Corporate social responsibility. ESG (environment, social and governance) ratings. Make no mistake, corporate America has taken notice of changing consumer and investor expectations. And customers are no longer satisfied with companies that destroy the planet or exploit their employees and supply chain while remaining silent on social issues. Miscues on social issues have become a huge reputation risk for any company.
Increasingly seen as the cause – not the solution – of our society and economy’s problems, US banks have quickly pivoted in this new business and moral landscape. In response to the George Floyd tragedy and Black Lives Matter movement, the vast majority of these institutions have come out with eloquent statements of support and, in some cases, generous charitable donations or ambitious pledges to Do the Right Thing.
In June, Bank of America alone pledged to donate $1 billion to invest in communities of color, only to be outdone last week when JPMorgan Chase pledged $30 billion to address the racial wealth gap in the US.
These actions should be – and have been – lauded. But they also illustrate how banks continue to approach racial diversity and economic inequity as problems to be solved with charity – a cost – and in doing so, segregate and ghettoize the very people they’re trying to help. What’s sadly missing from our industry are the innovative business models to sustainably and scalably make capital available to a vast swath of US customers.
America is browning. Millennials (now in their 30s) and Gen Z are the most diverse generation in history, and according to Pew Research, value social responsibility and diversity far more than their parents. This is an existential moment for banking. The America emerging does not fit nicely into traditional retail banking norms.
Today, 47 percent of Black and brown families are underbanked compared to 19 percent of white families. This lack of access is not an economic reality, it’s a lack of customer relationships and product development. For example, the Foundation for Business Equity and The Runway Project provide promising models for bridging social capital and traditional banking.
Assumptions around the viability of customers reflect one of most pervasive human biases: confirmation bias. Disrupting those assumptions, redefining risk and refocusing innovation can help banks create products and business models that allow them to profitably serve more diverse communities. Banks can focus their diversity efforts inward, ensuring diversity from the branches to the board, which will help bankers build authentic relationships to ensure they have access to these diverse bankable communities. Deeper relationships will mitigate risk by ensuring banks know their customers fully.
Banking all people with dignity is more than just the right thing to do, it is good business. Customers are asking for a new banking model, and it is time banks respond. Banks have a critical role to play in addressing systemic racism and inequity in our society. We must put to bed the idea that diversity is charity. It is a myth that does not serve the bottom line.
Malia Lazu is a professor at the MIT Sloan School of Management and the former Eastern Massachusetts market president and chief experience and culture officer at Berkshire Bank.