Mary Houghton is the president and co-founder of the ShoreBank Corporation, the largest and oldest community development bank in the country. She talks with Qn about how banking can be a powerful for-profit social venture.
Q: How did the ShoreBank Corporation get started?
It grew out of a successful minority small-business loan program at a bank in the University of Chicago neighborhood. So all of the markets that we looked at were African-American neighborhoods stressed by disinvestment. Our original objective was to demonstrate the power of a bank as an urban reinvestment strategy.
Initially, ShoreBank had a much broader range of program purposes than it does today. We were going to be a force for comprehensive community development strategy affecting not only the small business community and the residential housing community, but also the quality of healthcare, parks, and the employment-training system.
When any business hits the market, the idea gets shaped by market reality. It's a pragmatic process though and we ultimately decided to do a few things well rather than many things in a mediocre way.
Q: How does a community development bank differ from a traditional bank?
Essentially, banking is the intermediation between savers and borrowers. A traditional bank is organized to provide regulated banking services to customers with a business model which is making reasonable returns for its financial investors.
ShoreBank is organized in the same way, but with an additional purpose, which is to have a positive impact on a distressed market segment. The core business of the company is to achieve that goal in a profitable way.
Another way to think about it is that in a conventional bank, a banker might say, "Is this loan good for my portfolio and my shareholders?"At ShoreBank, we say, "Is this loan good for this community and my shareholders?"
Q: Is ShoreBank screening for the people who have been screened against in a lot of cases?
I think so. And "screen" is the right word, because with the consolidation of banking, many large institutions, not only banks, are trying to serve a mass market. They've tried to automate the credit-decision system as much as possible. Many people don't have enough quantitative data to survive in that system. They don't have credit cards. They haven't borrowed enough. They aren't good at filling out detailed written or online application forms. Their life is a verbal life, not a written life. There is a huge market of those people. And within that pool of people there are many credit-worthy segments. So they need a system where they don't have to be quite so quantitative and quite so professional.
Q: Why haven't more traditional banks filled this market, if it can be successfully filled?
The automation of decisions doesn't work well for focusing on small customers and small transactions. That explains a lot of it. And in the end, our kind of banking is just not as profitable as either banking for wealthier segments, or a completely mass-market system. It's a little bit less glamorous.
We are the fund manager for an equity fund that invests in community development and minority banks around the country. We figured out how, using public data, to aggregate information on every bank in the United States, and highlight how much of its lending was housing loans in low-income markets, and how many of their branches were in low-income markets. So we were able to essentially compare the 8000 banks in this country, offering a tool to anybody who is interested in moving their money to a bank that is doing more than most banks from this community development perspective. They can look at all the banks in their city or the six banks in their town. I think that kind of pure competition is a good metrics system. The information is available through the National Community Investment Fund or ncif.org.
Q: Is this something you could do as a nonprofit?
Credit unions are not-for-profit, and so we could do some of the same things as a credit union. Historically, credit unions have been a little bit more consumer oriented and less investment and business focused. We chose to be a bank so that we could focus on people who were in business, as opposed to consumers. But you could do it as a credit union.
And you can run a very good lending function as a not-for-profit, but you can't provide deposit services or investment services. And you can't tap savings, so you're going to have to go to outside sources of loans and grants to keep funding your operation which means you don't have as much space to grow.
Q: Is there credibility that comes from being a for-profit?
I think there is huge credibility in the market to do this kind of activity as a bank, because even though we are in a period where banks are kind of the bad guy on Main Street, you know that if you do business with the bank, it is regulated. You know the bank is going to pay attention to all the consumer laws. And it is going to be very businesslike and professional. And so doing this work as a bank gives you enormous credibility.
Q: How much do you think patience plays into the culture of your bank?
Quite a lot. If you think about the conditions of poverty and racism, they are deeply entrenched weaknesses. You're not going to change them quickly.
But this is really interesting work. People here get hooked on the long-term possibilities of a strategy. I think if you asked people at ShoreBank why are you accepting a longer strategy or a mildly lower salary, it's probably something about personal ability to innovate that is very rewarding to them and is as valuable as more compensation, and the ability to have a real effect on the market is worth a lot.
I think as we really reflect on what the financial engineers on Wall Street did to the country and the world — a lot of real hurt was created by conventional financial systems — we may be inspired to innovate more. We shouldn't forget that banking is fundamental. Why would you try to change things as a not-for-profit if you could, instead, have a bank for a platform and have much more power?
Q: Is it different to work in a place that doesn't have the profit motive as the very core of the mission?
It's not too much different, because as a regulated bank, the bank part of ShoreBank must be routinely profitable, because otherwise it wouldn't be allowed to continue as a bank. And we're trying to run sustainable and growing businesses, so making profits is good. It's just not the be-all and end-all.
Working to have a positive impact in distressed markets isn't charitable work we do on the side. It's our core business. And that means it's a different kind of business. It's an extra reason to come to work, you know? The people who work in our bank are very good at risk management and grading loans and collecting loans and having efficient systems. They are bankers. They just are doing it for a different purpose.
Interview conducted and edited by Ted O'Callahan