Dr. Marta Ra is a sustainability expert. She cofounded the international network Women in Sustainable Finance (WISF).
A modern-day David versus Goliath battle is currently taking place in the financial industry. A plethora of fintechs, including next-generation banks, are emerging around the world. These agile new players are taking on traditional banks, disrupting the industry dynamics. They challenge the rules of the game by being fully digital and by empowering their clients to make a positive impact with the money deposited in their accounts.
Turbulence Shows Vulnerability Of Traditional Banks
The recent turbulence witnessed in the banking sector points to systemic risks. In early March, the failure of three major crypto-related U.S. banks within four days took financial markets by surprise. Concern about the financial health of the global banking sector spread like wildfire. A few days later, First Republic Bank, the 14th largest U.S. commercial bank, had to be bailed out.
The loss of trust in the conventional bank systems did not stop at the U.S. borders. On March 20, 2023, the unthinkable happened: Switzerland’s second largest bank, Credit Suisse, was forced to merge with its archrival UBS to avoid collapse. This turmoil has reminded many bank clients of the vulnerability of the traditional banking sector, and they wonder whether the current bank system is obsolete. An increasing number of people are turning to next-generation banks.
Digital Banking Replaces Physical Bank Branches
Clients are drawn to these new players for several reasons, notably their offering of fully digital banking services. Until recently, people used to say that the proximity to their bank branch was the most important reason for choosing a bank. Today, consumers are more willing to bank without human interaction, a trend that accelerated during the pandemic. Bank clients now expect flawless and secure mobile banking to be available around the clock, no matter where they are.
Clear Focus On Sustainability Appeals To Consumers
Sustainability has increasingly become another top priority for bank customers. The demand for sustainable funds has soared over the past few years. The size of the global sustainable finance market grew by 80% between 2019 and 2020 to $3.2 trillion, buoyed by an increased client awareness. The Global Sustainable Investment Alliance estimates that the value of sustainable assets under management exceeded $35 trillion in 2020, representing a third of total professionally managed assets.
There are many different sustainable investment styles available, and next-generation banks are tapping on this fast-growing market segment. For example, Good Money, a California-based bank, excludes certain industries from its investments in order to avoid funding fossil fuels, private prisons, defense contractors, mining or the destruction of rainforests.
Why Sustainable Investing Matters
But many may wonder, “Does my money and investments, which are a drop in the ocean, really matter?” They do. When we think about our environmental footprint, we tend to only consider emissions related to transport, heating, waste and food. But the indirect carbon footprint caused by the money deposited in our bank accounts should not be overlooked nor underestimated. The money deposited at traditional banks is often invested in the oil and gas industry and other polluting sectors, making it a large source of CO2 emissions.
Helios, a French bank, is another example of taking a more sustainable approach. Nearly 65,000 tons of CO2 emissions have been avoided since 2021 thanks to the bank’s investments in a biotech company that produces super-enzymes capable of breaking down PET plastics and in the upgrading of a wastewater treatment that now produces green energy from the methanization of sludge, to name just two examples. Tred, located in the U.K., is another sustainability-focused next-generation bank. The “green” debit card offered makes their clients fully aware of their emissions, as it both tracks and estimates the carbon footprint associated with every transaction made with it.
SDG-Specific Investment
The United Nations Development Programme states that $3.9 trillion in funding is required annually to achieve the 17 UN Development Goals (SDGs). Governments only contribute around one-third of this amount, so the resulting financing gap of $2.5 trillion needs to come from the private sector. I believe this is where next-generation financial solutions can focus their attention and offer SDG-themed investments to achieve these development goals.
Sustainability Banks Are Here To Stay
As the above examples show, sustainability-focused banks are taking on traditional banks. These agile players not only tap into the demand for easy-to-use digital banking that is accessible at any time of the day; they also provide innovative sustainable investment options requested by clients. Sustainability banks are here to stay and are likely to take market share from the traditional insitutions.
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