By Karen Kroll
The most successful brands leverage whatever it is that makes them unique. In a commoditized sector, though, banks often struggle to stand out. Hence the ongoing technology race, the endless design upgrades, and the corporate soul-searching.
But then there’s Oakland, California-based Beneficial State Bank—the bank that couldn’t blend in if it tried. This institution is aiming for nothing less than economic justice. Not only that, it plans to achieve that goal by changing the industry from the inside. Not convinced? Read on.
Meet Kat Taylor.
With $800 million in assets, Beneficial State is dwarfed by the largest U.S. banks—the top three holding more than $1.5 trillion in assets. Yet Kat Taylor, Beneficial State’s co-founder and co-chief executive officer, remains determined to influence the banking system for the better. “It’s audacious,” she said of her goal. “But, we’ve endowed our banking system with enormous privilege.” As evidence, Taylor pointed to banks’ low cost of funds, and their ability to collect deposits in a highly facilitated manner—and then leverage those deposits.
“By definition, it should be very aligned with the public interest,” Taylor said. That means fair, transparent banking services focused on the needs of working class households and individuals. Since its opening in 2007, Beneficial State has worked toward this goal.
What does it look like when a bank is different at the DNA level?
It starts with its structure. The bank’s economic rights are owned by Beneficial State Foundation. The Foundation receives any profits earned, and must reinvest in low-income communities or organizations that protect the environment, promote renewable energy sources, or support access to sustainable food systems.
Next, Beneficial State targets a loan portfolio in which 75% of loans are made to “change makers,” such as those contributing to society through affordable housing or renewable energy, or to communities traditionally lacking access to capital, like small businesses. The remaining 25% of the bank’s loans are not “contra-mission” (in other words, they do not go against the mission).
Meeting these goals requires “regular, broad conversations about what it means to be mission-aligned,” Taylor said. And while the goals narrow the pipeline of potential borrowers, they also sharpen the focus, Taylor said. Companies that consider factors like sustainability gain an understanding of the risks in their supply chains and labor practices, and are going to be stronger borrowers, she added.
Beneficial State also is finding new ways to serve customers often considered “the working poor.” According to conventional models, the loss rate on the bank’s auto loans to these borrowers would fall somewhere between 30% and 40%.
It’s about one-tenth that. The reason? Many models incorrectly assess the risk of the working poor, Taylor said. “FICO and older models are very debt-based. They’re hard on people who don’t have a history of borrowing.” The traditional models also don’t give enough credit to potential borrowers who can demonstrate a consistent history of paying rent or other bills on time, Taylor said. Beneficial State’s underwriting process is automated, ensuring fairness, and accounts for factors like payment histories that other models don’t.
The third cornerstone to Beneficial State’s structure is what Taylor calls “radical transparency.” The bank undergoes a number of independent, auditable assessments of its operations. One example: it is certified by the U.S. Treasury as a CDFI or Community Development Financial Institution. It can apply for awards under the CDFI Fund program, which serves “mission-driven financial institutions that take a market-based approach to supporting economically disadvantaged communities.”
“We watched the credit markets burn down.”
Beneficial State’s growth wasn’t a given at the outset. OneCalifornia Bank, the former name of Beneficial State, received its banking charter in 2007. “We opened our doors and watched the credit markets burn down,” Taylor said.
The upside? Because the bank was so new, it didn’t have many assets on its books. Therefore, poor quality assets weren’t an issue.
The original business plan was to split the bank’s business roughly evenly between consumer and commercial lending. That became impossible as the housing market crashed. Taylor and her staff spent the first few years engaged in foreclosure prevention. “It was like holding back the ocean with a teacup,” she said.
What happened next? Growth.
Despite OneCalifornia’s size and age, it became “the go-to bank” for other banks under duress. In December 2010, it merged with ShoreBank Pacific, with offices in Washington and Oregon. In 2013, it became the majority owner of Albina Community Bank, also a CDFI, based in Portland, Oregon. In May 2016, Beneficial State merged with Pan American Bank, which had a history of serving under-represented consumers and small businesses.
The mergers are a testament to Taylor’s understanding of the banking industry. She and her husband spent several years “trying to figure out the next generation, 2.0 version of a socially responsible bank,” before opening Beneficial State, Taylor said. Earlier in her career, Taylor, who holds an MBA from Stanford and a BA in American History from Harvard, worked with Wells Fargo, lending to mid-market businesses.
Beneficial State now has twelve locations in California, Oregon and Washington. Its loan portfolio is split roughly one-third each to:
- Commercial real estate lending
- Small business lending
- Consumer lending
The growth allows Beneficial State to spread its investment in technology and regulatory compliance over a larger client base. This is key. “It’s rare for us not to have to compete on price and terms,” Taylor said.
What growth can make more difficult is retaining a focus on the bank’s initial values and goal of changing the banking system. “It doesn’t happen because you wish it too,” Taylor said. “We have to be deliberate, which isn’t inconsistent with good banking.
The impact that followed.
Beneficial State has made an impact. Between 2012 and 2014, it lent $49 million to nonprofit organizations, and committed about $36 million in loans to organizations engaged in renewable energy. Its approximately 1,200 clients with Payday Alternative Loans, (PALs) have avoided about $2.8 million in fees, according to the bank.
The work isn’t done, of course. Taylor would like Beneficial State to perfect its product set, so its customers become even stronger participants in the economy.
And of course, Taylor would like to increase Beneficial State’s influence on the banking industry. “We need to migrate deposits, equity, and human capital to a bank model deeply aligned with the public interest,” she said.
Karen M. Kroll is a business and financial services writer and content marketer based in Minneapolis-St. Paul. Email: [email protected].