Five ways banks and fintechs are trying to slow climate change

August 29, 2022 2:51 PM

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Banks and fintechs are using technology to help their customers make more climate-friendly choices. They're making green loans, helping consumers understand the impact of their transactions and nudging them into more eco-conscious spending.

Climate mindfulness can be a draw to young customers in particular: According to Simon-Kucher's global sustainability study in 2021, 39% of Generation Z and 42% of millennials are willing to pay a premium for sustainability. Research and consulting firm Forrester found that Generation Z and millennials who live in cities and have college or advanced degrees are the most likely to pursue green banking products — and to make brand decisions based in part on environmental considerations about the company or product. The topic of green banking is also top of mind with the passage of the Inflation Reduction Act, which incentivizes energy-efficient home upgrades and electric and hybrid vehicle purchases.

Another motive for banks is reputation repair.

"A lot of large banks are getting flak for their investment purchases and supporting big oil," said Ariana-Michele Moore, an advisor in retail banking and payments at Aite-Novarica Group. "At the end of the day, banks are best off partnering with firms and passing along their solution."

She prefers tools that help consumers make better decisions from the outset, rather than offsetting after the fact — but those are still valuable in building awareness.

"Deposit banks are going to be interested in solutions that draw the consumer to their apps and websites, so the more functionality they can add, the better it's going to be," said Moore. "Banks are supposed to be the trusted source of information. They can help educate consumers to make better decisions."

Here are five ways banks and fintechs are using technology to help customers live more sustainable lives, as well as a look at what might be coming in the future.

Banks, credit unions offer solar loans

Climate-focused financial institutions such as Climate First Bancorp in St. Petersburg, Florida, and the online-only Clean Energy Credit Union in Centennial, Colorado, both offer solar loans that customers apply for entirely online. But more traditional financial institutions have also entered the space.

In May, Fifth Third Bancorp in Cincinnati announced that it closed on its acquisition of Dividend Finance, a fintech point-of-sale lender that finances residential renewable energy and sustainability-focused home improvement.

"The addition of Dividend Finance enhances the scale of our digital service capabilities through its tech-forward platform," said Tim Spence, president of Fifth Third, in a press release at the time.

Credit unions have also partnered with fintechs to enable solar lending. For example, Teachers Federal Credit Union in Hauppauge, New York, works with GoodLeap, a company that provides financing options for the residential solar and broader sustainable home solutions industry and a digital marketplace to connect business partners, consumers and financial institutions. Alliant Credit Union in Chicago has purchased pools of loans originated by fintech firms from other credit unions, and is considering how to approach and navigate direct partnerships.

These collaborations are beneficial because, "the fintech gets a loyal and professional partner who is collaborative to work with, and the credit union gets to work with a professional technology firm that provides them with not just knowledge, but new members and new loans," said Peter Duffy, a managing director at Piper Sandler who has helped to broker fintech-credit union relationships, said last year.

Payment companies help consumers track their carbon footprints

Payment companies are launching a slew of tech-based initiatives so their clients can help consumers analyze and change their spending behaviors.

In November 2021, Visa deployed Visa Eco Benefits, a package of sustainability-focused benefits for account issuers. These include a carbon footprint calculator in partnership with German sustainability software provider Ecolytiq, carbon offset capabilities and rewards for sustainable behaviors. It was available in Europe to start, but Visa plans to roll out the bundle globally this year.

In September 2021, Mastercard announced the launch of its sustainability innovation lab in Stockholm, where it would experiment with technologies such as 5G and advanced artificial intelligence and research solutions for sustainable consumption and value chains. Mastercard also worked with Swedish climate-impact company Doconomy to make a carbon calculator available to third parties in 2021 via an application programming interface.

Buy now/pay later firm Klarna launched a carbon emissions tracker in its app in 2021, which is based on Doconomy's Åland Index (an index for CO2 emissions calculations) to analyze the carbon impact of each purchase. It also partnered with Milkywire, a service that enables donations to grassroots climate-focused organizations, so users can learn about and donate to projects Milkywire has assessed for transparency and accountability. In its 2021 ESG report, Klarna said it would work on improving accuracy by making calculations at the product level instead of the purchase level. Klarna is also working to curate content in its app that informs users of brands' sustainability efforts so users can adjust their purchasing decisions before they buy.

Payments company Stripe announced Stripe Climate in October 2020, a functionality where online businesses can direct a portion of their revenue toward technologies that remove carbon from the atmosphere from their Stripe dashboard. This feature began in the U.S. and became available globally by February 2021.

Challenger banks provide roundups, green mortgages, trackers and cash back

Aspiration Partners, one of the first challenger banks to focus on the environment, added a roundup feature that directs money to a tree-planting charity in March 2021, and hired its first chief of innovation, who once led financial products teams at Tesla, in August.

Several new entrants have cropped up over the past few years. Decorah Bank & Trust Company in Decorah, Iowa, launched the digital bank Greenpenny in the middle of 2020 as a way to grow while promoting sustainability, a long-standing commitment on the part of the bank. It offers deposit accounts, mortgages where homeowners could finance up to 15% of the "as completed" value of the property on energy efficient improvements, solar lending to individuals and solar financing for businesses and farms.

Ando Money and Atmos Financial are challenger banks that both debuted in early 2021. They have similar models: route deposits from their customers to fund clean-energy loans made by community banks. In June, Ando expanded into insurance, acting as a broker to connect customers with auto, home or pet insurance policies. The goal is to eventually have enough policies where insurance companies can create a pool of policyholders for which no premiums would be used for fossil fuel investment. For now, the challenger bank says it will plant 100 trees per customer policy.

Atmos offers a checking account that returns up to 5% cash back for shopping at dozens of sustainable companies. Its savings account yields 1.5% for users who make recurring donations to one of the climate nonprofits on Atmos's platform.

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Green-minded fintechs work with banks

Bank of the West in San Francisco was ahead of the game. In 2020, it launched a checking account called 1% for the Planet, in partnership with the nonprofit 1% for the Planet. The bank donates 1% of its net revenues from the account to environmental nonprofits through the 1% for the Planet organization. Users will also see a carbon-tracking tool embedded in the mobile app. Like Klarna, the bank uses Doconomy's Åland Index to calculate the carbon impact of a given transaction. Bank of the West was the first U.S. institution to implement this index in 2019.

Several fintechs, both in the U.S. and overseas, are picking up more financial institutions as customers. For example, Ecolytiq helps financial institutions offer green features on their apps such as carbon footprint calculations, personalized insights and advice (for instance, cutting back on red meat consumption) and the ability to donate to projects that are certified by the offset standards organization, Gold Standard. It counts Rabobank in the Netherlands, Tatra Banka in Slovakia, Green-Got in France, Novus in the United Kingdom and Tomorrow in Germany among its customers. It hopes to expand to the North American banking market.

Carbon Zero Financial helps financial institutions calculate carbon footprints of their users' spending, use credit card points to offset, and locate sustainable products. The company pivoted to a business-to-business model a few months ago instead of sticking with its original plan to launch a credit card. The company expects to have about 10 partners in place by September; one financial institution it is working with is Clean Energy Credit Union, which uses customer deposits to fund its clean energy loans.

One issue with carbon-tracking tools is getting granular data — say, what the customer bought at a grocery store or restaurant. Some services, such as Ecolytiq, try to get a clearer picture by quizzing users at the start about their habits, such as what their daily diet looks like.

Joro, a sustainability-focused standalone app provider based in Oakland, California, does something similar. It lets users connect their credit and debit cards to gain insights on the carbon footprint of their spending, including their largest carbon purchases. When users first download the app, they can answer a few questions about their lifestyle, including dietary habits and what their commute is like. They can also offset their emissions by donating to a portfolio of carbon offset projects evaluated by Joro's team. The amount to offset is automatically calculated based on the carbon footprint of their purchases, though users can also set a cap on their subscription.

Banking-as-a-service goes green

Climate First Bank opened its doors in June 2021, offering climate-mindful personal and commercial banking services.

With its OneEthos technology unit, the de novo is looking to spread its ideas to other financial institutions.

OneEthos will develop technology for Climate First to start, and later white-label its products to other financial institutions that want to build on ESG principles. This could include deposit accounts with an environmental twist, green loans, dashboards that could illustrate the emissions being saved by the customer's solar additions, and more. The longer-term vision is to be the sponsor for like-minded fintechs and challenger banks.

"The beautiful thing about technology is it can scale very easily once you build it," said Marcio deOliveira, chief technology officer of Climate First, in a July interview. "It's expensive and difficult to build, but once it is validated — which it will be by Climate First Bank — it makes sense to scale it by partnering with other financial institutions and fintechs." The bank is especially interested in working with partners that share its mission to scale solar lending.