Yahoo Finance New Canadian bank's novel approach: focus on positive community impact
It was Paul Allard’s frustration with the role played by the banks in the 2007-2008 financial crash that inspired him to make a career change at 50.
Allard became fascinated with the crisis and the Great Recession that followed, and the more he read about it, the more “pissed off” he became.
And while Canada escaped the brunt of the damage thanks to its more robust and “stable” banking system than the U.S., Allard decided he wanted to find a way to change the industry for the better.
So after more than 20 years in the tech sector, Allard decided to create a bank that wouldn’t be so heavily invested in the financial market, but would instead focus on the real economy, or businesses that actually produce goods or offer services that help everyday people.
“Instead of complaining, I said, ‘let’s find out how in Canada, with what we have, we can be transformative of the system and bring inspiration and hope to a system that needs to evolve,” he told Yahoo Finance Canada.
And that vision has started to come to fruition. Impak Finance, which is billing itself as Canada’s “first socially responsible” bank, has raised $1 million through its equity crowdfunding campaign and has more than 1,300 shareholders after launching the campaign on Oct. 12. It is hoping to reach $2 million when the campaign closes on Dec. 12.
Allard put the venture together along with backing from a team of entrepreneurs, bankers and financiers.
“(It’s) completely crazy. It happened overnight. It was kind of like ‘what?” said Allard, reflecting on the banks early success.
Allard said the plan is to roll out full online banking services on par with other digital providers, such as Tangerine, in two years. But the company is also hoping to offer clients “impact bonds” by next year.
Impak Finance is promising to be different from the traditional banks by focusing on loans to companies invested in the real economy rather than buying shares or other financial assets, which Allard described as products that are generated “out of thin air.”
One area in particular that has been neglected by the big banks is investment in small and mid-sized local businesses, said Allard.
“There’s a huge opportunity in terms of there’s a lot of capital looking for projects and there’s a lot of projects looking for capital, and there’s no platform or ecosystem bridging the gap,” he said, reflecting that as an entrepreneur he struggled getting loans from banks.
Allard noted that this is also a missed opportunity, noting that 90.2 per cent of private sector jobs in Canada between 2002 and 2012 were created by small and medium-sized businesses.
Another way that Impak Finance plans to distinguish itself is through its “collaborative” investing. Allard said if the bank identifies an opportunity that it believes has potential but is outside its risk threshold it may reach out to clients via crowdfunding platforms or call on traditional banks and angel investors for financial banking.
“It is about collaborating and trying to see if there is a good opportunity to mitigate the risk throughout the process to where we are profitable, but we take care of people and also the planet,” he explained.
Impak Finance is also assuring clients that 100 per cent of its assets will be invested in ventures that have a “positive impact on society and the environment.”
Allard said the bank has employed a team of experts who are putting together investment criteria, which will take into account the aforementioned factors, as well as their profit potential.
Successful applicants will have to attain a consolidated score higher than a yet-to-be decided threshold.
“Some of them will be more focused on the environmental aspect, some of them will be more focused on the social aspect, but it is a combination of these three scores that need to be a higher than a certain level,” said Allard.
Allard said the bank’s key performance indicators and the ratings it gives out will be “100 per cent transparent” and available online.
He added that the bank could even involve clients in the rating process, but the final say would remain in the hands of the risk management committee.
Impak Finance website lists sustainable agriculture, green infrastructure, renewable energy and affordable housing among the industries it plans to target.
And Allard insists that Impak Finance can make investments in these sectors without completely sacrificing its ability to turn a profit.
He said that the bank will offer a “very fair return” on equity between eight and 10 per cent, although he admits that is much lower than the 16 per cent to 17 per cent offered by traditional banks.
But overall, Allard said Impak Finance should be able to be more “stable” and “make more money.”
He said the company will use fintech to identify more opportunities, lend to companies that might otherwise go overlooked and will be able to “charge a couple of points more without exaggerating.”
Allard also pointed to a study by Morgan Stanley, which indicated that “impact investments” — or those intended to generate social or environmental benefits as well as profits — have performed at the same level at or better than the median return of traditional funds and that 72 per cent of impact businesses generate more profits when compared to their traditional counterparts.
He added that in 10 years he believes the company will hold two to three billion dollars in assets.
Oana Branzei, a professor at Western University who focuses on business strategy and sustainability, told Yahoo Finance Canada that this is a “reasonable claim” based on the fact that numerous startups have received billion-dollar valuations early on, such as prescription glasses maker Warby Parker last year.
But she questions Impak Finance’s ability to generate the type of returns that Allard referenced.
While Branzei said “you would have to be a really bad investor” to lose money that is invested locally, in the type of ventures that the company has outlined, she said there is a “huge variability” in returns and she is skeptical that what the company is doing is entirely innovative.
“To have the really high hanging fruit that Morgan Stanley is talking about you have to be one of these category-creating businesses,” she said.
“Everyone has a right to make this claim, but if you look historically over the last decade, there are a disproportionate few number of businesses that have achieved a disproportionate share of these returns.”
Branzei cited innovations in agricultural nanotechnology and clean tech as examples of impact investments as “industry-building success stories.”
But she said funds can also end up funnelled into “bottom-feeder businesses” which do “good” in their community and just break even.
However, Branzei believes that Impak Finance, and other banks like it, can make money while being socially responsible.
She said that its stated goals of investing in local products, services and causes, however, makes it more similar to a local currency — where a type of money is introduced into an area to keeps funds within the community — or a co-operative bank, which also attempts to ensure communities have a “stake and voice” in how their money is invested than the value bank it is labeling itself.
Branzei compared Impak Finance to the London Community Foundation and Vancity, which she called the “gold standard” of co-operative banking in Canada.
She said that several experiments with local currency in poor and marginalized communities have resulted in “spectacular growth,” while Vancity has delivered returns and invested in projects that are meaningful for the community.
Branzei said Impak Finance may be “conspicuously” avoiding mentioning the co-operative movement strategically to appeal to millennials who missed the peak of the model 20 or 30 years ago.
“It is as far removed as possible from this (idea of) prototypical, financial crisis, greedy, speculative banks,” she said.
“But it might be more of a novelty play in terms of, ‘Hey. This is a new mix. A new cocktail … It is what gets people excited today.”
Branzei said millennials will look for alternatives to traditional banks and Impak Finance will only need a “thin slice” of the market.
But regardless of its categorization, Branzei said that Impak Finance has a chance achieve what Allard set out to do – prompt change in the banking industry.
“I don’t think this new venture will be so ethical that it will make the TDs of the world unethical by comparison,” said Branzei.
“(But) If they start having a following the same way that co-operative banking started having a following 20 years ago then they wont tip the system over, but they may tilt it a little bit,” she said, although she admitted that traditional banks do offer similar services, but there is a lack of awareness about them.
And Allard believes this change could take shape in the form of other banks around the world following in their footsteps.
“I’d like to influence the other banks in offering some products (like) we’ll be offering. I don’t care if everybody copies,” he said, adding that the reputation of Canada’s banking system will attract even more interest.
“But if we have succeeded in putting that type of cash in the impact economy and changed … the financial education of people so they know they can look and ask where the money goes and how money creation is done, I would be a very happy camper.”
