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hi i'm catherine klein i'm vice dean for social impact at Wharton and I'm
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delighted to speak today with Kat Taylor who is the co-founder and CEO of beneficial State Bank beneficial State
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Bank is a triple bottom-line business focused on enhancing the prosperity economic sustainability and
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environmental sustainability of low-income communities so Kat thanks so much for being with us thank you this is
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a tremendous opportunity for us thank you I'm delighted to speak with you so
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let's start with a bank so why a bank so others with your level of professional
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achievement your level of financial achievements with success would and your passion for social justice for
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environmental change I think would say alright let's start a charitable foundation you said let's start a bank
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yeah I think yeah so often people don't even want to talk about banking because
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it's boring and complex and has some negative affiliations but banks nonetheless are extremely important in
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the way not only the economy works but in in what we drive in terms of societal outcomes the way we think about banking
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is that it is in a way the original and most powerful form of crowdfunding not that a specific deposit funds a specific
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loan but all deposits fund a lending practice and they do it with enormous prerogatives granted by us the public
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starting with FDIC insurance that allows banks to gather deposits at very low cost because they're insured risk free
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up to one hundred two hundred fifty thousand dollars also we're a leveraged business model banks enjoy leverage of
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at least ten to one so we have sort of exponential impact we recycle the capital it goes out and loans and comes
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back to us in large part so we can loan it again so the impact is accumulates over time and it's an extremely
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disciplined business model we have 13 exams a year and three separate regulators so we're constantly
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monitoring and understanding what that capital is doing banking is super important and we've underestimated how
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much it drives in society and in our view under expected of it we should ask more of our banks they drive
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so much important outcomes of importance to us so we did look at other models before starting the Bank venture
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philanthropy of traditional private foundation etc but we kept coming back to the Bank model because of its
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influence and its centrality to most people in their lives it's probably likely where a lot of people got their
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mortgage where they transact their business used to be a pillar of the community in communities it's less that
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now but it can be a really important part of the whole ecosystem in which the families and individuals and communities
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we care most about live and and for those who are not familiar with beneficial State Bank give us a picture
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of this Bank what's different it's not it's not Bank of America yeah you know
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what what is it what should we how do we visualize this how do we understand its
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scope and size sure so we started in 2007 some might have considered that an inauspicious time to become a bank but
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actually by the luck of the timing of our birth we made it through the great recession that landed in 2008 because we
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hadn't lent much money out yet so we didn't have sick assets because we honestly didn't have many assets at all
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other than cash and we got enormous insights looking at that Maelstrom what caused it what the repercussions were
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how it amplified over time at this point we've grown to be 800 million in assets
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that sounds like a big number to me but it's actually quite tiny in the banking
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landscape the biggest banks in the world are now well over 2 trillion in assets that's many many zeros away but actually
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our size is now getting to be an asset for us in terms of coverage we have 18 offices 225 employees in the three West
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Coast state so we're starting to get the geographic info we desire we're not
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attempting to be a National Bank in in large part because our model depends on accountability and that requires
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responsiveness but we're getting to a scale where we can have influence on the banking system and we also are
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getting a product set that more fully answers what people could and should expect from a bank so we're now a
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consumer lender as well as a commercial lender offering auto loans and credit cards but also scaled finance for social
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enterprise nonprofits etc so the difference in the bank our design features that we intentionally laid in
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to make sure that our bank model would be in alignment with the public interest and the values of our stakeholders first
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off we define our stakeholders much more broadly much more like a B corporation like we are they include not only our
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customers borrowers and trans actors of course not only our equity shareholders but also our communities the environment
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and the public at large so in order to have true alignment with those stakeholders the first thing we change
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was the ownership structure of the bank so 100% of the economic rights of beneficial State Bank are held and owned
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by beneficial State Foundation which is a public charity public charities are governed permanently in the public
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interest they can never be controlled by a private individual and the bylaws of that foundation require it when it
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receives profit from the bank through the dividend process to reinvest those profits back into the communities that
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we serve which are primarily low income and the environment upon which we all depend the second design feature has to
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do with that lending practice if we are crowdfunding on behalf of our stakeholders then we should crack that
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we should lend with respect to their values so preponderantly we put our loan capital meaning we count the loan
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dollars and at least 75% should be in the hands of change makers who are either providing something we
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desperately need like affordable housing renewable energy sustainable food or their unique ownership structures like
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ours as well B corporations worker cooperatives or they're simply communities and actors who've been
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deprived of capital in the past and have a very valid point of view to bring into
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the main econo so that would be small business at large women and minority-owned businesses
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low-income communities nonprofits etc that's design feature number two design
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feature number three is radical transparency so we not only report out on what our loans are doing who's
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holding them and that warrant that they aren't undermining our triple bottom
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line that you described but we're also taking affirmative commitments about how
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we act as a corporation we are B Corporation v is in the satellite the community we are also a community
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development financial institution which is a Treasury designation that's hard to
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get hard to keep we have a living wage policy we pay a hundred and fifty percent of living wage and all markets
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fully benefited we don't finance fossil fuels we measure our greenhouse gas and
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water landfill footprint drive it down every year put on an FTE basis we design the small business bill of rights etc
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etc you can see right what we're trying to do is hold ourselves accountable to
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third party auditable standards so that we act and fly right yeah and the purpose of that is double because our
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mission is to change the banking system for good and we're not going to do that
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as one bank we're going to do that and a theory of change it involves migrating
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over time deposit equity and human capital into these kinds of warranties into banks that act like us they will
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always be bigger than us but they can act like us and they might choose to as their growth strategy where the big
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banks can't change very readily the mid-size banks need always new strategies for growth and we think we're
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giving them sort of a playbook on that fascinating so a couple of questions and points to underscore one is are your are
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your branches based only in low-income communities how do you think about you know where they're located and where
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you'd want to expand sure well the whole branch model is somewhat up to inquiry
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at the moment because of the arrival of technology to banking like every other industry we feel like we still need to
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have a physical presence and we're possible we choose for that to be in in communities so preponderance of our
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branches are in low-income markets some exceptions just by inaccurate anachronistic choices of the past we've
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bought for banks and so sometimes we inherited their branch decision but for instance the two banks that we just
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merged with in June gave us seven new branches five in the Central Valley of California very important area for us
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for us to serve one in East LA one in North Hollywood and they are very much aligned with low-income community
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service the whole question of branch banking is one of not only what are the what's the user experience that people
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are looking for it's also a chance for us to improve the ecological footprint
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of banking I sometimes think it would be nice if we converted all those corner bank branches of old that are not so
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necessary anymore into low-income housing the re-insert needed affordability into the urban core but
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that might be a pipe dream at this point at this point at this point I wouldn't
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put it past you so you've been in business nearly 10 years what do you think the is even reflect back on those
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10 years what important lessons learned I mean when you launched this Bank with these bold ambitions and now you've
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you're here and alive and well 10 years later key lessons key points of a transition so I think in the beginning
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we had to begin and we had to experience what it was like to be a bank what the opportunities and challenges are in the
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banking landscape and understand them deeply and and I think we've probably thought we were going to change the
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banking system in an incremental fashion by just becoming kind of a bank that better serves the public interest I
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think now we've grown to realize that we need to redefine the category writ large
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that we should expect more from our banks we should understand the enormous public prerogatives publicly derived
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prerogatives that they have and how impactful they are on societal comes and make the banking system work
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for us there's 12 trillion dollars of deposits in the American economy alone
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those belong to us so if we make choices and align with our own values we might get better outcomes out of the banking
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system and at this point we really need to because it overwhelms a lot of other industries ability to address those
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large societal problems and it we dacent have it driving them the problems that is so if you look at philanthropic
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capital for instance I was told recently that all the philanthropic capital in the United States put together would
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fund about 15 months of the public school budget Wow yeah so if we can get business models fundamentally right in
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the first place especially banking so that they don't cause a lot of negative
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externalities or problems for us then we don't have to spend so much time and
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resource cleaning things up that's the main insight I think I mean there are
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many we've made our share of missteps along the way acquisition and integration is tricky culture is
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massively important a lot of young companies ignore culture until they have an accidental one these are things the
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blocking and tackling of every single day that we have to keep working on and we still need to grow half of
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Californians lives south of Ventura Boulevard and we're not really present there so we have more wood to chop yeah
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yeah and so you have this larger mission of not only serving your customers and communities but transforming the banking
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system this huge vision how do you get there yeah so we were just revisiting some proof points that were derived from
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a rebranding process we went through to become beneficial State Bank you can imagine on the way buying for banks and
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growing the initial one and moving into three state markets we had to change our
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name a fair bit along the way but beneficial State is a name that's meant to suggest the beneficial State we
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should all be in as a result of our banking system being an alignment with our values so the proof points that we
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call out and use to identify if we're getting closer to changing the banking
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system for good our number one making sure that we're deploying capital for its highest
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purpose which means actually helping our borrowers attain their highest purpose make sure that for instance B
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corporations who have a very explicit high purpose instilled in their very DNA we need to help them be successful and
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grow that community so first basically power to the highest purpose second is to make sure that the banking system is
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generating healthy transactional services for people banking services that actually make them better off the
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day after them they were the day before not payday loan debt that is a debt trap
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not the overextension of products that no one wants or needs but banking services that literally allow someone to
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be healthy in their life the third is and it's based on our profit taking model is it reinforces
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this but we need the banking system to actually reinforce the communities that they serve and the earth upon which we
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all depend so the fact that we are putting profit back into those communities and the planet is an
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important proof point for us I will say we have not issued a dividend because young banks especially who are still
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acquiring are encouraged by the regulator's to retain all earnings for growth but the bank the strongest lever
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we have to achieve healthy communities and a healthy planet is the bank it's
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really the lending practice that does it so we would always preference lending over grant making nevertheless we did
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capitalize the beneficial State Foundation so that it can grant into our communities about five to ten percent of
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the equivalent of our profit every year which is much higher than other banks the last is that we need to be true
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advocates we need to be a voice for change it isn't enough to quietly labor on our own we have to join trade
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associations like the Global Alliance for banking on values and the community Developers Association to advocate with
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our regulators and stakeholders and the public for a better banking system and the best way we can do that is first and
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foremost to show that Bank aligned with those values that's resilient ly profitable is a viable
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alternative to some of the other models in the system but we also speak with as louder voices we possibly can
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yeah all right so so part of it is being a role model doing your business well being a role model and sharing the story
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and getting out an alternative model of banking I want to go to the your B certification as a as a certified B
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Corporation so as you know well know companies that are be certified go through this elaborate vetting process
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and assessment around a set of practices the B lab assessment measures your environmental practices your practices
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for your workers your customers your community and your governance and and as you said I think what you said you're
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the fifth highest scoring but so a quite an accomplishment I'd love to to hear more about your
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practices specifically with regard to workers so some years ago as you know I studied a lot of attention pointing out
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that nearly a third of all bank tellers in the United States qualified for and receive some form of public assistance
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so people working in the banks on food stamps on on Medicaid and so on how do you pay your your workers how do you try
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to not be those banks right so we call that part of the train of misery actually that one-third of bank tellers
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and it shocks people because the banks are among the most profitable corporations in the world so why they
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would not pay their workers enough to avoid needing public assistance is a quandary in our case we proactively make
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a an affirmative commitment to them that we will pay a hundred and fifty percent
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of living wage in all markets fully benefited so we don't tolerate piecemeal
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part-time work that disqualifies people from benefits we use the MIT living wage
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calculator to make sure that we have a credible source of what that living wage should be in our markets we 150 percent
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is what is suggested for an one adult and one dependent so we're trying to make sure
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that the wage contributes to the household income adequately we'd love to increase that amount and we will strive
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to overtime but it represents to us the minimum that we would ever pay anyone and it's always above $15 an hour
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we also adjust for other salaried and wage earners to make sure there's rationale across the whole group of
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people um we're big advocates for fight for fifteen national standard minimum
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wage no exemptions but we do also worry a lot about other non salary non-wage conditions and benefits for our
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employees so we try to make sure that starting with our culture that we're creating a
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culture that's healthy and respectful for our fellow colleagues we have a run
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a lot of employee driven committees on wellness on the green team etc we recruit them to design their own sort of
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work life if you will we work with a benefits provider that's fashion forward
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and thinking about new things we can do we also are just labeled so that's a
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food style label that it tends to pick as 22 areas of social justice practice in a corporate setting is looking at
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procurement policies labor practices ethnic and gender diversity we choose diversity if you don't choose diverse
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you don't get it so if you wait for it to happen you will be subject to legacy
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dynamics in our view so we affirmative ly go out and choose diversity everywhere we can try to keep very high
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proportions of diversity throughout the organization and work with other vendor partners like labor X is a platform we
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go to often to seek non-traditional workers so that we have a better pipeline and I'm curious how others respond to
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your practices others in other banking institutions and the you know you're paying 150 percent of a living wage do
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they look at that and say well that's all very nice your small bank you have a
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social mission you know good for you we couldn't possibly yeah and what's the
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response if that's happening what's your response so being a small bank should
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actually make it harder for us to pay that because we don't have the same scale economies that the big banks do we
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don't have the bargaining power we don't have that concentration of power so it's
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a somewhat of a shamira to say we're too big to pay our employees fairly likely
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it's more capital market pressure we we also need to be profitable that is part
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of our business model and it is certainly a regulatory requirement we target a six to ten percent return on
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equity in a very stable way we feel that's enough to fuel our growth and be resilient but not so much that we're
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overcharging or underpaying somewhere because in our experience high returns from overcharging and under paying are
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not only not part of our mission but they're not sustainable over time and they set off other second-order effects
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and you see them yes I mean if people aren't making enough in their basic wage
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then you're gonna have a very strong sales culture if that's the only other
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place they can pick up some income right interesting so um you lead a triple bottom-line business as we've been
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discussing in what ways is leaving a triple bottom-line business more difficult and then leading a business
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that has a more singular focus and there are there ways in which is less difficult than building a business with
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a singular focus on profit yeah I am sort of a half glass fold gal but they so I think it's actually easier it is
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more complex because it's an optimization model not a maximization model but I don't have a categorical
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mind I really it's very hard for me to focus because everything is related to
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me so I an optimization model and I think it's more reflective of reality that in a
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sense if you put a maximization model into the world you're solving for one outcome that that isn't actually truly
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sustainable in the world that we know the I think it's it's interesting diversity and optimization are both
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perceived to be harder to manage more complex but they lead to better decision aim I think the studies are starting to
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show this that and can you give an example of what that might mean in practice optimization and diversity and
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how it might influence your decision-making mmm-hmm so diversity and decision making I think means that you
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are inviting if not recruiting more points of view into the decisioning process you will in a sense have less
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common ground at the outset but you will have a richer consideration of all the real factors that are influencing the
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best decision to make optimization I think is harder it's a harder process to
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manage because you can't sort of take a linear approach I'm not explaining as
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well but I think there's just more things going on at once that you have to keep track of and think of what the
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interdependencies are so you're really trying to balance multiple goals or pursue multiple goals and find the way
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that those are synergistic yes and mutually interdependent but I think what we've done for a couple hundred years
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now is insist on a maximization model that isn't eliminating those second-order and Inter dependency
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effects it's just ignoring them so we're opening the aperture of the camera lens
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and looking at everything that's going on I keep a list called these things also happened because just because you
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aren't noticing them doesn't mean they aren't happening yeah yeah so a final
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question then about you as a as a leader so in this space and what your bank is trying to do given that it's a triple
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bottom-line business you are managing lots of different goals as we've described connecting with lots of
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different constituencies what do you think makes you particularly successful in doing that so that if somebody else
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is aspiring to this and thinking I don't know and do that are there you know is there
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is there something that allows you to achieve this so it begins with it's not
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me it's us and it is a so we believe that we do better together than apart that's sort of a basic philosophy of the
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bank and that means we also would we manage better when we listen to all the voices and when people have agency and
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accountability and authority so we're trying to delegate out decisioning not
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in a disorganized way but we're trying to get more heads into the process I often say let's put more in different
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people in charge let's get those new points of view let's get the diversity let's get that
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optimization minds in there and let's get as many as we can if if I think about the world when we you know we sort
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of been mown seven billion people because it seems like such a challenge but that's seven billion hidden geniuses
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and if we could find a way in an organized way to harness all that mental energy and imagination and vision I
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think we'd actually make better choices and come up with better institutions and
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so that's what we're trying to do on a mini scale and that means a lot of
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emphasis on succession not that succession like if someone gets hit by a bus who's gonna take over them but we're
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really trying to focus on how do we help people develop their skills and opportunity set the the highest that
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they could possibly be so they can take a large leading role in the organization
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great fabulous thank you so much for being with us thank you very much for having us here and delving into banking
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thank you you