CUs Down Under
Australia’s 104 credit unions are profitable and well-capitalized. They’ve held onto the bulk of their market share despite aggressive competition from the four major retail banks that dominate Australia. Much of their success is due to collaboration, as evidenced by the recent launch of a national television advertising and awareness campaign.
Australian credit unions were well-capitalized long before the recession hit. And when the economic crisis did hit, the Australian economy dipped into recession only briefly. The banking system remained stable due in large part to a stringent regulatory regime. Australian credit unions are regulated to the same standards as retail banks, and they saw only a brief period of downward pressure on profitability during the recession.
It’s the current state of competitive environment, however, that is testing the potential of the mutual sector, which includes credit unions and building societies.
The market share and power of Australia’s four major banks is so large and concentrated that policy makers are now advocating a competitive shake-up, and Australian credit unions are widely accepted as the viable alternative.
Confidence in the Australian mutual sector stems in part from the fact that credit unions hold an average capital ratio in excess of 16%, well above retail banks’ 11% average. A credit union in Australia is backed by the federal government’s AU$1 million retail deposit guarantee, just like the banks.
Credit union governance structures are the same as banks. Credit unions must have a minimum of five directors with an independent, nonexecutive chairperson. Directors must have a sufficient breadth of expertise, and they can be recruited externally. Directors also can be paid, but there are limits on end-of-service payment amounts.
Unlike U.S. credit unions, Australian credit unions do not have tax-free status—they’re taxed the same as banks, having lost their tax-exempt status in 1992. Many in the industry have been able to see the silver lining in the loss of their tax-exempt status, saying it focused the industry on becoming more efficient.
Overall, observers say Australian mutuals are well-positioned to ride the first of what should be many waves of pro-competition government reforms.
Branching and member engagement
There isn’t a single product offered by an Australian bank that a credit union does not or cannot offer. Following a recent agreement between the fourth largest retail Australian bank and a majority of credit unions, the consortium now operates the second largest ATM network in the country—known as rediATM—which is a merger of around 100 institutions’ ATM networks under a single brand.
The mutual sector, however, is not without its challenges, and how it deals with them will determine the extent of its gains from financial reforms.
The lack of branch presence, for example, remains a concern for many consumers. Australian credit union leaders look to their U.S. counterparts for lessons in adopting the concept of shared branching—seemingly an ideal fit with the expanded rediATM network.
Another challenge has to do with declining member engagement—once the hallmark of mutuals. There’s growing consensus within the industry that the larger, for-profit institutions are eroding the cooperatives’ service difference by investing vast amounts of money into community engagement strategies. Banks compete heavily on price, and are pumping significant resources into customer service and retention strategies.
Putting price and service aside, there are two other factors essential to credit union growth—innovation and staying true to core values. By collaborating, Australian credit unions are looking for new opportunities to engage with members in ways that retail banks could never hope to achieve.
Finding innovative ways to connect with members through core business aspects—such as new product development, service innovation, and community development—will go a long way toward maintaining the mutual difference.
To this end, Australian credit unions are leaders in the fields of green loans and special-purpose savings products. They’re beginning to offer virtual identity checks for new accounts, and they’re radically re-designing their branch networks.
Some credit unions, committed to social responsibility in their communities, are partnering with local government councils to offer low- or no-interest loans for essential household items in disadvantaged communities. The council provides the loan capital to the credit union, which in turn delivers the product. These programs have been shown to reduce crime, and delinquency rates on these loans are as low as 2.2%.
Along with their progress and optimism, Australian and Canadian credit unions continue to watch their U.S. colleagues closely. Just as we draw lessons from their experiences, they also look to developments in the U.S. to spark innovation. The U.S.—with the largest credit union sector in the world—remains vital to the future of a now-global movement.
Art Chamberlain is media relations manager for Central 1 Credit Union, Toronto, Canada.
Michael Muckian is director of marketing and communications for World Council of Credit Unions.
Daniel Newlan is senior adviser, policy and public affairs, for Abacus Australian Mutuals, which represents credit unions and building societies in Australia.
World Council of Credit Unions, the global trade association and development agency for CUs.