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The fifth pillar of lending

The fifth pillar of lending

Emma Ryan 9 minute read

Excellent pricing, great customer service, solid BDM networks … why aren’t you writing business with a mutual?

The mutual sector is the industry’s best kept secret.

It’s made up of 74 credit unions, 12 mutual banks, six building societies, one other mutual ADI, holds 10.2 per cent of total household deposits and is worth $92.3 billion in assets – but so many brokers are unware of the benefits it has to offer.

First and foremost, the fifth pillar of lending is all about its customers. It offers competitive pricing and has far less channel conflict than the majors.

On top of this, the mutual sector offers choice and competition, making it a genuine alternative to the big banks.

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However, using mutuals isn’t an ‘all or nothing’ proposal. Brokers are able to maintain their connections with the majors and still offer their clients products and services from the mutual lenders at the same time.

While not every deal will be suitable to mutuals, it certainly won’t hurt to explore the sector more in-depth and see exactly what writing with a mutual can do for your business.

Remember, anyone can recommend a big four bank or one of the more popular lenders but it takes a smooth operator to nominate an institution outside the mainstream.

The evolution of mutuals

Mutuals have been around for years. In fact, the largest in Australia, Heritage Bank, has been around for a whopping 140 years.

Despite their prolonged existence though, many mutuals have just recently extended their service to the third-party distribution channel.

“We’ve been dealing with our mortgage broker partners since 1997 and at the time, there really weren’t a lot of other organisations like ours that saw it made sense,” Heritage Bank general manager of retail service, Paul Francis says.

Back then, Mr Francis notes that brokers were doing only around 10 per cent of total loans originated in the country, whereas nowadays that number has moved up to around 50 per cent and is growing.

The growth of the professional broker channel has been one of the reasons why we’re seeing more mutuals open their doors, according to Qantas Credit Union CEO, Scott King.

“We know that almost 50 per cent of home buyers seek a home loan via a broker, so expanding our channel strategy to reach a greater potential audience makes sense,” he says.

For Newcastle Permanent Building Society CEO, Terry Millett, expanding to the third-party channel allows for greater diversity.

“Broker distribution provides a greater diversity in our home loan portfolio, because it allows us to distribute outside of our footprint,” he says.

“We want our customers to get the best value they can, and brokers provide the opportunity to choose which institution and which products will suit them best.”

Benefits to brokers

Brokers who write business with a mutual can guarantee their customers will be well looked after.

According to the Customer Owned Banking Association (COBA), the mutual sector services more than four million people and has a higher customer satisfaction rate than the big four banks.

COBA figures show total building societies have the highest customer satisfaction rate at 93.5 per cent, while total mutual banks come in at 92.2 per cent, total credit unions at 89.3 per cent and the big four at 81.2 per cent.

Another benefit is the fact that the mutuals don’t have shareholders and thus, have the ability to operate on a true ‘customer first’ basis.
“Our customers are our owners,” Mr Millett says.

“The sharemarket-listed banks are 100 per cent owned by their shareholders who demand a financial return on their shares, so their business model and culture is about maximising profit and shareholder returns.”

Bankmecu head of third-party distribution, Richard Irving says the principle of customers owning a mutual bank means that profits are returned back to members in the form of lower interest rates and reduced fees.

“By way of example, Bankmecu customers were $22.7 million better off in 2014 through improved interest rates and lower fees – as measured by Cannex,” he says.

Mutuals are similar to the banks in that they too are regulated by APRA.

Teachers Mutual Bank national manager of third-party distribution, Mark Middleton says another key advantage is the unconventional service they can offer their customers.

“We’ve got all the traditional offerings that are already available out there in the market place but there are products and services we can offer that other banks don’t.”

As an example, Mr Middleton notes the Teachers Mutual Bank 100 per cent mortgage offset on fixed rates, which he says is a rarity in the market.
Brokers who deal with a mutual provide their customers with a real alternative edge.

Mr King says as every client is different, diversity and choice is always important in any offering.

“Not everyone is after just the lowest rate, most people want more,” he says.

“It’s the service orientation and authenticity around the offer that can be missing. It’s ‘what you see is what you get’ plus more with mutuals – no hidden fees and a place that genuinely cares about your business.”

In addition, ME, who refers to themselves as an industry super fund-owned bank, notes the brokers who use mutuals are likely to generate more referrals.

“[Mutuals have] competitive offers, product innovation and excellent customer service – the latter clearly evidenced by the strong results that ME and the mutuals generally receive from customer satisfaction surveys and net promoter scores,” ME’s general manager of brokers, Lino Pelaccia says.

“This impacts brokers directly as a great banking experience generates further referrals.”

According to COBA, the mutuals generally charge less than the major banks in loan interest and offer attractive deposit rates on saving investment accounts and 90-day term deposits.

The latest statistics from Canstar Cannex confirms this.

At June 2015, the average and minimum standard variable rate for the four major banks was 5.44 per cent and 5.38 per cent respectively.

Meanwhile, for credit unions the average standard variable rate was 4.89 per cent and the minimum was 4.18 per cent, demonstrating a significant difference.

Building societies and mutual banks had an average standard variable rate of 4.69 per cent and 5.07 per cent respectively, while the minimum for building societies was 4.09 per cent and 4.43 per cent for mutual banks.

From the horse’s mouth

As brokers become aware of the value mutuals have to offer, more are choosing to include them in their business.

Newcastle Permanent Building Society along with ME are on the panel of LJ Hooker Homes Hunter Valley principal Ben Eick – and he uses them for well over a third of his deals.

He says the thing he likes about mutuals is that they’re localised and have plenty of branches.

“They also have all the features the big banks have but probably even more access on the ground level than the big banks,” he adds.
One minor criticism Mr Eick has is the mutuals’ “tighter” policies.

“They can be very black and white in what they want,” he says.

However, Mr Eick notes the lack of “grey area” can be a benefit as brokers are able to clearly understand what they’re in for by dealing with a mutual.

“Their polices are tighter, they’re a little bit harder to get into but once you’re in there, it’s happy days because you’re paying a lot less than everybody else per week,” he says.

Capita Finance’s Adam Donald is another broker who sees the benefit in mutuals. Mr Donald writes at least 50 per cent of his business with mutuals, including ME and P&N Bank, and says one of the biggest benefits of working with them is their supportive BDMs.

He notes mutuals genuinely care about brokers, something that is not always the case with the majors.

“If something slips through the cracks with my client, they tend to give me a call and say ‘This is happening, do you want to get in contact with your client?’ and it’s that level of support which makes me so confident and comfortable using them,” Mr Donald says.

While Mr Donald says there’s little downside in using mutuals, he notes their brand recognition is a small disadvantage along with their lack of processing which sometimes prevents them from getting business approved as quickly as it is by the majors.

He notes this is a minor negative and still “100 per cent” encourages other brokers to use mutuals, as he says it will prove to be worthwhile and in addition, provide more competition to the majors.

“If there’s mutuals in the sector that are giving good product and are doing things that the majors can’t, why wouldn’t you support them?”

Aggregator weighs in

Vow Financial CEO, Tim Brown says despite the mutuals being a fairly small component of the overall distribution market, it’s a sector that appears to be on its way up. COBA confirms this in its latest report, saying as at March 2015, customer-owned banking is growing by 6.9 per cent annually.

“As we find more and more want to compete in the broker distribution space, we’re finding more and more competition, which then obviously generates more volumes for them,” Mr Brown says.

In terms of key points a broker should know when deciding whether or not to write business with a mutual, Mr Brown says there are some distinct advantages and disadvantages of this sector.

“Generally, the benefits of dealing with a mutual are that there’s less fee structure,” he says.
“They generally don’t have as high ongoing fees or transaction fees and their fixed-rates tend to be lower than the major banks which is very important when you’re discussing the benefits to your client”.

On the flipside, Mr Brown notes some of the mutuals’ location can be a disadvantage.

“They tend to have less distribution points,” he says. “If you want a full banking service where you want commercial type banking facilities, they generally aren’t in the market.”

However, Mr Brown believes overall they can help improve a broker’s business because they are truly independent and as a result, tend to help give a better array of offers.

“Instead of just being the four majors and maybe some of their regional offerings, you’ve got the mutuals sitting there and they’re often very competitive,” he says.

The challenge ahead

It’s become a primary staple in the broking world so it should come as no surprise that 92 per cent of mutuals stated that they planned to invest more in mobile technology throughout 2015, according to the latest KPMG report.

“There’s no doubt the importance of investment in technology with two-thirds of all customer interactions now being initiated via digital and self-service channels,” Mr King says.

“However, technology is more than just a channel solution and we’re doing a lot of work in this space to not only catch up to the majors but to redefine the banking model.”

Another obstacle on the horizon for many mutuals is increasing their broker numbers.

“What we’re really looking to do is continue our growth in this [broker] segment,” Mr Middleton says. “We’ll continue to invest in this channel by both our resourcing and also our IT [programs].”

Mr Francis says Heritage Bank aims to continue its commitment with its broker partners.

“We gave a commitment for further investment in sponsorships and are putting on an additional four BDMs around the country. We’re also making an investment in our broker technology and broker website.”

The KPMG report revealed growth and profitability were the biggest challenges facing mutuals in 2015, with 68 per cent regarding the big four as their greatest competitors.

This is an increase of 20 per cent from the previous year’s 48 per cent.

Despite these challenges, the mutual sector is confident they offer a genuine alternative to banks and by the looks of things, many are starting to share this view.

The fifth pillar of lending
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