Every Australian knows the names ANZ, NAB, Commonwealth Bank, and Westpac. A vast majority choose to entrust their money to the Big Four Banks, and many are quite happy with what they get - although far from all.
A small percentage of the population is taking their money to one of a myriad of Australian credit unions and mutual banks, finding the better rates, more personal customer service, and a deeper commitment to the local community - a much bigger draw than the global reach and top branding of the big four.
Unbanklike: credit unions vs. the big four
Australia’s big four banks control 90% of the country’s financial assets, boast global reach and walk largely in step with each other in terms of their offerings. A multitude of credit unions, mutual banks and building societies have offered an alternative to banking services for many decades, yet their share of the market has hardly grown. However, in an uncertain economy and an environment of general distrust of large corporations, the customer-owned institution's lower rates, and a more humane approach to customer interaction are becoming a real alternative to the big four.
David and Goliath
Size does matter: size brings visibility that no clever advertising campaign can ever hope to match. Size also means larger marketing budgets, the ability to hire the brightest candidates, and wider risk diversification across loans. In size, the big four eclipse the credit unions.
NAB has more than twice as many customers as all of Australia’s credit unions and mutual banks combined.
Not that all of Australia’s credit unions and mutual banks are mom-and-pop shops. Community CPS Australia Group, for example, is one of the largest customer-owned financial institutions in the country, managing $4 billion in assets and employing 595 staff across 44 branches that serve around 186,000 members. Bankmecu, a customer-owned mutual bank, has $2.8 billion in assets, and 348 staff serving its 126,000 customers across 26 service centres. The second-largest credit union, People’s Choice, has more than $8 billion in assets and more than 350,000 customers. CUA, the largest, has more than 400,000 customers nationwide. Overall, more than 5.3 million Australians entrust a combined $85 billion to credit unions, mutual banks and mutual building societies.
- $85 billion: amount of assets Australians hold with all of the country's mutual banks, credit unions and building societies.
- $721 billion: assets held by Commonwealth Bank.
The hundreds of thousands of customers, sizeable staffs, and billions of dollars in assets can seem impressive – until you look at the big four. Westpac has 36,000 full-timers managing $678 billion in assets for 570,000 people and institutions in Australia and overseas. ANZ employs 48,000 people around the world to oversee $532 billion as of 2010 – for 8 million customers worldwide. That’s almost twice as many customers as all of Australia’s credit unions and mutual banks have combined. Even more impressively, NAB has 12 million customers globally, served by 50,000 staff. The biggest of the big, Commonwealth Bank – never shy about its position, pointing out on its website that it’s Australia’s biggest retail banker with "the largest customer base of any Australian bank" and "the largest financial services distribution network in the country with the most points of access" - has 51,000 people managing $721 billion in assets from more than 1,100 branches nationwide, as of December 2012.
Goliath posing as David
The big four are fully aware that many Australians are deeply suspicious of them; rather than change the sentiment, the big four allegedly decided to use the sentiment in their advantage too. Multibrand strategies, as they are known, involve advertising wholly-owned subsidiary banks as independent banks - in essence, as alternatives to the big four that actually own them.
Examples abound. As of June 2013, the home loan webpage of St. George - owned by Westpac - advertised that "St.George will also beat any advertised home loan rate from ANZ, CBA, NAB and Westpac on new home loans." Bank of Melbourne, also owned by Westpac, advertised its home loans with "Get a better rate than the Big 4." In late 2012, Westpac chairman Lindsay Maxstead said the multi-brand strategy was starting to pay off.
Westpac has been particularly successful in marketing its properties without anyone knowing the better. A News Limited article cites a survey by Abacus, an association that represents 120 member institutions in the mutuals sector, which found that only about half of Australians knew that St. George was owned by Westpac, only 37% knew that it owned Bank of Melbourne, 28% that it owned Bank SA and just 14% that it owned RAMS. But Westpac is not the only one: a third of Australians knew about Commonwealth Bank’s acquisition of BankWest, and just one in five knew that NAB owned uBank. The credit unions have spoken up about this, and Australia’s financial watchdog, ASIC, has been actively monitoring the big four’s multi-brand strategies "to make sure investors are not being misled,” according to ASIC’s Greg Kirk, who spoke with News Limited.
The numbers game
The multi-brand strategy, unsurprisingly, focuses on better rates: the big four do not compare well to the customer-owned financial institutions.
BankMecu's customers were collectively $20.1 million better off than they would have been banking with the big four banks.
A study in 2013 found that between the best and worst home loans, the difference can be nearly $1,000 a year. The worst turned out to be Citibank – the 10th-largest bank in the mortgage market, with $7.7 billion in Australian loans: Citi’s standard variable home rate over a 12-year period was an average 0.42% higher than the best offer on the market. According to bankmecu’s Cannex Valuation report from June 2012, its customers were "collectively $20.1 million better off than they would have been banking with the big four banks." Beating the big four’s rates is what the customer-owned financial institutions see as key to their competitiveness.
When the Reserve Bank of Australia cut the official cash rate in May 2013 to 2.75%, every financial institution followed, lowering their rates by an average of 25 basis points – and the credit unions remained ahead of the banks. CUA cut its standard variable home loan (SVHL) by 25 basis points to 5.60%. These all beat the Big Four: CBA lowered their SVHL to 6.15%, and NAB and ANZ to 6.13%. Westpac lowered its SVHL to 6.26%, although its website points out that "most of Westpac standard variable mortgage customers will move to the new Premier Advantage Package discount rate of 5.56%.”
In fact, Australian credit unions pride themselves on their rates precisely in relation to the rates of the Big Four. Their advertisements and websites frequently point out exactly how many basis points their home loans are below the Big Four average. CUA goes even one step further: its Rate Breaker Package is actually pegged to the Big Four: it comes with "a home loan interest rate 1%p.a. lower than the average of the advertised standard variable rates of the Big 4 Banks.”
Shareholders and members
The lower rates offered by credit unions are due to several factors like reduced marketing budgets and more modest salaries for top brass. However, they also reflect a fundamental philosophical difference between banks and customer-owned financial institutions: the idea of what constitutes success, which in turn determines how they approach risk. Banks are responsible to their shareholders, for whom success is gauged by the balance sheet at the end of the year. Credit unions and mutual banks are responsible to their owners – who are also their members. Providing the best rates for the types of loans the members want is therefore at the top of the agenda. All profits at the end of the year, instead of going to shareholders, are put back into services and go toward reducing fees. Because the risk is not spread across as wide a spectrum of customers, credit unions are inherently more cautious.
"The impact of the GFC on the Australian banking sector has been significant and it is safe to say there has been a flight to the perceived safety and security of major banks,” said Wayne Matters, deputy chief executive officer of Community CPS Australia Group. "However, the reality is that credit unions are governed by the same regulations and have the same deposit guarantees as banks.”
Fundamentally, the banks are there to make profits for their shareholders.
"Big risky transactions just aren’t part of our business,” said Stuart Symons, sponsorship and community manager in People’s Choice PR department. "The irony during the global financial crisis was that people were flocking to the big banks, but it was actually the banks that were falling over because they were the ones that were taking on risky investments and repackaging them in financial instruments.”
"We have a relatively tight credit risk profile – we largely lend to parents and small businesses, and we offer them fantastic rates. Fundamentally, the banks are there to make profits for their shareholders. They’re always looking for growth, for the next thing they can do. We aren’t interested in double-digit growth – we hone in on providing the best rates we possibly can for our members.”
The difference in ownership structure affects more than the rate of loan. John Yardley, general manager of lending and personal banking for bankmecu, came to the organisation after working for major banks in Australia and New Zealand.
"The first thing that struck me and took some time to sink in was that the frame for the decision-making – front and centre is the best interest of customer-owners – is deeply entrenched in the culture and history of the organisation,” Mr Yardley said. "Decisions weren’t strictly about commercial issue and maximising profit, how much does the market allow us to charge rather than, like in our organisation, what we should charge to ensure we’re operating sustainably.”
The not so little differences
The average big four customer satisfaction is under 80% - and that’s at a 17-year high – according to an April 2013 report from research firm Roy Morgan. Satisfaction among home-loan customers of the big four is even lower, averaging just 75%. bankmecu and Victoria Teachers Mutual Bank, meanwhile, each scored 96%, the highest in the country, while CUA scored 91%.
- 80%: Average customer satisfaction at the big four.
- 96%: Customer satisfaction at Victoria Mutual Bank and bankmecu.
The lower loan rates can probably account for a large portion of the difference in satisfaction rates, but some of this can also be explained by an alternative approach to the banking experience itself – a more personal touch. CUA, for example, has been experimenting with a new type of branch, one that is "unbanklike,” according to Darrin Northey, group general manager of Distribution at CUA. A new branch in a Brisbane shopping centre has an open environment where customer-teller interactions are performed around a kitchen bank to eliminate teller lines, with a cafe zone and quiet spaces. There is an emphasis on technology that can help customers help themselves – iPads are available for in-branch online banking. The branch also hosts workshops – a recent one was on how to host a renovation – designed to bring the customers and the community to the branch and perhaps see it as something more than a place for the transaction and monitoring of money. According to Mr Northey, the design has been more successful than they could have predicted – customer feedback, mortgage volumes and foot traffic are all 150% to 200% higher than at CUA’s standard branches, and the credit union is adopting it at two other new branches.
The higher satisfaction is not just from the customers. According to Mr Yardley, working for a credit union has many quality of life benefits – although he readily admits his move from a major bank to the mutual bank "certainly was a step down in remuneration.” The kinder/gentler approach extends to employees as a whole, it seems.
"As long as I can remember, we never made any broad cost-cutting announcements, and that’s quite a difference between us and the big banks,” said Brent Hill, senior manager of marketing communications for People’s Choice.
"To me it’s a sign of prudent management oversight – we haven’t let things get too bloated, and therefore we don’t need to pull things back,” said Mr Symons.
We believe competition is incredibly important, and the general Australian consumers are absolutely screaming for it.
All about community
The credit unions compete with the bigger banks for image, and nowhere is that more pronounced than how they integrate into their communities.
- 6%: Percentage of pre-tax profits People's Choice donates to community programs and organisations every year.
- 0.4%: Average pre-tax contribution made by major Australian and New Zealand companies in 2012.
Community CPS established a foundation in 2007 to support community-based health initiatives, education and empowerment – since then, it has contributed over $6.8 million locally, including $1.2 million in grants and donations direct to community groups, according to Mr Matters. It also recently introduced a Community Reward Account – a low-fee savings account that can be linked to a customer’s nominated charity or not-for-profit, to which the credit union will donate a portion of its profits based on the average annual balance in the account. Teachers Mutual Bank spends 4.2% of pre-tax profits on community investment, while People’s Choice donates about 6% of pre-tax profit to community programs and organisations each year – or 15 times the 0.4% average 2012 contribution made by major Australian and New Zealand companies, according to a benchmarking report from LBG Australia. People’s Choice also does fundraising and runs a lottery on behalf of community groups.
The battle ahead
There is some evidence of cooperation between at least certain credit unions and the banks. CUA, for example, has a third-party distribution arrangement with Citibank for its credit card business – in essence, it offers a Citibank card branded to CUA. But for the most part, credit unions see the banks, particularly the big four, as their main competition. And while credit unions and mutual banks do compete among each other to some extent, they spend more money and effort on beating the banks.
"We just don’t lose business to other credit unions, mutual banks and building societies – we lose it to the major banks,” Mr Yardley said.
Despite tough economic conditions, most credit unions are currently expanding their reach – by partnering with others to have better ATM networks, opening more branches, and offering more products. With limited resources, innovation is often the driving force of offering more with less. Lobbying has also become a necessity, according to some, and is carried out through Abacus.
"We will continue to lobby against the multi-branding strategies employed by some major banks that are designed to give the illusion of competition while in fact they perpetuate the lack of it,” said Mr Northey. "A lot of consumers just aren’t aware that brands such as BankWest with the Commonwealth Bank or St. George with Westpac are owned by the big banks. Those kinds of brands being marketed as competition to the major banks, pitching themselves as completely separate while actually they are wholly owned subsidiary of the major banks. There’s a level of murkiness in the marketplace.”
