Author: Don Magin

Competition and mutuality makes for better banking for consumers

Having a number of mutual financial institutions in a region benefits consumers writes CEO Don Magin

With a Senate Inquiry underway, nine point plans on the table, and Government reforms to be announced, there will continue to be much discussion about the banking sector in the coming weeks and months.

As the discussions unfold, I hope that the key principle of greater competition for the benefit of consumers continues to be the yardstick against which we measure the ideas and initiatives that are mooted. 

It is a fact that during the global financial crisis, competition within the Australian banking sector decreased. The major banks swallowed up competitors. People also incorrectly assumed that the major banks were somehow safer than building societies and credit unions despite all being subject to the same regulations and all being protected by the Government’s guarantee of deposits.

The result is that, nationally, the major banks have a very unhealthy dominance of the home loan market. Credit unions and building societies have around 9% of the market.

Key markets where the Greater operates, including the Hunter, Central Coast, North Coast and New England regions of NSW are a good an example of the type of banking market Australia needs.  In those regions there are a number of mutual financial institutions offering real competition to the major banks. It means that the major banks are not as dominant there as in other parts of the country.

The cost of funds is a more significant issue for smaller financial institutions than it is for the major banks. Despite this the Greater and a number of other mutuals only lifted interest rates by the same amount as the Reserve Bank (RBA) – 0.25%.  The major banks all chose to raise rates above the RBA increase – the Commonwealth Bank’s increase of 0.45% is almost double that of the RBA.

This brings me to my second point. It is not just competition that is benefiting consumers in regions like the Hunter and Illawarra but mutuality.

A mutual financial institution is owned by its members. The major banks are owned by shareholders.

The Greater did not increase interest rates by more than the RBA because we did not think it was the right thing to do, particularly for existing members.

Free of the burden of having two masters, our focus is not ever increasing profits or shareholder returns but satisfying member needs. This partly explains why the Greater has a customer satisfaction rating of 95 % and the banks are at 75%. We can, and do, put people before profits. 

The Greater booked a record number of home loan appointments the day after Commonwealth Bank announced its rate increase and the discussion about bank profits took hold. We maintained that 200% jump in appointments the following day and have continued to improve our market sare since. 

That is competition in action. Banks should be free to charge whatever interest rate they want but there should be sufficient competition in the industry to allow consumers to vote with their feet and find a better deal.

It was encouraging to see that people are increasingly aware of the alternatives to the banks and, importantly, taking action. I was also pleased that the Greater had invested in its profile raising Seinfeld campaign prior to these recent events, but that is another story.

Competition is already here but we do need a range of measures to allow other lenders, like building societies and credit unions, to effectively compete with the banks on a level playing field.

Economics commentator Peter Switzer spoke about one of the other key reforms needed on Sky News. He said that “if this debate is going to mean anything then ... the competitors to the big banks have to get access to cheaper funding.” He means funding that is cheaper than it currently is, not cheaper than it is for the banks.

The benefit of “cheaper” funding for a mutual financial institution is that it will be used to benefit consumers rather than shareholders.

This article was originally written for and published in the Newcastle Herald in Dec 2010 and has been updated.