Where now for ethical banking?

The news that the Co-op Bank had been put up for sale last week didn't come as much of a surprise to many of those with an eye on such things.

After all, it’s had a tumultuous few years, almost collapsing in 2013 after revealing a £1.5bn black hole in its accounts, and being forced to accept a bail-out by US hedge funds.

So far at least, interest has been slim with only Metro Bank this week showing vague interest in parts but "certainly not interested in buying the bank."

Despite challenges in recent years, Co-op Bank has been seen as a more principled alternative to other high street banks since it introduced an ethical policy in 1992. That policy prevented it from investing in arms, fossil fuel extraction, animal testing and companies that exploit workers.

Even though that ethical stance remains a key selling point, customers have been flowing away from the bank, with numbers falling from 4.7m in 2013 to just 4.1m last year. In the meantime, its losses have been alarming; it lost £610m in 2015 and £117m in the first half of last year.

But just because customers have been ditching the Co-op Bank, it doesn’t mean that they have given up on the idea of ethical financial products. The good news is that, if the Co-Op is absorbed into another bank and wiped off the high street then there are alternatives for savers and borrowers who want to know their money is being invested ethically.

Profitable ethics

A number of businesses believe that ethical banking is still an attractive option for consumers and one that’s worth investing in. Triodos Bank, for example, has a focus on sustainability and lends savers’ money to organisations that can show they are making a positive social, environmental or cultural impact.

Presently it offers savings accounts, including ISAs, and investments; however it has revealed plans to launch a current account this year. That will potentially be a real draw for ethically minded customers who don’t mind managing their current account entirely online.

Triodos is confident its sustainable focus will attract new customers. However, other challenger banks are trying to differentiate themselves from big banking brands by promising a greater community focus.

The recently launched CivilisedBank is on track to launch this year and promises savings accounts and business current accounts that maintain a focus on the customer and a return to personal banking from local bank managers.

Kirsty Maxey, managing director of financial communications agency Teamspirit, says banks must do more to win trust and support from their customers.

She says: “Ethical banking is complex, encompassing the decisions made by fund managers for institutions to the direct experience of customers with a retail bank. Recent new entrants to the sector such as CivilisedBank have sought to differentiate themselves by referring to their purpose driven, ethical credentials but it remains to be seen how attractive this will be to consumers.

“What is clear is in that in a low-trust environment, where many consumers are more confident in pure payment brands such as PayPal and Apple Pay than financial institutions, banks have to prioritise communicating their commitment to consumers.”

Current account conundrum

Unfortunately for customers, it can be harder to find a current account provider with an ethical focus and if the Co-op were to vanish from the high street then that would become even harder.

Building societies may still invest in defence, tobacco and other industries commonly eschewed by companies that market their ethical focus. However, they typically have a greater focus on the communities they serve because they are answerable to their members rather than to shareholders.

Local building societies may offer current accounts as well as savings and lending, but they usually only accept customers from within the community they serve. Nationwide is currently the only building society offering current accounts nationally.

Spiritual savings

Religious customers who want to bank with an organisation that shares their values have still more choice, as do customers who are willing to access products with a religious slant even if they are not part of that faith.

For example, Reliance Bank, originally known as the Salvation Army Bank, promises that its investments are made within strict ethical boundaries. Not only that, but its profits are used to further the Salvation Army’s mission, which includes both charitable and evangelical work.

That evangelical arm may put off customers who are not religious, but the bank does offer a broad array of current accounts, savings, loans and mortgages.

Other options include Sharia-compliant financial products, which provide the same day-to-day services as mainstream accounts but do not provide interest or overdrafts, both of which are against Islamic law.

Money invested in an Islam-approved account will not be lent to businesses investing in industries that are against Islamic principles, including alcohol, gambling and tobacco.

Credit to the community

Credit unions provide one final option for concerned customers who want their money to be used ethically by the organisations they save with. They do not typically offer current accounts, although some do, and they allow savers to ensure their money is used to benefit their neighbours rather than profit-hungry shareholders.

Traditionally, these unions are small and not-for-profit, and they exist to serve a specific community. That might mean a geographical area but it can also be people working in the same industry or even attending the same church.

In many communities they provide support and lending to people who struggle to manage their money, and provide a genuine alternative to pricey payday loans or dangerous doorstep lending. By saving into a credit union account, customers can feel confident that their money is helping their local community.

Around a million British people already use credit unions. If the Co-op Bank departs the high street or is absorbed into a bank with less of an ethical focus then that number could grow.