Impact banking: Vancity – delivering on the triple bottom line
Vancity is the largest credit union in Canada, but by 2007 it was acting like a commercial bank – yet now, after steering every part of the business back to being mission-based, it is delivering record profits, lower risk, new membership and improved employee engagement. Has it shown that the ‘triple bottom line’ of people-planet-profit can be achieved?
If you have visited Vancouver, cycled around Stanley Park, taken a water taxi to Granville Island, dined in Gastown and headed up to the mountains afterwards, you will likely have contemplated moving there, looked at house prices and swiftly concluded that you’ll actually be staying right where you are.
It is clean, green, diverse, modern and progressive, which naturally means the city outranks New York, San Francisco and Los Angeles as the most unaffordable city in North America, and on a world stage it ranks third behind Hong Kong and Sydney.
Vancouver’s median home price is $800,220, which is 11 times greater than Vancouver’s median household income of $72,662.
As the city has become less affordable, it has experienced social issues caused by income inequality: homelessness is at a record high and the percentages of working poor and of households living in poverty have increased.
But one financial institution has responded to the changing needs of a ‘gentrifying’ city by transforming itself to focus on social mission and impact: credit union, Vancity. Not only has it improved the lives of those that live and work in the Metro Vancouver area but has also increased its member base, attracting younger members and making record profits of nearly C$150 million.
With C$21.7 billion ($16.5 billion) in assets, Vancity could be a medium-sized bank; indeed, that, says chief executive Tamara Vrooman, was what it was turning into. And it presented a problem.
“By the end of the 1990s and the early 2000s, we’d lost confidence in the model of serving community first and of the things that made us different,” she says. “Yes, we still donated 30% of our net income back into the community, but we had lost our inspiration and purpose.
“We had started to replicate commercial banks, becoming more like a small bank, and inefficiencies crept in. We had a net outflow of members and our engagement was starting to suffer. We had drifted from our roots.”
Those roots had been put down shortly after the Second World War by a group of individuals in East Vancouver who had been redlined by banks. They had wanted to buy homes for their families and start businesses, but the area of town was seen as too risky by the traditional banks. So 14 individuals got together and each contributed C$22 to start a credit union. Vrooman compares them to today’s crowdfunders.
When Vrooman joined in 2007, having previously served as deputy minister of finance and secretary to the Treasury Board for the Government of British Columbia, net earnings at Vancity had been falling for three years, its efficiency ratio had also fallen and member loyalty scores and employee engagement were at lows.
Vrooman says the shift from earning money through purpose to earning money through traditional bank lending, while operating as a credit union, had introduced risk and it was not bringing its full balance sheet to the benefit of the community.
“We were at risk of not being able to allocate capital, yet the future of society and the economy – and therefore our business – lies in where loans are being made and to whom. The 30% we were donating of our net income is important, but it’s not going to have the impact that billions of balance sheet dollars allocated in the right places will.”
To transform the business back to being values-based was not a quick or simple fix.
“Everything had to change: procurement practices; hiring; risk management; liquidity; our competences at board level,” she says. For capital to be allocated to truly serve the community, every part of the model needed to be examined.
Across North America, credit unions have an ageing membership and are concerned about the future, but at our AGMs we hear crying babies - Tamara Vrooman
Part of that change included revisiting where it was making its loans; the credit union made a commitment to make 50% of its entire loan book impact-focused – affordable housing, non-profits, green business, social entrepreneurs and financial inclusion. The credit union is halfway to that target.
“We had a choice,” explains Vrooman. “We could let loans that weren’t impact run off and discourage them from renewing and replace those with impact loans. That would have taken us to 50% in impact with C$10 billion in assets, or we could grow our assets by being less strict and take a longer trajectory.”
Vancity chose the latter and its assets have doubled since 2007. It was the sustainable choice.
The decision to turn towards loans to businesses and organizations that were having a positive social or environmental impact raised the question of risk for the institution.
“We discussed at length whether that meant taking on more risk and were we prepared to do that,” says Rick Sielski, senior vice-president of enterprise risk. “But we realized it may seem higher risk to make these loans, but it’s not. It just requires greater sector expertise, creativity and patience sometimes to structure the loan.”
Being local with community networks, Vancity had that.
“We didn’t have to take on more risk at all,” says Sielski.
In fact, Vancity’s track record shows that delinquency rates are marginally better in its impact portfolio of loans. It makes sense. The borrowers tend to be values-based individuals with deep networks in communities, which have ways of supporting each other that do not always come up on credit applications, says Sielski. But he adds: “Is the risk lower or higher? isn’t the question. The risk is just different.”
An example is the financing of a maternal health centre serving three first nations communities. The organization wanting to run the health centre did not own the building and traditional credit risk assessments would have resulted in the organization being turned down for a loan.
“But we knew that the three first nations’ governments were committed to the success of the centre,” says Vrooman. “There was no legal agreement to say that, but we knew this was an asset valued by a broader community that would respond to support the centre if it became at risk. In this way, actually our risk was decreased.”
Our members say they love us – and that is not something people often say about their financial institutions - Catherine Ludgate
Vrooman’s point is that the hegemony of physical collateral as sole determinant of credit risk has to be changed if financial institutions want to become more community-oriented. It will require a different skill set.
“How we research the health of a borrower needs to change,” says Vrooman. “Skills of social mapping, community networking and data sourcing are needed.”
Does a change like that in risk management require extra resources? Having previously worked for large Canadian financial institutions, Sielski says he is aware that traditional banks will say it is too resource-intensive to make such loans.
“Perhaps initially you could argue that is the case, but once you understand the differences in risk profiles and get to know the impact sectors, community and build relationships, that delta diminishes pretty quickly, as would any other more conventional area of focus.”
Since re-orienting the business back to being driven by community needs, Vancity has made record profits – last year pre-tax net income was C$146.6 million. Deposits increased to C$18.5 billion and 25,000 new members joined, taking membership to more than 535,000 – and, stresses Vrooman, 50% of those are under the age of 35.
That is unheard of for credit unions.
“Across North America, credit unions have an ageing membership and are concerned about the future, but at our AGMs we hear crying babies,” she says. “The millennial generation is engaged and is seeking financial institutions that give them the right products and services, but which had also better be ethical and doing the right thing by the planet and community.”
Indeed, Vancity feels like a financial institution that captures Vancouver’s essence, appealing to its progressive, diverse and young population. Its mobile offering is on a par with the traditional banks. It has a large social media following and its members frequently use it to show their appreciation of Vancity.
“Supporting community through finance is our offering, and people get behind that,” says Catherine Ludgate, a manager in the community investment team. “Our members say they love us – and that is not something people often say about their financial institutions.”
She describes the credit union not as a financial institution but rather a “social change institution that uses the tools of finance”.
Although Vancity does have a small-grant making programme that invests in work such as the British Columbia Poverty Reduction Coalition and the Living Wage for Families Campaign, Ludgate says the credit union’s actions go “far beyond a CSR strategy.”
Grants are also used to seed organizations before making loans. Catalyst Community Developments Society is an example. It is a not-for-profit real estate developer tasked with creating affordable housing or affordable spaces for community groups.
“Since 2001, we’ve seen the average home prices in East Vancouver rise 365% and rents rise 75%, yet median incomes have only gone up 17%,” says founder Robert Brown. “People working in coffee shops and restaurants, our firefighters and teachers, and even managers of small companies cannot afford to live here and are having to move further and further out. It starts impacting the social fabric.”
Catalyst was granted seed money by Vancity to help it get started, later providing an equity investment, a construction loan and lines of credit to support the operations, as well as providing mentoring. Catalyst has completed two projects, including 49 below-market rental units at Dockside Green, a sustainable community in Victoria for people earning between C$20,000 and C$70,000. They currently have eight other projects under development, with a total of over 600 affordable-rent homes.
“That kind of support just doesn’t happen with other financial institutions, it has made a huge difference in our ability to provide affordable housing for people,” says Brown.
Vancity’s work in financial inclusion also reaches financing. One in five people live in poverty in British Columbia and approximately 15% of the population is unbanked or under-banked. Some 18,000 people live in chronic poverty in the downtown eastside of Vancouver alone.
To serve this population Vancity operates an alternative branch in partnership with a community housing agency, Pigeon Park Savings, which offers basic banking services.
“We bank 4,000 to 5,000 people – individuals who would not have had access to a bank account and would have had to deal only in cash, often relying on payday lenders,” says Ludgate. The business isn’t expected to make money for Vancity’s members, but is something the members all support as an important part of being a financially inclusive community.
Falling into a trap
There are also profitable solutions to financial inclusion. Vrooman says the credit union noticed that payday lenders would set up shop wherever Vancity opened branches and employees recognized some of its members were using them.
“When we surveyed our members to gauge usage of payday lending we were shocked and embarrassed,” says Vrooman. “Twelve percent of our members had used a payday lender over the previous 12 months. We realized we weren’t meeting their needs.”
The credit union went about offering an alternative.
Vrooman says she went to payday lenders as a mystery shopper as Vancity was finalizing its offering.
“The people who were in line were there for many different reasons – a realtor trying to keep his personal taxes separate to his business taxes, a new Canadian who found it the easiest way to get her money while figuring out how to bank in a new country. There were young mothers with children and restaurant workers. Some were marginalized in terms of traditional financial services, yes, but some were not.”
Vrooman says the experience showed her Vancity was about to design its offering the wrong way.
“It was a lesson in the risk of making assumptions,” she says, “and one I think we could all learn across the financial industry as we consider how to provide services that improve upon alternative lending. It sounds obvious and yet we fall into this trap of assuming we know why people aren’t using our services and what they need.”
We are now putting members in touch with one another and helping them grow in a more sustainable way - Tamara Vrooman
Vancity developed a mobile alternative that charges the same rate as a credit card and comes with credit counselling and debt consolidation to help borrowers break free from a debt cycle. It was also popular, 800 loans were made in the first 12 months, ranging from $500 to $3,000.
“We saved our borrowers over $1 million in interest, and the loan losses to us were lower than for our regular credit card,” says Vrooman.
The product has also been picked up by Vancity’s business members. One contractor was so despondent to see his employees using payday lenders that he brought his business to Vancity, including payroll, to give them access to the product. He also asked Vancity to assist him in setting up a foundation.
It is this influence upon its community that Vancity has recognized and harnessed. Vancity is also trying to help get Canadians banked by using its network among its own peers. Over several years of serving the unbanked or under-banked, the credit union developed financial literacy training for its employees, which it then took to the Canadian Credit Union Association to offer it to its peers nationwide.
“We stripped out any Vancity language so it can be used by any credit union and have shared it with approximately 100 of our sister credit unions,” says Ludgate. “That’s what the cooperative principles are – to share and help members – but even as credit unions, we forget sometimes. It is my hope that we get to a day soon where we can say, collectively, the credit union system has reached five million Canadians from coast to coast to coast.”
Ludgate says Vancity speaks to its own members and community partners about social issues to spread awareness also, because it sees “speaking to them about living wages as being integral to being a socially responsible society and improving life for those who are living in poverty”.
Now Vancity’s members approach it looking for opportunities and connections in order to learn how to be more environmentally or socially responsible.
“ They see the win-win-win opportunity like we do, and so we are now putting members in touch with one another and helping them grow in a more sustainable way,” says Vrooman. “This is the best outcome possible, because if our balance sheet transforms to become 50% impact but our community doesn’t transform, then what have we achieved really other than lip service?”
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