How money is managed is essential to the future of the planet. It can be used as a force for good – to finance clean energy systems and community development projects. Or it can be used to fund environmentally destructive projects, such as fossil fuel extraction.
Small neobanks like Aspiration are leading this debate. Small banks have served America’s communities since its foundation. And now, they are essential to making businesses ethical for the future of the planet.
Why do we need banks?
As you’ve probably guessed, people need banks to help them manage their money. Since the Renaissance era, banks have been serving people. The oldest ‘modern’ bank that we know of is the Medici Bank. Founded in 1397, the Medici Bank had branches all over Italy that stored people’s money and gave out loans. It helped powerful business owners build trading companies that bartered everything from wool to olive oil to lemons. It even worked with the Pope of the Catholic Church to collect 10% of worshippers’ income for tithe. Then in 1494, the bank went bankrupt after decades of mismanagement and corruption. But by that time, it had become widely applauded as the first-ever model of a banking institution. Since then, banks have become important public businesses. All national economies rely on banks to keep track of money and conduct crucial trade with other countries.
Just about everyone has a bank account these days to save their hard-earned money and receive income. We keep our money in the bank so we can use it in the future. They’re also the only government-authorized financial organizations at the moment that can process transactions for millions of people in seconds. And as any business owner will know, banks are still the most-trusted lender in society that can give loans at affordable interest rates.
Traditional big banks: Are they a problem?
When most people think of banks, they think of big names like JPMorgan, Chase, and Wells Fargo. All of these banks offer more-or-less the same financial services. They give their customers a small APY (Annual Percentage Yield) on their savings, loans for houses and cars, and quick access to their money wherever they might be in the world. But there’s another side to banking that most people might not be aware of. Almost all big banks use the money you’ve saved with them to give out loans at high-interest rates. Banks profit off the interest rates. They also make huge returns on investments in risky business ventures, when they are successful, of course. Bankers receive crazy salaries and bonuses to develop funding strategies for these ventures.
So what might some of the highly profitable businesses be? Oil companies and large industrial farms are just two of the businesses that banks love to invest in. They generate huge amounts of revenue and have very little competition to fight against. The only problem is, these businesses harm humans and the environment.
Since the Paris Agreement was adopted in late 2015, big banks including JPMorgan Chase, Wells Fargo, and Bank of America have invested $1.9 trillion dollars into fossil fuels. Their funding has helped expand fossil fuel infrastructure across the world, destroying natural landscapes, putting indigenous communities at risk, and polluting our air and water. It doesn’t end there. Big banks’ investments in agriculture have caused a sharp rise in deforestation. Large farming corporations cut down forests to make land for livestock grazing and soy farming. It’s estimated that between 2001 and 2015, forested areas the size of India were destroyed for farming. There’s no argument that big banks profit off businesses that cause climate devastation. But there are alternatives to big banks that can help prevent these gross acts of climate terror.
Small banks are a socially responsible, ethical alternative
Small, mission-driven banks are the best alternative we have to big banks right now. Many operate on principles of social responsibility to ensure that their services only create positive social value. They’re found all over the United States in places as diverse as New York, Minnesota, and California. Some don’t even have physical branches, providing an online-only service.
Small banks offer the same financial services as big banks. But the key difference between them lies in the way they manage our money. Small banks, for one, make sure that the money you’ve saved with them doesn’t end up harming the environment or people. They closely align themselves with environmental and social justice causes. They may commit themselves to the CO2 reduction goals of the Paris Agreement or invest their profits in clean energy technologies. They also keep their service fees and business operations transparent so that their customers can see how their money is being managed. At Aspiration, we publish our Redwood Fund business investments annually on our website to show our customers that we commit only to sustainable and ethical investments.
It’s the polar opposite of how big banks operate – most have policies that don’t require them to reveal their investment portfolios and business transactions. Many small banks have been gaining popularity as the public grows wary of big banks. The Great Recession of 2008 and the involvement of big banks in the fossil fuel industry both dissolved people’s trust in financial institutions. With more small banks to choose from, the shift to ethical, small banking is likelier now than ever.
5 benefits of small banks
Although small banks may not have the same geographical reach as big banks, they stand out for five main reasons.
They are responsible community members
The first, and most important, benefit of using a small bank is that it works to improve the lives of community members. Many small banks were founded to serve their communities, and this ethos is deeply embedded in their business practices. Small banks usually give loans with low-interest rates to local businesses so they can provide useful services and create jobs in the community. Some go further and organize financial literacy programs to help people understand how money works. They believe that the better-informed people are about wealth, the longer that the wealth will be kept in the community. Most small banks give back to their communities to help them build better futures. One of the most important investments small banks have made in their communities is installing climate-resilient infrastructure.
Small banks generally have lower fees than big banks. Some may not even charge any fees for the maintenance of checking accounts. A study by Money-Rates.com found that around 45% of small banks did not charge monthly fees for checking accounts, compared to 29% of big banks that did the same. They also discovered that small banks have little to no fees for overdrafts. These policies can be attributed to the community spirit of small banks, who seek to help their communities, not profit off them.
Services tailored to local community needs
Small banks also have special services tailored to meet the needs of community members. For instance, they may offer loans with flexible payment conditions to individuals and small businesses who might not qualify for loans given by big banks. These loans could be developed with input from customers and feedback from bank employees .Small banks understand the specific requirements of businesses in their area and can therefore offer specialized, even personalized, banking services. Some small banks even have services that allow their customers to withdraw their monthly pay 2 days before pay day.
Higher ethical standards
High ethical standards are a core tenet of small banks. Small bank owners know that their customers have built a strong, oftentimes personal, relationship to their money. So they strive to ensure that the management of their customers’ money is transparent and fully accountable.
Ethical standards are upheld in a variety of ways. For a start, small banks don’t invest any of their customers’ money in harmful industries like fossil fuels or logging. They seek to make profit by financing other socially responsible businesses that have a culture of giving back. Small banks also pay their employees fair wages and treat their customers with respect. Personal relationships are the lifeline of small banks, and they work hard to maintain trust with their employees and customers.
More of your money stays in local circulation
Unlike large banks that may take deposits from one area to make loans in another, small banks distribute loans in the same communities where their depositors live and work. It creates an intimate community where members help finance local businesses and organizations using their own wealth. The Independent Community Bankers of America® (ICBA) estimates that more than 60% of small business loans in America are made by small banks. Wealth that’s kept locally spurs economic development within neighborhoods that need it most. Small banks usually have giving back initiatives that fund scholarships or education programs through local colleges and museums.
Things to look for when choosing a small bank
If you’re looking to switch to a small bank, there are three key requirements you should look for.
Commitment to do no harm
First, the small bank you’re looking to move to should have a commitment to not harm the environment or humans. The bank should have a clearly written policy on its website or contract showing that it does not invest in harmful industries such as fossil fuels, private prisons, logging, and/or large scale agriculture. Too often, traditional banks promise not to invest in these destructive industries but do so secretly. Make sure that the small bank you want to use commits to its ‘do no harm’ policy in writing and in its investments, just like Aspiration does on our home page.
Socially responsible designations
Ethical small banks should also be certified by any or all of the following certifications and associations: B Corporation (B-Corp), Global Alliance for Banking on Values (GABV), and Community Development Financial Institutions fund (CDFI). These designations make sure that the small bank is legally accountable to ethical regulations and sustainable development criteria. Any bank with these certifications and associations can be trusted to have socially responsible, transparent business transactions.
High APY (Annual Percentage Yield)
While ethics and social responsibility are both important, the small bank you’re interested in should also offer good financial returns on your deposits. Small banks usually offer up to 1.00% in APY on savings deposits, much higher than the 0.01% offered by big banks. Some small banks even allow their customers to choose their own monthly account maintenance fees, which is great if you want to try out their financial services first and see if they meet your expectations.
Try Aspiration – A small neobank for the future
Aspiration is one of America’s most socially responsible financial institutions. Since 2013, we have helped over 1 million customers save their money in environmentally-friendly ways, whether it’s by offsetting the carbon emissions for every gallon of gas they purchase or investing their money in sustainable businesses.
We offer up to 1.00% APY on your savings and donate our earnings to community development programs through our ‘Dimes Worth of Difference’ commitment.
Try Aspiration today to help build a better planet for the future.