If the dodgy behaviour revealed by the banking royal commission has you thinking you need to switch banks, then a group of small, supposedly ethical banks are dying to have you.
The banks in question are ‘customer-owned banks’, but are probably better known as mutual banks, credit unions and building societies.
These businesses differ from the major banks in one key respect: they don’t have shareholders.
This may not sound like much, but defenders of the model say it makes a big difference because it removes a fundamental conflict of interest.
The biggest scandal to come out of the royal commission so far involved AMP charging customers for financial advice they weren’t receiving.
Fees the customer thought were going to a financial adviser were actually going into AMP’s coffers, for the benefit of shareholders.
If AMP had not had shareholders, the argument goes, it wouldn’t have felt nearly the same pressure to extract every last cent out its customers that it could.
See a full list of customer-owned banks here.
What is a customer-owned bank?
Mike Lawrence, chief executive of the Customer Owned Banking Association (COBA), said the ownership model was the key point of difference.
“Our organisations are not listed and there are no shareholders. They are effectively owned by their members, which are the customers,” he said.
“That means 100 per cent of profits go back to customers, not as cash, but through product development and investment in the business.”
He said customers have a vote at general meetings – something that only shareholders have in listed companies like the major banks.
Unlike listed companies – where the more shares you have, the more votes you have – customer-owned banks strictly allot one vote per customer.
That, Mr Lawrence claimed, meant there was “not the constant pressure on the bottom line to drive returns to shareholders”.
For those who are afraid that smaller banks might be riskier, Mr Lawrence pointed out that they faced the same strict regulatory regime as big banks, and often had higher capital adequacy requirements.
And as with big banks, deposits up to $250,000 are guaranteed by the government.
How do they stack up as consumer products?
Steve Mickenbecker, a banking expert at financial comparison site Canstar, told The New Daily that customer-owned banks were increasingly competitive.
“There’s been quite a transformation over the last few years. They have a depth of product range that is quite attractive,” he said.
While they do not generally have the “bells and whistles” that the big banks have – such as cutting-edge technology, branding, distribution, and ancillary services like stockbroking, investment platforms and financial advice – he said for “black and white, bread and butter” banking they were just as good.
One potential drawback is that they don’t have the national network of brick-and-mortar branches like the big banks.
“But they all have internet banking these days, and people don’t use branches so much anymore,” he said.
He said that most customer-owned banks were members of the ‘Ready Network’, which gives customers free access to NAB’s ATMs – so there’s really no disadvantage on that front.
On actual products like home loans and deposit accounts, he said they were very much on a par with listed, shareholder-owned banks. On savings accounts he said customer-owned banks were better. While on credit cards, he said they had much lower purchase rates.
However, if you want to rack up rewards like frequent flyer points, the big-name banks are better.
Mr Mickenbecker said as a rule, smaller customer-owned banks were not geared up for business banking.
Is there a conflict of interest?
Paul Kofman, a professor of business and economics at the University of Melbourne, said the lack of shareholders provided some protection from conflicts of interest. However, he said there were others.
In particular, he said the personal interests of employees could still create conflicts, even in the absence of shareholders.
He pointed out that Dutch bank Rabobank was implicated in the LIBOR interest rate rigging scandals despite its co-operative ownership structure.
He added that another difficulty small, customer-owned banks faced was attracting top quality staff.
“The big banks are recruiting the very best potential employees. They completely outbid smaller competitors, and the regulators,” he said.