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Beneficial State bank found in California is a community development bank. It was founded by Tom Steyer and Kat Taylor man and wife and the operation was started in the year 2007. The man aim of opening the bank was to providing entrance to financial services for all peoples, particularly the by tradition the underserved, as a considerable number of the population living around the area by then were living below poverty line.
For the last four years the bank it has enjoyed a normalized success in profit. Tom Steyer and Kat Taylor were the sole capital providers to the bank. 20% of the banks depended with the loan. Tom Steyer and Kat Taylor advocated for two views in order to change the banking methods. The views included depositors being viewed as citizens and not customers or beneficially. The second view was depositors be viewed as crowd funders due to their deposits. And indeed banking is the most potent known method of crowdfunding.
Organization structure in the bank
All the economic rights were deposited to the bank once the bank was fully registered and scrutinized to hold the voting stock and economic rights. The holding of the rights was done to ensure that the voting rights were based on profit maximization. The mindset of the pioneers Tom Steyer and Kat Taylor was to help and empower the underserved people in the community. Later the business will grow and will run on profit margins. Once the founders are not there the right to the economy will haunt this decision.
To mitigate such an issue, its profit margins will not be based using the other banks bottom-line. The rights in the foundation have to be distinguished from the economic rights of the bank. The bank is an individual business entity, and the foundation was mainly for charity programs. The foundation is prohibited by the law from operating on the interest framework. The bank is growing, and the people are growing their economic interest will grow therefore to some extent their will conflict with foundation.
Regulatory issue
The launch of the bank was done during the housing effervesce burst. And since the majority of the bankers were low-income earners could not be able to build a house from just the savings they had, they needed more support in terms of the loan. Majority of the capital that was running the bank was from credits, and the profit was directed to fund and sustain the foundation. This lead to a mortgage crisis.
The bank also believed in not being conservative about the regulators because the management believed in business values like access to the capital and fair lending. This was an accidental timing, and the bank had to make choices that will make them viable (Charbit, & Desmoulins, 2017). The bank was young and not much invested to be able to sustain such market waves. The regulation required merging or buying another community bank; this would lead to the death of one.
To resolve the issue the regulators could not allow community banks be imperiled by the uncertain business conducted by big banks forcing the small banks to collapse down at once. The idea of buying another bank was viable. Another solution was to make the foundation to operate on the independent ground. So that it could give the bank an opportunity to plough back the profit, the policy of community banking could be abolished to allow economic competitiveness between the Beneficial State Bank and other banks. A community-based bank is not entirely covered by state law. The conversion to a chartered bank increased its capacity to borrow as it was now aligned to the state laws.
The financial crisis
There was a financial crisis that ranged between 2007 and 2013. This was caused by the low capability of the Beneficial State Bank to borrow, and the depositors could not be able to raise enough money to sustain bank activities and still be able to lender loans to the community without failing to give out depositors their money (Ahmed, 2018). As a competitive advantage, Beneficial State Bank applied to get technical and financial assistance but to get this they needed chatter from the states.
In order to solve the crisis bank had to acquire the best person to help them run smoothly. The human resource must rhyme with the business vision and ideologies. The bank was forced to launch a summer internship program to enable them to run the institution with minimal wages and in return convert the wages to financial profit. The interns were guided by the experts.
The societal issue
The majority of the people in the society that the Beneficial State Bank operated were poor and were underserved when it came to matters of banking and access to finances. This is revealed by the fact that they were earning below the poverty line. The big aim of the bank was to make empower and serve them economically. The people were poor, and their needs superseded the bank and the foundation capacity. The author speaks about bringing interns into the field such that they could witness how community development banks are faced with challenges.
The bank by 2016 donated over $450 million and 87 percent of this money was used to mission-driven sectors. The missions were all aimed at making the lives of the people better. The money was rendered to community cooperates rather than individuals. The capacity of the people to repay loans is low. The people surrounding the bank are not able to build homes and rely on mortgage loans to do so. The depositors cannot sustain the bank, and the bank also has to rely on loans. The fact that the Taylors family remained the sole financier of the foundation and the bank reveals a poverty-stricken society.
The bank or the foundation alone can not solve the problem. There is a necessity for government intervention and other well-wishers. The government is responsible for job creation and support the ongoing project to reduce the poverty level. The society needs to be uplifted to standardize their lifestyles (Charbit, & Desmoulins, 2017). There is a need for the non-governmental organizations to support by funding community development banks like Beneficial State Bank. By helping them, they will be able to reach the majority. Groups and foundation should offer guarantor’s services to, though low, potential clients who want to better the life.
Growth capitalization issue.
Another issue that was experienced by Taylor was how to capitalize on growth. The bank required over $5 billion to meet the required regulatory needs. Considering the bank setting and non-interest capacity of the bank depositors such huge amount was not easy to raise. With the need to scale the bank mission they had to change the purpose of banking for good. The bank was small to have such capacity, and therefore there was a need for Taylor and the family to strategize for the better of the entire banking admin.
To mitigate the issue, Taylor implemented a resilient cost structure. That was able to meet the ongoing basis. They have also produced enough excitement and scale to appeal to talented and aligned human capital. They gathered sufficient attention to arousing the depositor base so that they maintain on a changed value proposition allied with the bank’s specified goals. In conclusion, entice equity capital. Another strategy adopted by Taylor was additional mergers and acquisition (M&A). Although the bank was able to grow organically, there was a need for supplement. This could only be achieved through M&A reinvestments.
The social impact of Beneficial banking
The Beneficial Banking model is explained below ( Figure 1) where the profits were distributed to the foundation and reinvested back to community for the sustainable environment
There was an issue on motivation factor. The morale of the depositors was low; this was not due to poor quality on banking services but was due to the quality of life the members were living. In order to make depositors constant clients there was a need to entice them. But the biggest challenge remained how to entice and motivate them. There is a need to enable capital creation in order to increase the bank’s profitable actions. Ever since the bank’s establishment in 2007, Taylor and Steyer had been the only investors in the bank and considering the matter they could not make it alone in the investment they required eternal investors.
To make this a reality they had to outline and define the ownership alignment. They looked for charitable vehicles from foundations and charitable organization and family offices. Taylor understood privatization by selling bank shares would ruin the brand. This was done with regulators requirement on the mind (Borovský et at., 2018). After consideration, Taylor settles on the following options that solved the issues on partnership and investors: perpetual non-cumulative non-voting convertible preferred stock, three-year put, capitalization, and voting, and buyback option.
Perpetual non-cumulative non-voting convertible preferred stock.
Any investor on this option was to operate on of Class C shares into a fixed number of them. He/she had no right to vote and was entitled to dividends after the five years on investment. This was a sure way of making sure that those who have invested are there to stay and were not motivated by self-interest or profit (Bundgaard et al., 2016). The duration of five years was enough period for the investment to be able to payback. Beneficial State Bank concluded that “This is a permanent returns instrument with an exchangeable feature that, while lower than the 5 percent characteristic non-profit disbursement verge, comprehensive downside safeguard with the put.
Three-Year Put
Three-year put entailed an investor receiving the right to a stated price in the incident that they wanted to terminate the contract after three years. As a result, the depositor would be sheltered against a deterioration on the worth of the investment at the termination of the put (usually five years). Expressing this new possibility increased supplementary governing deliberations from not just a bank perspective but a safekeeping perspective as well. All these options were made available to coerce and appeal investors to deposit with the bank with a mind of long-term investment. This resulted to essentially, the creation of own alternative by the couple, on the capital market. This was to enable submission to the “exceptionally inexorable short-term burden when they were right back into the activities that yield economic, short-term revenues at the cost of long-term values.
Capitalization and Voting
Under this option, the duo retained all the class A shares. Which permitted them to carry out effective voting regulation above the Bancorp. Beneficial State foundation had no rights to vote and held Class B shares. This structure was to allow Steyer and Taylor to maintain the prevailing ownership alignment, while also giving new-found venture capitalist the right to make decisions on matters of corporate policy
Buyback Option
The last option considered offering that would liquidity the requirement of investors wishing to exchange a percentage of their asset to money. As a portion of its capital strategy, the bank would deliberate a bonus guiding principle for common investors with economic rights. The members would also deliberate on the addition of a buyback package to offer liquidity for investors and to entice extra mission-aligned depositors.
Conclusion
Steyer and Taylor recognized the regulatory abstruseness and the uncertainty of it is yet to come with venerable passion. The prospect of raising outside capital would be the biggest challenge considering that they were running another charitable foundation and the bank was a community development based organization. Several issues affected the well-being if the bank. The major one being the low societal lives and high levels of poverty. The bank gave an opportunity to the unserved to experience banking services.
The following were the outstanding issues that affected the beneficial state bank. Organization structure in the bank as per regulatory requirements, a regulatory issue on minimum capital and infrastructure. The financial crisis due to non-interest running of the bank and the organization. The societal problem concerning the high rate of poverty. Growth capitalization issue as the mission was not to privatize the bank.
Several possible mitigations were put into place. They included the implementation of resilient cost structure, appealing to talented and aligned human capital mergers and acquisition (M&A) to raise the capital needed. The bank defined the ownership alignment to make it clear for the interested parties. Government appeal and also other foundations foundation. They looked for charitable vehicles from foundations and charitable organization and family office. To avoid selling banks shares.
References
- Ahmed, M. B. (2018). KASB Bank Limited: Capital Shortage. Asian Journal of Management Cases, 15(1), 1-22.
- Borovský, T., Doktorová, J., Gruber, E., Hrdlička, J., Jakubec, O., Míchalová, Z., … & Szende, K. (2018). Faces of Community in Central European Towns: Images, Symbols, and Performances, 1400–1700. Rowman & Littlefield.
- Bundgaard, J., Tell, M., Jensen, S. B., Weber, K. D., Bjerksund, P., Stensland, G., … & Vilhelmsson, A. (2016). Trends in Financial Market Innovations: The Role of Taxes.
- Charbit, C., & Desmoulins, G. (2017). Civic Crowdfunding.
- Charbit, C., & Desmoulins, G. (2017). Civic Crowdfunding: A collective option for local public goods?. OECD Regional Development Working Papers, 2017(2), 1.
- Figure 1. The social impact of Beneficial State Bank. Adapted from the Keeley, M., & Dunbar, M. F. (2016, July 05). Meet The Woman Beating the Big Banks At Their Own Game. Retrieved March 30, 2019, from https://consciouscompanymedia.com/sustainable-business/meet-the-woman-beating-the-big-banks-at-their-own-game. Reprinted with permission.
- Keeley, M., & Dunbar, M. F. (2016, July 05). Meet The Woman Beating the Big Banks At Their Own Game. Retrieved March 30, 2019, from https://consciouscompanymedia.com/sustainable-business/meet-the-woman-beating-the-big-banks-at-their-own-game
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