“It’s a pretty audacious ‘shoot the moon’ challenge to change the banking system for good. But nothing less will suffice.”
AT A GLANCE
Team Members: 71 (65 at the bank and 6 at the foundation)
• $630 million in assets
• 507 borrowers
B Corp Score: 165 (the second-highest ever in the US)
If you think banking is all boring paperwork and rich guys in fancy suits out to make themselves even richer — well, you’re partly right. But not when Kat Taylor gets involved. Taylor and her husband, Tom Steyer, were already billionaires when they founded Beneficial State Bank (BSB) in 2007, but their goal wasn’t to make more money for themselves. Instead, they chose banking as one of three areas to focus their time and energy on in order to change the world for the better. (The other two areas are climate change and agriculture.) Rather than donating money to existing organizations, they created their own functioning business in order to coax change from within the industry.
Now Taylor serves as BSB’s co-CEO, working long hours, but for zero pay. We spoke to her on a rare day of rest about why she chose banking, what makes BSB different, and what critical lessons she has learned along the way.
You clearly have a deep-seated sense of responsibility. Has that always been a part of you? What are the earliest roots of the work that is most central to you now?
Kat Taylor: Tom and I were born in 1957 and 1958; think of “Leave it to Beaver” and Donna Reed. You were supposed to be a good kid, do well in school, achieve at everything, get a good job, raise a nice family, and somewhere at the end of your life you would do some philanthropy.
But our two mothers disrupted that paradigm for us. Tom’s mother ran school reading programs in Harlem. She was a total rabble-rouser. She rode a bicycle around; she railed against air pollution. And in 1955, my mother decided that American children weren’t being taught enough environmental education and that’s why we were crashing the planet. She ended up being part of a team that built one of the earliest museums where you could learn about the planetary systems and get to know our flora and fauna better. So we had very strong influence from our mothers that you’d better not wait until you’re 60 to write a few checks or anything like that.
Also, because I’m a child of TV, my childhood is dotted with spectacular images. Some people remember the moon shot; I remember all of the funerals — Martin Luther King, John F. Kennedy, Bobby Kennedy, Malcolm X. I’m not particularly well set-up to be a civil rights leader, being a white woman from the West Coast, but I just could never believe I come from a country founded in slavery and native genocide and less-than-personhood for at least half the people.
So, for a long time I’ve been working in economic justice, but thinking of it more as, “Okay, I’ve got to get myself skilled up to do this.” I went through a bank training program because banking is a very big obstacle to economic justice for minority communities. If you want to change an industry and you don’t attend to banking, you’re not going to get there. Banking is easily three or four times larger than any other industry. We chose a particular focus on banking and “good money” because that’s what we could get our hands around and understand.
What are the issues with the banking industry that inspired you to start BSB?
KT: We consider banking to be the original and most powerful form of crowdfunding. We all pool our deposits so that we can finance the communities and world in which we want to live, and also borrow it back from time to time when we have needs — like home, college, and even retirement — if we haven’t had the privilege of saving.
Low-cost capital [e.g., from depositors] is very powerful to begin with. It enables those who have access [to it] to offer goods and services at a lower rate, undercutting competition because their cost of goods includes the price of their finance. And then when you put that low-cost capital through a banking model, you can collect $9 of deposits for every $1 of equity and lend out $10, or 10-to-1 leverage. That leverage is literally exponential. It’s very powerful.
We certainly don’t want to deploy that money in ways that are deleterious to us. But it has been deployed that way because it got anonymized. As soon as the banking system got big enough and the deposits all went into this big black box, then the bankers on the other side felt entitled to lend it to anything that would maximize return. It was aided and abetted by a thesis in capital markets and corporate responsibility that the only responsibility of the corporation was to maximize shareholder profit.
We have to pull the system back to us and acknowledge that the most important stakeholders are the depositors who put their money there in the first place. It is their money; and the customers’, including borrowers and transactors who are helping the bank make good on its promise to use those funds well; and the communities’ and the planet’s in which all those activities take place. Because if you lend to fossil fuels, you are making society pick up that carbon bill.
I believe we can take the banking system back and make it govern in the public interest, a system of distributed power where the depositors are the ones driving the outcomes by their choice. We wouldn’t want depositors saying, “Lend to this company,” or, “Lend to that nonprofit,” but they should be able to look at our quarterly and annual track records and say, “Yep, I’m comfortable with that lending practice, so I’m staying here,” or, “Nope! I don’t want any part of that, so I’m getting out.”
Also, one-third of bank tellers are on some form of public assistance, which means that, somehow, we can make shareholders very, very wealthy but we can’t pay our tellers enough for them not to have to go back to the state and the federal government for any of the welfare programs.
Being a follower of the civil rights movement and trying to be of help in any way I could, I did follow the great socially responsible banks, the pioneering ones, like South Shore Bank [later ShoreBank] in Chicago, Grameen Bank in Bangladesh, and Self-Help Credit Union in North Carolina. To this day, I still so admire them. Those bank models were really important to us in starting the bank, but they also were, in society’s mind, still stuck in this category of, “Isn’t that nice? There are the big banks and then there are these community banks to serve the underserved communities.” And, to me, that was a false parsing of what was going on. Essentially, the best banking services for anyone are the best banking services for everyone.
These community banks are heroes in my mind, but we need deep systems reforms. Nothing else will suffice, because these community banks cannot overcome the damage of a banking system that’s not working in the public interest. They can blunt the damage, but they can’t overcome it.
Tell us about how BSB works and how it’s different.
KT: Impact is important to us, and we get there with three design features of the bank. First is our ownership model. One hundred percent of the economic rights belong to Beneficial State Foundation, which is a public charity, permanently governed in the public interest. The board has to be appointed by three large public charities that represent access to low-cost higher education, access to safe and affordable housing, and community development. There are no private shareholders in the mix, so there’s no one forcing us to meet short-term quarterly earnings benchmarks — we have enough pressure to be profitable from our regulators and our own model. At the end of the day, profits, if and when distributed, can only go back into the low-income communities that we serve or the environment upon which we depend. So it’s virtuous profit-taking to match the crowdfunding at the front end of the model.
The second design feature is our lending practice. If we’re going to be crowdfunding and responsible to our most important stakeholders, we’d better know and be able to tell them where those loans are going. At least 75 percent of our loan dollars have to be in the hands of the new economy. That means those loans are funding affordable housing, renewable energy, or sustainable food. They’re also funding companies organized like B Corporations or worker cooperatives, and they’re going to communities and actors previously starved of capital, like women- and minority-owned businesses, low-income communities, small businesses in general, nonprofits, and the social sector. If it were less than 75 percent, we wouldn’t be moving to the new economy. We’d not only be standing in the old one but reinforcing it. And the other 25 percent can’t be working against our mission — we have rigorous conversations around that.
The third design feature is radical transparency. We publish everything we possibly can about how we show up as a corporation: our B Corp score — we’re the second-highest in the United States now; our greenhouse gas, landfill, and water footprint and what we’re doing about it; our labor practices — we pay 150 percent of living wage in all markets, fully benefitted. We take commitments and certifications all over the place. We’re trying to sign the Small Business Bill of Rights, etc.
The transparency is really important so that we know that we are being true to our stakeholders. But it’s also important because our real theory of change is not that we replace the banking system but that we influence it in a way that it substantively changes. We can’t just hold up the bright shiny object of our lending practice; you can find that done bigger, better, faster, stronger, in any of the big banks. But they don’t show you the train of misery behind it: the one-third of tellers paid beneath the poverty line; the lending into the housing bubble and then the student debt bubble and now the auto loan bubble; the fossil fuel engagement; the $235 billion of fines, etc., etc. That’s what has to stop. We want them to keep doing that great lending, but they’ve got to stop the train of misery. And the only way that we can show the world that that’s happening is sort of in the negative. We take all these commitments and pledges that they just plain can’t.
We know we have to be a good bank to our customers and our communities and the planet. But we’ve got to change the banking system for good. We’re not going to replace it. We’re going to try to influence it by a smart regional model that inspires the even bigger regional banks to mimic some of our — not just behaviors, but commitments and warranties, and win market share from the biggest banks that way.
What traction have you achieved so far?
KT: We started from zero. When this merger [with Finance and Thrift at Pan American] goes through, we’ll be about $800 million in assets. It seems like a huge number to us. It is getting to the point where our scale is better at managing bank economics. There’s high overhead in banking because of regulatory compliance, the core systems that you need to run; basically the electronic railway for all these transactions and the technology to report and monitor and everything else. That $800 million in assets is getting us closer to where we can do that efficiently. It’s still quite small compared to the $2 trillion that Bank of America has, but I believe it is already getting some notice, like, “Wow! There’s a different way to do banking.”
We’re attracting more deposits, which is important. We have people interested in providing outside equity under our unique ownership model, which is 100 percent owned in the public interest. We have increasing human capital coming to us through summer internship programs or just more applicants for open positions. We have been profitable for several years. We now pay taxes. We’re hitting our return on equity, which is 5 to 10 percent; that’s our goal. Below that, we don’t think we’re robustly sustainable, and above that we think we’re charging too much somewhere because we should be returning more of that profit to our customers.
We are way ahead of plan in loan growth this year. We’ve had 20 percent loan growth, approximately, in each of the last four years, which is an industry standout. That’s not by borrowers sacrificing. It’s increasingly that the alignment of the bank is the thing that wins the deal once we’re competitive on price and term.
On a personal note, we, as a young company, applied for a line of credit from BSB and understandably were denied because of various risk factors. Is it possible for banks to redefine risks to accommodate for impact, or is it just the way that it has to be in the banking institution?
KT: In all this decision-making, there’s what we believe, and there’s what we can convince the regulators to believe. They hold our fate in their hands. If you approve a lot of credit applications that you believe are very sound but the regulators see as high-risk, they will have you risk-rate them with a high number, which mandates that you reserve a higher amount of capital against those loans in case they don’t go well, which inherently increases the cost of delivering any of the banking services. It may be more than you wanted to know, but that’s a real constraint on us. We have to try to underwrite to not only our satisfaction but the regulators’ satisfaction so we don’t overburden the bank’s cost structure, which isn’t good for any of the bank customers.
But we are trying ways to solve for impact, because we believe that high-impact borrowers should get a benefit. It could come as “we’re more inclined to approve you,” but that is not going to fly with the regulators, because they’re simply looking at ability to repay. So one way we’ve translated impact into ability to repay is we have recruited, with the borrower’s permission and help, a funder of the borrower to stand in as a last-case guarantor. Particularly for a startup business that has no track record and cash flow yet, it allows us to look beyond them to their backer — their foundation that supported them or an individual who supported them — and take backing from that.
But it would be an interesting case study. We’ve done that; we’ve written some of these up to say, “Banks need to do a much better job of their basic responsibility, but they also can do more than they’re doing right now.”
“Work hard, but not at something that creates the world’s problems. Because however much money you earn and give back in the end, it is not as powerful as preventing the harms in the first place.”
What’s the largest challenge that you’re facing as a banking institution?
KT: Getting really, really good metrics — high-quality, third-party auditable metrics that move beyond input. Which means moving from “This is how many loans we made” as an input to “This is what those loans funded” as an outcome; and even beyond that to “And because we funded this many renewable kilowatts, this community-choice solar neighborhood was able to accelerate.” How do we know we’re getting quickly to a new economy? Metrics and validation are very, very important for us.
And — I think of this as a fun challenge — wooing, recruiting, or courting human capital to this bank model. Bringing our training and development inside has been hard but almost necessary, because if we rely on the big banks to train people and then we hire them, a lot of what they train inculcates something that’s hard to un-train: “What we want to do in the branches is earn a lot of fees by all these practices that are actually not healthy for the individual customer,” and so on.
Running a bank, meeting our regulatory burden — no one’s complaining about that. That’s just what we have to do, and we look forward to doing it well. The big banks rail about the regulations, but we don’t want the regulations going away any time soon. Fair lending is there because there was so much unfair lending for so long. It’s deeply ingrained. I think it’s a pretty audacious “shoot the moon” challenge to change the banking system for good. But nothing less will suffice, so we just have to be down for that, and keep chipping away at it if we can.
We know that you have a long history in the philanthropic world, and it seems like you’ve shifted towards capitalism in recent years. Can you talk about that decision and how you think for-profit models address problems differently than nonprofit models in philanthropy?
KT: I actually love the whole spectrum, even the hybrids, and I think they all have their place. I think the reason we’ve moved to social enterprise is that it’s a little bit akin to or metaphorical of our own life, where in the beginning, we thought, “Work hard, my boy. Do well in your chosen field. Accumulate resources and then give a high percentage of those resources back to solving the world’s problems.” Now we’re like, “Work hard, but not at something that creates the world’s problems. Because however much money you earn and give back in the end, it is not as powerful as preventing the harms in the first place.”
Corporations that feel all they need to do is maximize shareholder profit, that is a totally backward view that has to leave, and the way it will leave is by competitive companies. The best outcomes in society will come from well-governed, diverse, broadly responsible companies — meaning, “I don’t just obey the laws, I observe a regimen like the B Corp Assessment,” so that we literally are changing the fundamental business model to not create all the harm in the first place, to minimize harm that might be hard to either identify or predict. We should be moving towards a “Benefit to All, Harm to None” model as quickly as we can.
I know that sounds naïve, but think about organic agriculture. I mean, yes, the wolf eats the rabbit, the rabbit eats the grass; you could call that destruction, I suppose, but that isn’t in my camp. What destruction is, to me, is tilling up half of the Great Plains, killing all the myriad microorganisms under the ground, and creating a system that’s going to, by definition, spew a carbon externality into the atmosphere that we can’t afford.
I think we are going to have to hold to these really high ideals. We are shooting for “Benefit to All, Harm to None” in everything we do. That’s going to prevent a lot of things and make the treatment of symptoms a lot less expensive, but that means inherently changing our fundamental institutions, government, and business.
How do you see the role of business evolving over the coming decades?
KT: I think it’s going to get a little mushier on that spectrum of nonprofit versus for-profit. I think we still could have a lot of really good nonprofits in our midst with a business mindset. And I hope, on the other end of the spectrum, that we create a culture in America that says, “There isn’t anybody who just gets to be a business and everything else be damned,” that all businesses have corporate responsibility to their place and people and resources and everything else. I just don’t believe there’s something good to be had from pure profit.
It might be safe for us to assume that you probably don’t have to work. Why do you work so hard, and what is your personal purpose?
KT: Yes, not only do I not have to work, but because of the way that the bank’s set up, I can work but I can’t get paid by any of the organizations that we started — which is fine.
The reason I work is that I actually feel very connected to this world, like the world is my community. This is our planet, but we’re here on no greater stature than any of the other creatures who are here. I am inspired by challenges, but even more by solution sets. It’s really fun to try to be creative about these things. And, I’m kind of a shy person. It’s easier for me to relate to people in work settings.
You must have a lot of people asking things of you and trying to get your attention. What gets you excited? How do you decide what gets your attention?
KT: I’m 57. People my age kind of pooh-pooh younger people, network effects, technology, devices, but I get very excited about how next-gen solutions and next-gen actors are engaging. I don’t think any brave worlds have ever been created by hand-wringing. I think they get created by vision and inclusion and remarkable constituencies coming together. So I always try to favor those things.
What is the best piece of advice that you would give to the younger generations?
KT: Honestly, I almost feel like I could get much more advice from them. I think they’re brilliant. They seem very, very entrepreneurial and innovative to me. Maybe I’m seeing a certain cross-section of people. I feel like they have a lot of opportunity and so that allows them to feel that way.
But I guess I’d say that many heads are better than one. Working together is not only enriching, but you yield a better solution set. I know that there are all these heroes out there like Elon Musk and Mark Zuckerberg, but we’re moving beyond single-hero history to movement history. Go for flat organizations.
What is giving you hope for the future?
KT: Young people, and scientific and knowledge gains — the computing power, the bigger, cleaner datasets, incredible technology advances, incredible medical advances. All of that could be used for terrible things but for the fact that I love these young people. I think they’ve got a lot on the ball. I don’t think we’re necessarily hearing from them in our stupid, old, adult systems. By the end of my mother-in-law’s life, she was so tired of talking to old people that she would just invite young people over. You’d go to her house for dinner and there’d be her and her husband and like forty 22-year-olds. That might be me someday.$
BANKING BY THE NUMBERS
Regulatory fines paid by the US’s largest banks in the last seven years
Number of families who lost their homes to foreclosure in the 2008 economic downturn
16%, 53%, and 66%
Average household wealth reduction among Whites, African-Americans, and Latinos, respectively, in the 2008 downturn
Fraction of bank tellers who rely on some kind of public support
Bank-provided financing to coal in the last 10 years, leading to 140 million tons of hazardous waste in the US
Source: Beneficial State Bank
BENEFICIAL STATE BANK’S IMPACT
$285.7 MILLION loans dedicated to mission-aligned entities in 2015
81% total loan dollars given to mission-aligned borrowers and users in 2014
$19 MILLION loans committed to affordable housing projects from 2012–2014 (752 affordable housing units supported)
$62.1 MILLION loans made to small businesses from 2012–2015
$65.7 MILLION loans committed to nonprofits from 2012–2015
$32.1 MILLION loans committed to renewable energy projects from 2012–2015
$56.9MILLION loans committed to low-to-moderate income communities from 2012–2014
KAT TAYLOR AND TOM STEYER’S THEORY OF CHANGE
Kat and Tom focus on three key strategic industries that they view as critical to effecting large-scale change from a systems perspective: finance, climate, and agriculture. In addition to Beneficial State Bank, which tackles finance, the couple has these other initiatives:
In 2013, Tom and Kat founded NextGen Climate, a San Francisco-based environmental advocacy organization committed to supporting candidates at all levels of government who will take action on climate change. In April 2016, the organization announced a $25 million campaign to encourage registration of Millennial voters in seven key states: Colorado, Illinois, Iowa, Nevada, New Hampshire, Ohio, and Pennsylvania.
Kat and Tom ventured into the world of sustainable agriculture with the purchase of a nearly 2,000-acre ranch in Pescadero, California. TomKat Ranch was intended to be a model conservation project, but has evolved into a demonstration site for sustainable farming practices, providing best practices for other farmers on everything from rotational grazing to grass-fed beef production.
TAYLOR’S TOP 3 PIECES OF ADVICE FOR MISSION-DRIVEN ENTREPRENEURS
1 Measure for accountability.
I mean, really, honestly, measure as best you can — and not just the outputs, not just the outcomes, but what you say you’re changing: are you getting somewhere on it?
2 Create a great culture.
That will attract wonderful human beings and keep them happy and fulfilled in what they’re doing.
3 Create non-hierarchical organizations.
Or, to put it in the positive, put different and more people in charge and really distribute power as much as you can.