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U.S. banks pledged billions of dollars to help struggling communities in 2020 — and new research suggests their largesse will help their bottom lines, particularly if they’re operating in a competitive market.
In short, they make a good name for themselves that resonates with existing and future customers.
That’s according to a study presented recently at the American Economic Association annual meeting. Banks that donate money to nonprofits are rewarded with increased profits and bigger market shares, it concluded.
“A lot of people think, ‘Well, can firms really do well by doing good?’ In this context, the answer is yes. In this context, doing good actually leads to future benefits,” said Simon Xu, a researcher at Australia’s Socially Responsible Investment Research Lab, an independent research group.
He co-authored the study with Seungho Choi, an assistant professor in Queensland University of Technology’s School of Economics and Finance, and Raphael Jonghyeon Park of the University of New South Wales.
“ “In this context, doing good actually leads to future benefits.” ”
Xu and his co-authors were interested in why banks engage in corporate philanthropy, and whether and how it affects their performance. To trace that relationship, the researchers looked at tax-deductible donations that 102 U.S. banks made from their private foundations to nonprofits.
Those contributions are relatively easy to track because they’re publicly disclosed to the IRS. The authors reviewed more than 92,000 donations made between 2000 and 2015 and examined the banks’ balance sheets and branch-level deposit data.
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2020 was a big year for bank donations
The researchers wanted to examine banks’ corporate philanthropy because banks are among the most active of corporate philanthropists, and often rank highly on lists of the most generous companies in the U.S.
The twin crises of the coronavirus pandemic and national reckoning over racial injustice made 2020 a standout year for banks’ philanthropy. Bank of America BAC, -3.04%, for example, announced $100 million to support local communities reeling from the pandemic. Bank of America did not respond to a request for comment.
Wells Fargo WFC, -2.88% said in March 2020 that its private foundation would hand out $175 million in donations to “help address food, shelter, small business and housing stability, as well as to provide help to public health organizations.” In July 2020, the company announced a $400 million effort to help small businesses by donating the processing fees
it would have received from the government for participating in the Paycheck Protection Program back to the community, a spokeswoman said.
“ “Now more than ever, business has a responsibility to step up and help solve some of the world’s most pressing challenges.” ”
Wells Fargo’s head of social impact and sustainability, Nate Hurst, said in a statement that the bank engages in philanthropy “because it’s the right thing to do when people are in need and we believe in improving the lives of our neighbors.”
J.P. Morgan Chase & Co. JPM, -2.27% committed $30 billion in October 2020 over the next five years to advancing racial equity, and previously committed to investing $200 million by 2022 in Detroit’s economic recovery, a spokeswoman said.
“Now more than ever, business has a responsibility to step up and help solve some of the world’s most pressing challenges,” said Janis Bowdler, president of JPMorgan Chase Foundation, in an emailed statement. “An economy that is fair and works for everyone, including communities of color, low-income families and others who have been underserved for decades, is good for the communities we serve, our employees and our business.”
Competition between banks seemed to drive donations
Their findings: the more competitive a banking market, the more likely it was that banks donated to nonprofits. To control for other factors — such as the possibility that a bank made more donations than its competitors did because it was more profitable — researchers zeroed in on donations made by banks in the aftermath of natural disasters and compared them to donations made by banks in nearby counties where natural disasters hadn’t happened. The authors theorized that natural disasters created a situation where banks would donate out of necessity, not choice.
Researchers also focused on places where antitrust laws ensured competition between bank branches following bank mergers. They found that the probability of banks making donations increased by 39.2% when banks moved from a “near-monopolistic” market to one with “perfect competition.”
“The competitive banking environment is what’s really driving their donation activities,” Xu told MarketWatch. In a competitive industry such as banking, making donations to nonprofits is one way for banks to stand out from their rivals in the battle to attract customers, the researchers theorized.
“ “Bank donations can indeed be altruistically motivated, but our results indicate that these donations have a strategic component.” ”
The research covered about 90% of the U.S. banking industry and the findings are “generalizable,” Xu said. The paper has not yet been published.
The findings about the possible motivations for banks’ philanthropy led to another question: Were these donations paying off for banks? The researchers found a measurable impact on banks’ bottom lines.
“Our results show that banks that donate to nonprofits in counties affected by natural disasters experience a higher local deposit market share following a natural disaster, relative to those banks that do not donate,” the authors wrote.
Donations made a measurable difference in banks’ market shares and profits
In fact, the deposit market share of banks that donated after a natural disaster was 0.5% higher, on average, in the year immediately after the disaster. That increase in deposit market share persisted for up to two years after the donation.
That translated into increased profits, researchers found, with donating banks earning on average $3.5 million to $7.3 million more in profits in the following year than non-donating banks. Donations also appeared to have an impact on banks’ lending activities. After natural disasters, banks that made donations reaped more deposits, and subsequently originated more local mortgages.
“Bank donations can indeed be altruistically motivated, but our results indicate that these donations have a strategic component that has a material impact on a bank’s local deposit market share,” the authors wrote.
Attracting ‘socially responsible’ customers
The donating banks may have increased their market share because making the donations helped them establish a connection with nonprofits that later turned into a professional relationship, according to the researchers. News of the donations may have also helped the banks attract “socially responsible” customers who wanted to do business with a bank that they perceived to be ethical.
Though not covered in the paper, Xu noted in an interview that corporate giving could also be a less costly way for a bank to increase its market position compared to traditional methods. Marketing and advertising expenses add up, but donations to nonprofits are tax-deductible and are often covered by the media for free, he said. “It’s possibly not only a cheaper, but a more effective way of getting to the public and attracting the attention of the public,” Xu said.
