KPMG’s Hessel Verbeek (HV) (National Leader, Mutual Banks and Partner, KPMG Strategy) talks to Michael Lawrence (ML) CEO of Customer Owned Banking Association (COBA), about the unique role of mutual banking, maintaining relevance, sector consolidation, and proportional regulations.



You represent almost 60 credit unions, mutual banks and building societies, some of which are individually small, but who in aggregate are equivalent to a large Australian retail bank. How do the mutuals operate as a sector, rather than individually, to punch above their weight?

I believe we punch above our weight, and we have every right to because of what we represent. Collectively we’re the fifth-largest retail bank in Australia, with assets of over $150 billion. We control more than 10 percent of retail deposits, and more than 4.5 million customers bank with us. And through COBA we can speak with one powerful voice.

We also punch above our weight for the communities that we serve. We've got a presence in every state and a very strong regional footprint, with over half of our members headquartered in regional centres. That is quite unique, particularly when you think of the jobs that sustains in regional centres. This includes everyone from front line staff to C-suite employees.

We also serve a diverse range of customers and communities, such as the education sector, police, nurses, other emergency services, the defense force, the transport sector and more. Our members are able to develop closer relationships with their customers because they are close to their communities, and they can prioritise customers over profits to shareholders.

Also, let's not forget that we've been around for over 150 years, so we're not new to this.

You’ve touched on the size, the link to communities and history, but what, in essence, differentiates the mutual model from the commercial model?

First and foremost, the model itself. Customer owned banking institutions have a different ownership structure to shareholder-owned banks. Profit is important, but the difference is with customer owned banks profits go back to the communities, for the benefit of the customers. Profit goes to improving products and services for members, and doesn't get paid away through dividends.

Secondly, the customers are really part-owners of the individual institutions, so customer interests are not at conflict with shareholder interests.

A third aspect is that we’re the original peer-to-peer lenders. It was originally about providing opportunities for employees that couldn't get access to what they needed through a bank. People would deposit money into their credit union, then there would be members who needed money for a holiday or a car, so loans were given effectively using the members’ money that they were getting a return on. The model is founded on the principle of giving back to the community. That social responsibility is ingrained.

Next, we know our customer needs and wants, and our customer trust and satisfaction results are evidence of this. Our members are four of the top five banking institutions in both 2020 and 2021 named by Forbes World’s Best Banks, based on trust, innovation and service.

Another unique factor is that we can take a long-term view. We are not out to hit profit targets to appease investors. And, we have a culture of responsible lending. APRA's statistics recently show not-performing loans at 0.3 percent in the sector, which is one-third of the overall banking sector.

Is the sector also serving particular customer segments which are not served, or are underserved, by the commercial banking sector?

Our members often serve unique employment groups so they have developed a very good understanding of how to serve that customer base. If I reflect on the COVID-19 pandemic and the work APRA did on some capital relief for allowing deferrals, due to lower customer requirements our deferral rate was half of what the broader industry was and the recovery was quick. That points to understanding your customer base, working with the customer base, and having those conversations.

One sector observation is that the mutual banks are stronger in the mature customer segments and have a lower share with the younger market. How do you see your ability to recruit younger customers?

It is fair to say that we've got a more mature demographic in general. But if you look at the number of first home loans in the market today, proportionally speaking we write more of them, attracting a younger demographic. It is true that we are less represented in the “pre-mortgage” customers.

There are always going to be people who want something that's more local and more community focused. Many young people fall into this category.

Does this mean the mutuals need to focus more on the pre-first home buyer then – the younger, digital banking customer?

There’s definitely a realisation within our members that they also need to think about innovation and digital, because they've got to be relevant to the younger generation. Interestingly, if we had this conversation 2 years ago, I would have been saying that this is very important as there is a migration from regional Australia into the Eastern seaboard capital cities.

Now, after the pandemic, the migration is happening from the capital cities back into the regional centres. That doesn't mean you stop innovating – the younger generation want smart digital innovation. We have to be responsive and quick.

Are mutuals able to compete effectively on the digital innovation front?

Being smaller, we can be nimble. We do lead in a lot of digital innovations and we don't have the high barriers to entry that the neobanks have been facing.

I think there is a misconception that, because we don’t have the deep pockets of the major banks, we don’t innovate. But they need deep pockets. They've got very complex legacy systems. We can be agile and the cost of bringing something to the market isn’t of the same magnitude.

Over history, our sector was the first adopter of ATMs, the first with Apple Pay, Android Pay, the first to go to market with the NPP (New Payments Platform) and with Open Banking. Also, our sector again has a history of being able to partner for innovation – rather than build or buy, they will partner.

The sector also has a long history of consolidation. Only 15 years ago there were around 170 mutual banks, and two mega-mergers were announced recently. To what extent do you think consolidation will continue?

Mergers have always been a strategic option for mutuals to pursue inorganic growth. That's not unique to our sector or Australia. In the US, around 15-20 years ago they had 50,000 credit unions, and now around 25,000.

The mutuals might look at their capabilities and consider if they need to merge to execute on their strategy. The important thing from our perspective is that they are staying mutual.

Whether consolidation continues and whether this leads to very large mutuals, that's up to the individual mutuals, and it’s about finding a strategic and cultural fit.

However, many mutuals out there are looking to operate in their own unique market and don’t see a merger as the way forward. They are comfortable with the sustainability of their own model and playing a niche role for their target customers.

The sector is heavily regulated. What would you love to see in terms of regulatory or policy settings that will allow the mutual sector to continue to flourish?

If you want purposeful growth, you need purposeful regulation. Each piece of regulation needs to be targeted, tested and considered as part of a whole-of-system lens. Policy makers and regulators need to respond to the impact on competition, innovation and consumer choice of constantly ratcheting up regulatory compliance costs. Also, having to take scarce resources away from customer service and innovation to meet more compliance obligations really challenges mutuals. It's a competitive advantage to the major banks, because there is a fixed cost component to managing regulation.

As mutuals, we don't expect a free kick. But we do want proportionate regulation and a level playing field. We're asking the regulators and policy makers to commit to producing a comprehensive regulatory-change roadmap that gives stakeholders a clear view of the regulation that's proposed, so that regulated entities can plan to change in an orderly manner.

At COBA we've mapped every piece of regulation and compliance from every regulator and government that is coming in the next 12-18 months. It is a blizzard of regulation. We look forward to working with government and regulators to help them better understand what sensible regulation and regulatory coordination looks like in Australia.

Our wish is for a stronger commitment from policy makers to consistently and rigorously apply regulation impact statements, and to build in post-implementation reviews on all major changes. We need them to address the burden of adding new layers of regulation, and to have a one-in, one-out approach.

Other than giving the sector one more powerful voice, what other roles can COBA play to manage the impact of regulations?

If we can help coordinate and work with the external auditors, and work with the third-party suppliers, it's going to be a more efficient and hopefully less expensive outcome for our members. We will do this for example for the new Prudential Standards CPS 234 on Information Security.

We've got other examples of where we cooperate on things that are non-competitive. The Small Australian Mutual's (SAM) Network look at a whole raft of opportunities of working together. We also have a financial crimes unit within COBA, and do our best to be at the forefront of financial crime and cyber risk.

These are just some of the forums where we work together for the betterment of the whole sector. That mutual sector collaboration will always be there, and will continue to grow.





Michael Lawrence is the CEO of Customer Owned Banking Association (COBA).

Hessel Verbeek is the National Leader for Mutual Banks and a Partner with KPMG Strategy.



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