-making processes. These particular problems of managing growth are common to all banks.