The mutual banking sector has seen strong growth over the last couple of years, with socially conscious customers increasingly asking their brokers about alternatives to the major banks who have been forced to reinvent themselves following the fallout from the banking royal commission. We explore the shift towards customer-owned banks
Mutual banks provide the same consumer banking services as publicly listed banks, including credit cards, personal loans, home loans, term deposits, online savings accounts and mobile banking. The critical difference is that mutuals are owned by the customers they serve.
Whereas commercial banks are owned by their shareholders, meaning that key decision-makers have to balance maximising shareholder value against customer interest, customer-owned banks are, by their very nature, solely customer-focused.
As a result, there’s no stakeholder balancing act to contend with, and 100 per cent of the profits go back to the customers and the communities they serve.
This customer-centric focus has become a key selling point for customer-owned banks in the aftermath of the financial services royal commission, which was highly critical of the way major banks and their subsidiaries had in some cases abdicated their responsibilities to customers.
A mutually beneficial alternative
By returning profits to customers, mutuals are often able to offer more competitive products than their commercial counterparts.
Stewart Saunders, Heritage Bank’s head of broker distribution, says mutual banks don’t have the inherent conflict that listed banks face in trying to serve two masters.
“On the one hand, the big banks have to generate dividends for shareholders, while on the other hand, they have to serve customers. They can’t put both groups first. At Heritage, however, we don’t have that conflict. We don’t have to pay dividends to shareholders, so we don’t have to put profit ahead of anything else,” Mr Saunders says.
“Our customers own us, so everything we do is for their benefit. That means we focus more heavily on delivering great value to our customers and putting their needs first. It means we offer a more personalised and caring service that our customers love. You’re not just a number at Heritage.”
Darren McLeod, head of third party at Beyond Bank, says the bank offers its customers fully featured products at every stage of their life.
“With 48 branches across Australia and multiaward-winning technology, the bank is growing and seeking to have the largest outreach to customers who wish to have more than a transactional relationship with their bank. Currently, we have [first home buyer] specials with cash, no annual fee products with unlimited offsets, competitive fixed rates, and sharp investment rates regardless of repayment type.”
In addition, mutual banks can play a vital role in providing financial services to otherwise underserved niche markets and clients.
For instance, Teachers Mutual Bank (TMB) – through its four brands: Firefighters Mutual Bank, Teachers Mutual Bank, UniBank and Health Professionals Bank – provides banking services, financial products and services tailored to the needs of workers in the essential services sector.
Mark Middleton, national manager of third party distribution at TMB, says that understanding these niche markets helps the bank deliver the right solutions and good credit quality.
“We’ve seen, through those brands, the essential services workers, who in many ways see it as difficult to get finance because maybe their shift work isn’t being recognised, their income stream isn’t 100 per cent, for example, with police, firemen and paramedics, where a lot of their income is from shift allowances and overtime,” he says.
It’s not just about the money
More competitive financial products and better customer service are only half the story when it comes to Australia’s mutual banks, according to Vincent Lewis, manager partnerships at Bank Australia. The other half of the equation is: mutual banks tend to have strong social and environmental values in terms of their investment choices, with many giving back to their customers and the communities they serve by supporting local sporting clubs, schools and charities.
Mr Lewis highlights the importance of ethical investment as a key differentiator in the marketplace, with up to 2,000 new customers a month joining the bank as a result of its “Clean Money” campaign.
“For Bank Australia, it is about commitment to our values, how we engage with our community partners, the work we do for a better environment, greater workplace inclusion, in aiding the homeless or refugees, that we look to make a difference to the planet, our customers, our community partners every day,” he adds.
“We have been running multimedia marketing campaigns about ‘The bank Australia needs’. And in the past 12 months, this advertising became more pointed through the introduction of our Clean Money campaign, which looks to educate consumers on how their money is spent. The Clean Money movement highlights our very real point of difference describing where the bank will not invest our customers’ money.”
Meanwhile, Mr McLeod notes that Beyond Bank has been independently certified as meeting the international B-Corp social sustainability and environmental performance standards.
“We are Australia’s first B-Corp certified bank, meaning we have met the highest standards of overall social and environmental performance, transparency and accountability. This certification has seen customers look at us as a viable organisation to bank with rather than who has just got the cheapest rate,” he says.
Hayne pain is mutual bank gain
Following an 11-month-long inquiry into financial sector misconduct, commissioner Kenneth Hayne’s findings starkly illustrated what can go wrong when governance, culture and remuneration at major financial institutions go unchecked.
The challenge for major banks in a post-royal commission environment – a challenge that is not felt by mutuals due to their customer ownership model – is developing management practices that eliminate trade-offs between “doing well” and “doing good” while satisfying both financial and non-financial stakeholders. As the major banks and their subsidiaries continue their work to realign themselves to customers, key advantages mutuals have are their long-established customer-centric business model, sustainability and social responsibility values, and their position within various niches.
Mr Saunders and Mr Middleton both observed that consumers’ social consciousness has shifted on the back of the royal commission, leading to an uptick in enquiries around ethical banking.
“We’ve definitely had increased interest from people who have specifically mentioned the royal commission and dissatisfaction with the conduct of the big banks as the reason they have come to us. People are starting to understand that there are genuine alternatives to the big banks out there,” Mr Saunders says.
“The commentary coming out of the royal commission has alerted the community to alternative lenders, including mutual banks… and they’ve gone out and found out for themselves. Brokers have certainly helped in contributing to this awareness.”
One of the major factors driving customer-owned bank growth in recent times has been customers looking for an alternative to the major banks.
“We know that the Clean Money campaign had an impact on our customers. And most pleasingly, our new customers are predominantly Millennials and younger Gen X. Between those two cohorts, we’re looking at about 70 per cent of our recent customers sitting in these two subsets, [which] is a shift from historical norms,” Mr Lewis says.
Collectively, mutuals are becoming a force to be reckoned with post-royal commission.
According to figures published by the peak sector body, the Customer Owned Banking Association, as of September 2019, there are around 4 million Australians choosing to bank with a community-owned lender.
All up, there are 71 customer-owned banking institutions in Australia, including 41 credit unions, 27 mutual banks and one building society. In total, these institutions hold $119 billion in assets and $102 billion in deposits.
The sector is the fifth-largest holder of household deposits outside of the big four banks.
“In June, APRA released figures that showed customer-owned financial institutions were growing much faster than the big banks. Over the past 12 months, the customer-owned banking sector’s housing loans have increased by 8 per cent, while the major banks’ grew by just 2.6 per cent,” Mr Saunders says.
Managing the growth
With the mutual bank sector experiencing rapid expansion, Mr Lewis says Bank Australia is being cautious in its approach to growth.
“Over the last four years, two of those years we grew at 20 per cent. We have actually pulled the reins in over the past two years. We were growing too quickly, which placed scarce resources at risk. We wish to grow, but in a sustainable manner,” he says.
“The bank is looking to double in size over the next four to five years. Assets currently are $6.3 billion, with a target of $12 billion by 2025. More importantly, and probably more challenging, is the desire to double our customer base to around 270,000-280,000 in the same period.
“The bank is taking a staged approach, so within three years we want to be sitting at circa $9 billion. In this manner, we can preserve capital, maximise profitability and continue to invest in the business, our customers and community partnerships.”
Standard & Poor’s (S&P) recent report, titled Larger, Well-Managed Australian Mutuals will Prevail as Market Consolidates, noted that while the margins of mutual lenders continue to remain higher than those of the major banks, they have shrunk faster than the big four over the last 10 years as competition in the mortgage market increased.
S&P credit analyst Lisa Barrett, who authored the report, claimed that continued consolidation between mutual banks is “inevitable” for them to be able to effectively compete with the big four and regional banks, who have much lower operating and funding costs.
Indeed, numerous mergers have been announced this year in the customer-owned banking sector, such as between Regional Australia Bank and Holiday Coast Credit Union, between P&N Bank and bcu, and between Sydney Credit Union and Endeavour Mutual Bank.
“In our view, mutuals will continue to expand outside of their traditional common bonds to facilitate future merger opportunities,” the S&P report stated.
While acknowledging that mergers are costly and time-consuming, Mr Lewis says they do offer dividends when the partners are a good fit, adding that consolidation has been a part of Bank Australia’s growth.
“Bank Australia has 61 years of history and has merged 71 times to get to where we are today. We rebranded to Bank Australia four years ago, which has had a significant influence on our growth since,” Mr Lewis says.
“Consolidation in the industry has been going on since the early 1980s… There is no doubt there will be more mergers, given increasing compliance requirements, the cost of capital, the depth of competition in the market, and fintechs coming in.”
While mergers are not currently a part of Bank Australia’s growth strategy, with the bank focusing more on the “acquisition of like-minded, values-based customers and asset growth”, it would not disregard a merger opportunity if there was a “significant upside”.
A bill to level the playing field
The community-owned banking sector is poised for greater growth, thanks to the Treasury Laws Amendment (Mutual Entities) Bill 2019 passing Parliament in April. Whereas previous provisions had restricted the customer-owned banking sector’s capacity to issue the full range of regulatory capital instruments, such as convertible debt instruments, due to uncertainties around their tax status, the new law allows mutual banks, credit unions and building societies to raise capital more easily.
The new bill includes: a new definition for a mutual entity as a company where each member has no more than one vote; changes to demutualisation rules to ensure that it is only triggered by an intended demutualisation, not by other acts such as capital raising; and the creation of a mutual-specific instrument that can be used to raise capital.
The fundamental problem for mutual banks, according to Mr Saunders, is that Australia’s regulatory frameworks are designed for listed banks, which have shareholders and alternative access to capital. Mutuals rely on retained earnings for their capital, meaning they raise capital from the profits they make.
“That’s been a major barrier preventing mutuals from competing on a more even playing field with listed banks. Mutual banks haven’t been able to grow at the rate that they would like, because of the handbrake of only being able to generate capital through retained earnings,” he says.
“The ability to issue Mutual Equity Interests that has recently been introduced does offer potential for mutuals to access greater levels of capacity. However, the jury is still out at present on just how economically viable these will be for mutual banks. The cost of these new capital instruments may end up being greater than their return on equity. We’re now looking closely at this issue.”
Opportunities for brokers
A major factor in the continuing growth of the mutual bank sector has been the strengthening of relationships with brokers, creating mutually beneficial opportunities to better serve their customers’ needs.
A pioneer in this regard was Heritage Bank, which was one of the first mutual banks to actively work with brokers and has developed strong relationships within the broking community over the past 20 years.
“As a regionally based mutual bank with a strong presence in Queensland, brokers enable Heritage to engage with customers across the country where we don’t have a physical presence,” Mr Saunders says.
“In July, we announced we will open two branches in Sydney later this year – the first ever outside our home state of Queensland. It’s extremely exciting that we are taking this big step forward and will be able to offer our outstanding customer service in branch, face-to-face.”
For its part, Bank Australia is seeing a growth in the number of non-partner aggregators who are reaching out because they have customers who are asking for an ethical bank.
“The emphasis for me is getting a better understanding of the sector out to our broker partners. A greater understanding of what the mutual banks really can bring to the table both for the community as well as for brokers,” Mr Lewis says.
“There is an estimated 8 million Australians who deem themselves socially aware, and the stats would suggest that over 50 per cent of those consumers would talk to mortgage brokers about their home loan or next purchase. Many of those aligned consumers would already be with a mortgage broker today.
“There are customers out there today looking for ethical banks, so educating brokers about mutuals will assist them in capturing a market [that] may otherwise be closed to them.”
Tas Bindi is the features editor for The Adviser magazine.
Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business.
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