Understanding the different types of ethical banks

Do you consider yourself to be a conscientious consumer? If so, you’re probably aware of the environmental and social impact of your purchasing decisions. But have you thought about whether the institution you bank with aligns with your values?

Here, we’ll dive into how ethical banks in the UK work and the different types of banks you can consider.

What is ethical banking?

Ethical banking is when you choose a bank or financial institution that invests your money in a way that isn’t a detriment to society. Instead, ethical banks aim to invest your deposits in a way that has a positive impact on society, the environment and/or local community.

If you’re conscious of issues like climate change and human rights, choosing to deposit your cash in an ethical bank can help you make a real difference. Many ethical banks offer various financial products, such as current accounts, loans, savings, and mortgages. Each firm tends to have its own set of ethical aims for you to consider. On the whole, ethical banks promise their customers that they won’t invest money in certain commodities such as tobacco, weapons, fur or alcohol. 

Every individual has their own, unique moral values and the same applies to banks. This means that what makes a bank truly ethical will depend on your personal perspective. But a bank that can be deemed ethical is generally one that uses its clients’ money to invest in good causes, such as charities, supporting human rights and tackling climate change.

What factors should I consider when choosing a bank?

The UK certainly isn’t short of banks and building societies. According to the Office for National Statistics, as of 2022 there are 260 banks in the UK. With such a wide range of financial institutions to choose from, it can feel like a tough decision choosing a bank that’s right for you and your finances.

Here are just some factors to consider when choosing a bank:

The bank’s values: While different banks can look similar in terms of their services, their values can help you to differentiate them. If you’re looking to align your financial choices with your ethics, explore the commodities the bank invests in such as clean energy and human rights, and avoid banks that invest in what you don’t want to support.

Fees: Make sure to check if the bank charges a fee, and if so, how often you’ll be charged.

Type of banks: There are several types of banks to choose from, from ethical banks to high-street banks, and challenger banks. To decide which type best suits your needs, it’s worth comparing their key features. We’ll explore the different types of banks and how they work later. 

Services offered: What services are you looking for? Perhaps you want a bank that offers a competitive interest rate to maximise the return on your savings, or maybe you’d prefer one that offers a range of credit card options. Make sure the bank you choose offers the services you need.

Reviews: A great way to work out if a bank ticks your boxes is by reading reviews from both customers and finance experts. Reviews can give you a good idea of what to expect from that financial institution.

Digital features: Is being able to manage your money digitally important to you? While many banks offer basic services through their app or website, such as transferring money and checking balances, not all institutions offer advanced digital features. You may want a bank that allows you to lock your debit card should you need to, or open new savings pots or accounts.

Principles and practices of ethical banks

As we’ve mentioned, what makes a bank ethical will depend on your own principles and values. But generally speaking, an ethical bank is one that is concerned about its environmental and social impact and uses your money to invest in good causes.

The principles and practices of ethical banks include:

Transparency

Ethical banks are usually transparent and honest about the steps they’re taking to be ethical and sustainable. They tend to be open about the causes they do and do not invest in and maintain a level of consistency to ensure their ethics are incorporated both internally and externally.

Sustainability

Ethical banking encourages environmentally friendly initiatives where they can and aim to invest in environmental organisations. For example, an ethical bank may choose to only offer online communications, rather than sending you a paper copy of your bank statements in the post.

Local communities

Ethical banks don’t just fund environmentally friendly industries; they may also give back to the community by organising activities or volunteering at events.

Types of banks

Next, we’ll explore the different types of ethical banks and their key features for you to decide which type would suit you best.

Green banks

As the name may suggest, green banks focus on and invest in sustainable technologies and eco-friendly initiatives. Green banking prioritises sustainable banking practices that aim to promote clean energy and fight climate change. With a green bank, you can expect your money to be invested in causes like renewable energy, reforestation and carbon offsets – ideal if you’re an environmentally-conscious person.

If you want to ensure the bank you choose is meeting the highest standards for social and environmental performance, you could opt for a bank that is a certified B Corp. The B Corp certification is awarded to businesses that meet the highest standards of performance, accountability, and transparency across various factors. These include high social and environmental performance, employee benefits, and charitable giving. The B Corp certification is a global accreditation serving as proof that an institution is making positive social and environmental efforts. 

Sharia banks

If you’re looking for a bank that aligns with your religious values, a Sharia bank may be the solution. Sharia banking, also known as Islamic banking, refers to banks that adhere to Islamic religious laws. These banks follow some core principles such as:

• Not charging you interest (Riba) to borrow money
• Not paying interest on savings accounts
• Not benefiting from restricted practices such as gambling, alcohol or tobacco
• Not engaging in high-risk investments or in deals that come with extreme uncertainty
• Sharing profit and risk between banks and consumers

Wondering if a Sharia bank is ethical? You could consider Sharia banking to be a form of ethical banking as the money you invest won’t be used to fund organisations or businesses that are forbidden under Islamic law. So, depending on your ethics and values, a Sharia bank may suit you.

Challenger banks

To grasp the concept of a challenger bank, we first need to cover the history behind them.

Before the changes in the UK’s financial services regulatory landscape, setting up a new bank was both expensive and complicated, which meant very few banks dominated the UK market with hardly any competition. Prior to Metro Bank being granted its banking licence in 2010, there hadn’t been a new high street bank for 100 years. So, after the 2007-2008 financial crisis, it was decided to open the market up to new banks, which is where challenger banks came into play.

Challenger banks are mostly small and modern retail banks that are new to the market, which aim to challenge the long-established institutes. They look to specialise in the areas that are underserved by the ‘big four’ banks (Barclays, HSBC, Lloyds Banking Group and NatWest Group) with modern, financial technology and a focus on you as a client. 

While those four high-street banks offer stability and familiarity, they often offer lower interest rates. Whereas challenger banks can offer higher interest rates due to their lower business expenses. Overall, challenger banks look to differentiate themselves from the traditional banks by using modern technologies and focusing on digitalisation, such as online-only operations, that avoid the costs associated with traditional banks. 

Looking to maximise the return on your savings?

If you’re looking for a high return on your savings, our cash deposit platform may suit you and your financial goals. With Flagstone, you can access hundreds of accounts from a range of banks including challenger, sharia, and charity – all via a single application.

With a diverse selection of rates and banks at your fingertips, you can grow your savings whilst staying true to your moral principles. See how Flagstone can help you.

Use our cash deposits calculator today