Ethical banking: How to put your money where your values are

Do ethics matter to you as a consumer? Maybe that looks like a loaded question, because it is. Ethics influence our decisions at a deep level. Our ethical commitments influence the food we put on our plates, and where we get it. They can steer us toward or away from certain stores to shop at, or which app we use to get a ride home from the airport. Entire lifestyle brands base their existence on a foundation of ethics.

If you’ve ever trusted your personal convictions when deciding to support or not support a certain business, you’ve used ethical judgment at some level. When’s the last time you looked at your bank in that same light?

The 2008 financial crisis dealt a lasting blow to the public’s trust in banks. Facing dire economic circumstances, many consumers began to question the power and influence of the trillion-dollar banks that profited from the crisis — then got bailed out by the government. This left many normal Americans to take their money elsewhere and seek out a more responsible banking model built around sustainable finance.

Enter the new age of the ethical bank. Well — some banks are trying to conduct their business in a more transparent and obviously pro-community way. That’s the ethical banking we like. Other institutions signal their values, but often fail to live up to them in real-world economic terms. Still others are expanding the concept of ethical banking to include interlocking issues like global warming and climate change.

Read on to learn what ethical banking is, the benefits of ethical banking, and (maybe more importantly) the impact of unethical and unsustainable banking.

What is ethical banking?

What does it mean for a bank to be ethical? What are ethical banking practices, and what sets them apart from traditional banking practices? There are a few good ways to approach these questions. There is no set definition of ethical banking, and indeed, one person’s ethics differ from another’s. But within the realm of personal finance, we think of ethical banking as falling into one of four categories:

1. Profit motive: keeping money in the community vs siphoning off corporate profits

This one’s first for a reason. No matter what a bank’s professed moral convictions are, one thing is certain: that bank is a business, and it exists to turn a profit. That’s why it’s called retail banking.

Where that profit goes can be a great indicator of whether that bank aligns with your ethics. A small number of too-big-to-fail megabanks control a large market share of this business, and unless you live in Manhattan, your local community is probably not seeing much, if any, of the profit their customers nationwide generate.

For Kasasa, ethical banking overlaps with local banking. Your local bank or credit union is far more likely to keep the money in the community than the giant megabanks they compete against in the retail banking marketplace.

A good to measure ethical banking and social responsibility at the local level is to check whether your bank or credit union sponsors local community events. Local financial institutions also tend to offer loans with a fair interest rate to small businesses in town, and invest in crucial local infrastructure projects. Socially responsible investment should be the cornerstone of ethical banking practice. If your financial institution isn’t investing locally, it’s a safe bet they don’t have your community’s long-term flourishing at heart.

2. Transparency in doing business (or lack thereof)

As a business, a bank makes money through interest: specifically, by borrowing money from depositors at one interest rate, and lending money to borrowers at a higher interest rate. A deposit account (like a checking or savings account) should be paying the account holder interest, or a monthly dividend: that’s money paid to you by the bank. On the other side of the balance sheet, the bank lends money to consumers at a higher interest rate. That means that for your auto loan (or your credit card), you are paying the bank a percentage each month, depending on the specifics of your debt.

It gets a lot more complicated from there, but that is the fundamental business model of any bank. Now ask yourself this: Have you ever been hit by an unexpected fee from a bank? A hidden sign-up fee, say, or a minimum balance fee you didn’t see coming?

These issues can best be boiled down to failures in transparency. The bank is selling you a product, then hitting you with unexpected or possibly unnecessary additional expenses. You don’t find yourself having to shell out random $25 payments on the lawnmower you bought two years ago — your banking experience shouldn’t be any different.

While some ethical principles are loosely baked into the regulatory environment, you’re best off doing your due diligence and finding accounts without unnecessary maintenance fees.

3. Green initiatives: sustainable banking from an ecological perspective

This is a less common interpretation of ethical banking, but one that is gaining traction among younger consumers motivated to offset or reverse the ecological effects of global warming. Sometimes called green banking, or sustainable banking, the idea here is that banks, as investors, should funnel their money towards products and companies that are working to reduce carbon emissions and promote fossil fuel alternatives. Some personal finance companies, like Aspiration, have gone so far as to build environmental impact estimates, which they use to score potential investment opportunities from an ecological standpoint. This is ethical banking in a big-picture sense — and an appealing alternative for many eco-minded consumers.

4. Sharing your values (online)

In this case, last is least. The lowest-effort way for a bank to attract ethical consumers is to say that they’re doing ethical stuff. Megabanks are particularly good at this. With their gargantuan resources, they're able to turn around well-designed, highly polished social media strategies and PR campaigns responding to emerging social issues in almost real-time. If all you want from a bank is a superficial mirroring of your values, this may work for you.

If the above-mentioned business ethics and/or the environmental impact of fossil fuels are more concerning to you, those megabanks trying so hard to signal their virtue will probably look less appealing. You can track for yourself at BankTrack, a critical resource when it comes to any discussion of ethical banking. Their mission, updated in January 2022: “...to challenge commercial banks globally to act urgently and decisively on four interrelated global emergencies: the accelerating climate crisis, the ongoing destruction of nature, the risk of ever more pandemics and the widespread violation of human rights.”

Impact of unethical and unsustainable banking

Choosing a socially responsible bank can have ramifications much, much bigger than your local community — we’re talking everything from climate change to human rights abuses. Ethical banks often stake their moral claim on avoiding investment in fossil fuel companies because of unethical practices in that industry, and its impact on the ecosystem. No big bank would fully divest their holdings in fossil fuels: too much money in those assets. The result is a self-perpetuating cycle of decreasing supply, increasing demand, and continual environmental harm.

But zooming in a bit, it’s easier to see how unethical or unsustainable banking might impact you on the local level. Apart from any green or ecological meaning, sustainable banking also means something simpler: banking as a sustainable business. When basic business principles go off the rails, catastrophe ensues. Need we mention the 2008 crisis again? The megabanks were blinded by greed to a downturn that would end up hurting the already most economically underprivileged. There's probably no clearer example of unethical or unsustainable banking in recent memory.

One major upside to choosing a local bank or credit union to manage your funds is that these community financial institutions tend to be more conservative in their investments (good from a business sustainability standpoint), and at the same time more conscious about the social responsibility and local impact of those investments (ethical banking bonus points). Community banks and credit unions operate at a human scale, while megabanks operate at the scale of global commerce.

A community financial institution will be more invested in your long-term well-being, and in the health and wealth of those around you. More than half of all small business loans under $1 million come from community banks, according to Independent Community Bankers of America. Small businesses are the backbone of the nation’s economy, owned and operated by your friends and neighbors. When you bank with a community bank or credit union, your money helps support and grow your local economy.

How to choose the right ethical banking products for you

To differentiate themselves from the ethically murky territory occupied by the big, international conglomerate banks, some smaller financial institutions are trying to reach ethical consumers by adopting ethical investment as an institutional priority. Generationally, as American Millennials move further into adulthood, they are largely choosing to invest in community.

Their younger peers in the Gen Z cohort are arguably even more values-driven, a diverse mix of viewpoints for whom race, gender, sexuality, income equality, and the environment rank as top concerns.

To repeat a warning from above: It can sometimes be tricky to tell the difference between ethical versus conventional banking at the outset. If a bank appeals to you because of its ethical stance on social justice issues, you should spend a little extra time to see if they put their money where their social media posts say it is.

Ultimately, the ethical principles that drive your choices as a consumer depend on many overlapping factors, and different people will have different values. This can vary by age, or by location. What comprises meaningful local investment will certainly be specific to you, and will look very different if you’re in a rural ranching or agricultural community vs renting a studio apartment in a growing city.

No matter where you live, your money is your source of financial power. You should use that power in the way that best suits your personal values, and doing so might require you to see if your banks ethics are up to your code.

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