February 23 marked the end of an era. Last week was the last time we organised an Afterwork session. It was the last time our virtual round tables took place at 16h CET. From now on, we welcome you at Breakout Bites, virtual round tables from 12h30 to 13h30 CET.

We celebrated our last Afterwork session with an exceptional guest: Peter Surek, Head of Social Banking at Erste Group and CEO of Erste Social Finance Holding. He joined us in a talk about how they leverage finance for social impact.

With its origins and headquarters in Vienna, Austria, Erste Group covers 10 markets in Eastern and Southern Europe with corporate, retail, private and wealth banking. Founded in 1819, it was the first savings bank on the territory of the Austrian monarchy. It was founded by a Catholic priest and a few nobles who wanted to democratise banking in an era where banking was only available to the wealthy.

The fact that a group of volunteers ran it is more than a funny anecdote of the bank: it is still in the DNA of the group, as you will read later on.

Erste Group today is one of the largest financial groups in Eastern Europe, with a balance sheet of approximately €324 billion.

Social Banking?

"Social Banking" has many meanings and interpretations. Peter explained that activities related to Social Banking at Erste Group are based on three fundamental principles:

• They must have a societal impact;
• They must be linked to banking but separate from the existing major business lines;
• They must be financially sustainable.

That last condition stands out for me. Peter: "We should cover our costs. The Board understood that our ROI target could be lower than other business lines, but we had to cover our costs at least; we are not a charity. That was the task which we got at that time."

A team analysed the market and found three segments where Social Banking could fill a gap where regular banking was/is failing:

• Micro enterprises that required a microfinance proposition;
• Non-profits, NGOs and social enterprises no bank was willing to finance;
• People at risk of poverty or financial exclusion that require a basic bank service and access to credit for a better (financial) life.

Social Banking is a department inside the bank, coordinates all the Social Banking Units across the different countries covered by Erste Group.

Peter: "You cannot run Social Banking from Vienna. You need to have local people and local teams that can work on those topics. That is why we have this function here on the Erste Group Holding level to coordinate the activities and cater for the risk management and regulatory frameworks. We basically satisfy all the requirements. The local business units deploy Social Banking Units inside of these banks."

Leveraging Finance for Social Impact

With the University of Economics in Vienna, the bank built an impact model and an impact assessment. At the start of Social Banking, in 2011-2012, regions like the Balkan countries measured an unemployment rate of almost 40% among the young population. So for Erste Group, the success of their microfinance business was defined by the jobs created and preserved by the micro-businesses they supported.

Their latest Impact Report, published in 2022, highlights the creation and preservation of 80,000 jobs through their financing. One step further, they also spoke to 1.500 organisations to evaluate their impacts on how the loans affected their turnover and profitability and whether they experienced improvements on a personal level.

The key impact indicator for the second pillar was how Erste's financing improved the financial situation of non-profit organisations and social entrepreneurs. Because of their dependence on subsidies, bridge financing helps them improve their liquidity situation, which in turn helps them to reach out to more beneficiaries.

The bank developed a separate brand, Zweite Sparkasse, to support the third segment, the private individuals. Financial stability, improvements in people's financial health, and in the case of migrants, access to current accounts are key metrics to determine success here. Zweite Sparkasse's unique formula builds on the goodwill of 350 volunteers, retired employees of Erste bank, that support clients that are referred by 50 partner NGOs.

FLiP is another initiative focusing on financial education. Next to an interactive, innovative financial museum, they also have a bus that travels across the country and online by bringing financial education with relevant content and training.

Keeping Shareholders Happy

Stakeholder management was a crucial element in rolling out Social Banking. Erste Group is a stock-listed bank, so shareholders are key stakeholders to manage.

Peter: "It's always a convincing process with new people who join the management and explaining to the Supervisory Board the added value of Social Banking. Of course, they understand that Social Banking is at the roots of the bank and that it is basically part of its mission. Still, they question whether this is costing the bank money or whether it generates added value for the bank."

That explains the importance of keeping Social Banking profitable: it needs to contribute to the bank's results, like any other business line, just not always that much.

Peter: "You can compare us sometimes as a kindergarten, or a health centre for the bank, for the clients who are not yet ready for regular banking. We are catering for them; we are developing them. Once they are doing fine, they will be a very loyal client of the bank. Because if you help somebody in a difficult situation, this customer is usually much more loyal than those who get by some marketing campaign."

Erste Social Finance Holding

Next to being Head of Social Banking for Erste Group, Peter is also CEO of Erste Social Finance Holding, the entity that holds equity participation in different social banking entities. Quasi-Equity investments are limited to social enterprises or, for example, social infrastructure projects.

Financial products like Quasi-Equity help these organisations build a bigger capital buffer that Erste Bank can leverage to provide additional loan financing. Usually, they expect the entrepreneur to fund at least 10%-20% of the investments, the Holding will add another 20%-30% through quasi-equity in the form of subordinated loans, and the rest can be financed by a loan.

Social Impact Bonds are another financial innovation for creating impact. They connect philanthropic or impact investors with social projects for which public authority pays a return if the contacted impact is achieved.

Conclusion

Peter brought an inspirational story from which I hope many banks will take an example. This is not only marketing but a story with hard numbers that show the impact the group has had so far on different levels.

Years ago, we had 2 executives of Erste Bank bringing their story at The Banking Scene Conference Brussels. It was lovely to hear that the story they brought about Zweite Sparkasse and FLiP wasn't a short-term initiative; it still has an impact. Maybe even more revealing: it is part of a much bigger Social Banking project.