Banks v mutuals: Steph Nash

Customerowned institutions are taking on the traditional banks with sharp deals but it still pays to shop around before you buy

Thanks to the current low-interest-rate environment, there is a mass of financial products floating around the banking space competing for business. It’s become more important than ever to make sure you’re getting the best deal, so what should you be looking for when you’re shopping around?

There are two main types of financial institutions: retail banks, like the big four, and customer-owned institutions. Customer-owned banks are credit unions, building societies and mutual banks. Like industry super funds, customer-owned banks retain their profits for members. They have different investment goals from retail banks, which are listed on the stock exchange and pass most profits on to shareholders. If you become a member of a credit union, building society or mutual bank, you become a part-owner and are then entitled to have a say in how the business is run. You have the right to vote at general meetings and can even stand for a position on the board.

The big four banks – CBA, NAB, Westpac and ANZ – made $29.6 billion last year and control around 80% of the lending market. The customer-owned banking sector comprises 75 credit unions, 12 mutual banks and six building societies. According to the Customer Owned Banking Association (COBA), some 4.5 million people bank with customer-owned banks, which is a fairly significant chunk of the market.

Credit unions and building societies don’t satisfy the capital requirements to be labelled as banks. Mutuals, however, can be called banks, even though they are customer-owned. The regulator APRA changed the rules for mutuals in 2014, giving them the go-ahead to operate as banks. Originally, customer-owned institutions mainly did business with the “mum and dad” part of the market, offering small personal loans and cash accounts. Now they’re equipped with a nearly full arsenal of products, including residential and investor loans and credit cards.

Where does the money go?

While big bank profits are largely paid out as dividends or reinvested, customer-owned banks use their profits to benefit their members. According to COBA, profits from customer-owned banks are traditionally spent on service improvements, product innovation, establishing competitive mortgage rates and maintaining fairer, competitive pricing for members.

For example, Terry Millett, CEO of Newcastle Permanent Building Society, says his institution donates heavily to community programs and charity events. He estimates that last year its customers and the wider community benefited by about $55 million.

“Part of the ethos of a customer-owned organisation is to operate for the benefit of its customers,” he says. “We do this by giving back through our extensive community programs, including substantial partnerships with grassroots, community football and Surf Life Saving, our 16-event Cinema Under the Stars season each summer ... an annual primary schools mathematics competition ... and by raising funds for charities through our branch network and head office.”

Customer satisfaction

Customer loyalty is important to banking institutions. In October last year, the customer-owned banking sector’s overall satisfaction rating was 91%, according to Roy Morgan. This was well above the big four’s average of

79.5% and higher than the best performers among the 10 largest consumer banks.

Customer satisfaction has been a recent problem area for the big banks due in part to a number of scandals, including a lawsuit launched by the Australian Securities and Investments Commission (ASIC) against NAB, ANZ and Westpac for alleged rate rigging. (The trial is due to start on September 25.) Coupled with allegations of dodgy financial advice throughout the industry, it’s no wonder the banks are out of favour.

Also, the big four have been quick to push up home loan interest rates, even though the Reserve Bank cut the cash rate to a record low of 1.5% in August and has left it there.

Norman Morris, industry communications director for Roy Morgan, says that customer dissatisfaction with home loan rates is driving down the banks’ overall appeal. “Although customers have a generally positive view of their bank, there are some problem signs emerging,” he says. “Despite the very low loan and deposit interest rates that favour borrowers, home loan customer satisfaction with the big four banks has fallen even further over the last year, and is proving to be a drag on overall satisfaction.”

Home loans

Looking at the average interest rates among institutions, it’s clear you’re more likely to get a better deal with a customer-owned institution. The big four have not followed the RBA’s rate cuts, with the average standard variable rate for a $300,000 loan sitting at 4.93%. That’s 0.36% higher than the average rate for customer-owned banks. For a $300,000 loan over 25 years, that’s almost $19,000 difference in interest payments.

Millett says customer-owned institutions offer lower interest rates to look after their members and have a better propensity to do so because they’re not listed on the stock exchange. “It’s pretty simple – we don’t need to price our rates to make huge profits for shareholders,” he says. “We ensure that we’re competitive with the market and that our customers are getting great home and personal loans with competitive interest rates.”

However, the gap between banks and customerowned institutions in terms of home loans isn’t exactly huge. Andy Rigg, chief operating officer of CUA, says that while customer-owned banks strive to keep rates competitive, they do still need to evaluate running costs and external economic conditions.

“We regularly review our interest rates and adjust them in line with our members’ interests to ensure we can offer a range of attractive home loan options across variable and fixed rates for owner occupiers and investors,” he says. “In setting rates we also balance the need to continue to grow our business and reflect changes in the external environment, including funding costs or the competitive landscape.”

The spread among home loan products across both segments is enormous. On Canstar’s website, a search for a $300,000 loan with an 80% loan-to-value ratio (LVR) brought up 88 bank products and 104 products from credit unions and building societies. The lowest advertised rate across the customer-owned sector was 3.60% while the highest was 5.33%. So while it offers better deals on average, would-be borrowers still need to spend some time finding the right loan.

So if customer-owned institutions offer lower rates, what’s the selling point for the banks?

Steve Mickenbecker, from Canstar, points to the big four’s technological efficiency and distribution. “With the big banks, it’s easier to manage your finances because it’s all there, often including your super. Essentially, you can use a bank site to be your financial portfolio manager. And don’t underrate the power of a distribution that has 800 or 900 branches across the country. A lot of people in the market still want to deal with a broker or a banker face-to-face to walk them through it.”

The Commonwealth Bank is a good example of a big bank with user-friendly technology and near-instant accessibility. One need only look at the resources that CBA pours into technological innovation to get an idea of the customer experience provided by the big four.

“We have one of the largest branch networks in the country with more than 900 branches across Australia and around 4300 ATMs [including Bankwest],” says a CBA spokesperson. “We have state-of-the-art technology which allows our customers to bank 24/7 via phone, and digital channels including our No. 1 rated Commbank app. Our app offers convenience and market-leading technology, and gives customers the control they need to manage their banking needs whenever they want.”

Mickenbecker also believes that the banks are better equipped to deal with high-end investors who have more complex debt arrangements.

“The big guys deal with the complexity of big borrowers more naturally than some of the smaller players,” he says. “For the smaller players, I think the focus has always been to take less risk and stick to residential owner-occupier loans. They’ll write up an investment loan if it’s gilt-edged but they’re unlikely to take on the massive concentration of debt of someone who owns a dozen properties.”

We don’t need to price our rates to make huge profits for shareholders”

Unsecured personal variable loan

Mickenbecker says personal loans have always been the flagship product for the customer-owned sector.

“Personal loans have always been a much more competitive territory for customer-owned banks. It goes back to their heritage, as they started out as little credit unions that would take deposits from their constituency and generate enough surplussing in deposits to be able to lend to other like members.”

Looking at the averages, there’s almost a 1.5% difference between personal loans offered by banks and their rivals. For a loan of $10,000 over five years, that’s a $458 difference in interest – over 4.5% of the value of the original loan.

But just as with home loans, the spread among the various financial products is high. Mickenbecker says borrowers should look at a range of products in both categories to get the best deal. “Within the big-bank group there are some differences in rates, but then look at the customer-owned banking sector,” he says. “There you’ll get a massive difference in the rates from highest to lowest.”

Credit cards

Although there appear to be significant savings to be had with customer-owned banks, for rewards cards Mickenbecker says the payoff probably won’t be as sweet. The big banks tend to have better value rewards, and most customer-owned banks don’t even offer a rewards card.

“If you look at Canstar’s five-star winners, they tend to be bigger guys,” he says. “I think you might find on average the rewards benefits you get from the big guys far outstrip what you get on average through the customer-owned banks sector.”

For a $3000 monthly spend, at the time of writing, American Express had the highest rewards card for a bank at $900 of value per year. Summerland Credit Union had the highest value for a customer-owned bank, at $600 a year. Unlike American Express, which rewards customers with complimentary flights or frequent flyer miles, Summerland has a cashback scheme – $10 cashback for every 1000 points accrued.

With lower-fee non-rewards cards, the difference in rates is quite significant. Canstar’s figures show a 4.1% gap between average credit card rates for banks and customer-owned institutions. For a $5000 debt paid back over two years, that’s about $210 in interest payments.

Deposit accounts

With deposit accounts paying so little, it’s important to be on the ball with the range of products on the market. Canstar data shows that big banks on average pay slightly more to online savers and longer-term deposits. In the online saver sector, banks tend to offer a lot more promotional introductory rates, which can be good for your balance if you’re paying attention.

But Mickenbecker encourages customers to take an active approach to their savings and says they should be ready to switch when a better deal comes along. “If you’re taking out that high headline rate, just make sure that you’re conscious of the fact that after six months or nine months or 12 months you’re going to be on a base rate. It can require much more active management of your money than used to be the case. When you were getting 10% on online savers, it wasn’t as sensitive, but when it’s a difference between 2% and 3% or 1.5% and 2.5% it starts mattering a lot.”