Let’s be honest, financial literacy may not be the sexiest subject, but it pays – literally – to know your best options when it comes to banking. After all, you work hard for your money so it’s only fair it works hard for you! And one thing is clear: bigger isn’t always better when it comes to banks.
While Australia’s big four banks – Westpac, Commonwealth Bank, ANZ and NAB – have the lion’s share of the market, it doesn’t necessarily mean they have the best to offer in the way of interest rates and customer satisfaction. The good news is there are plenty of alternatives – with more than 100 banking institutions in Australia to choose from, including publicly listed banks, customer-owned banks and credit unions.
Whether your focus is a home loan, credit card or term deposit, it’s worth taking the time to shop around. Finding the right fit for your individual needs will set you on the right financial path for life. In fact, figures from comparison website RateCity.com.au show that by switching from a typical big four home loan interest rate to the lowest in the market you could save about $3000^ a year based on a $350,000 loan.
Despite this, Peter Arnold, Data and Insights Director at RateCity.com.au, says that many people don’t consider switching banks to get a better deal.
“Particularly in the home loan space, the major banks have over 80 per cent of the market share, whereas the low rates are elsewhere,” he says. “I think there are a few reasons for this, but essentially a lot of it is inertia. People have been with the big banks for a long time and might not even see [not changing to a bank with a lower interest rate] as costing them money. But if you are after a low home loan rate, it’s going to be a lot easier finding it with the customer-owned and non-bank lenders. They are usually a bit smaller [than the big four] and they look after their members.”
Indeed, customer-owned banks have a reputation for putting the needs of their customers first – they don’t have pressure from shareholders to make a profit no matter what.
“Customer-owned banks and credit unions are generally regarded as having lower fees – as well as having a real community focus,” says Bessie Hassan, Money Expert at Finder.com.au. Generally speaking, they have better interest rates, and that’s across the board – credit cards, savings accounts and home loans.
“As with any big financial decision, you need to find the best deal for your personal circumstances. So if you are after lower rates and you enjoy the personal service and that community feel that a customer-owned bank or credit union might offer you, they might be the best option.”
These were some of the attractions that saw Newcastle couple Mike and Inga Campbell switch from one of the big four to a customer-owned bank, as well as the feeling of having more control over their finances.
“We had a swathe of bills land at the same time and it prompted me to contact our broker to find a bank that offered multiple offset accounts so we could put money away for various bills, such as water, rates, insurance and holidays,” Mike explains. “She found one where we could also get a lower home loan interest rate. It offered the best of both worlds for us so we refinanced. Changing banks gave us more control over our money, which has reduced my money stress levels.”
What’s the difference?
In Australia there are essentially two main types of banks – publicly listed banks, which are owned by shareholders, and those owned by their customers, which include customer-owned banks (also known as ‘mutual’ banks) and credit unions,. All are subject to the same government regulations set by the Australian Prudential Regulation Authority (APRA).
Like the big four, customer-owned banks are Authorised Deposit-Taking Institutions (ADIs) and are regulated under the Banking Act. The Australian Government guarantees deposits held at all ADIs, which means customer-owned banks are just as safe and secure as the big four.
Customer-owned banks are usually headquartered outside of capital cities and are known for their strong community ties. And being owned by their customers means that their profits go back to benefiting the customers and local community, while the big publicly listed banks have a reputation for putting profits and shareholder interests ahead of their customers.
“When you take out a home loan – or any other product – with a mutual bank, you become a member,” says Arnold. “Their number one aim is to look after their members and provide fair banking for them. This usually comes through via lower rates, fees and better service.”
“The interests of bank shareholders are usually around profits and dividends, whereas mutual members are interested in the best rates,” Hassan says. This is generally speaking, of course, but with the mutuals there is no clear focus on profits and dividends. It’s really about customer service and more competitive rates.”
Customer satisfaction & community
The other point of difference is that customer-owned banks consistently have higher customer satisfaction ratings. Roy Morgan research* shows that there is a wide gap between customer-owned banks and the big four when it comes to keeping customers happy, with the big four coming in at 79.8 per cent behind building societies at 90.9 per cent, mutual banks at 90.6 per cent and credit unions at 89.7 per cent.
“I think the biggest advantage of the mutuals is that as well as having really competitive products, they also offer personal service – particularly the smaller regional banks,” Arnold says. “Customers may get to know their local branch manager and staff. When they call, they will often speak with the same person.” Also add a sentence around customer owned banks keeping up with new technology in line with the major banks
This is certainly the case with the Campbells: “From a customer experience point of view, going into the branch, the staff are great,” Mike says. “I feel there’s a more human element – there’s a little bit more warmth. Maybe it’s because they’re not as big. It’s a bit like when you go shopping at your local shops rather than a big mall – it’s a bit more personal and you feel like you’re helping the smaller guy.”
Being smaller has other advantages, such as being able to adapt to the changing needs of customers without the corporate red tape that binds the big four. And Arnold says customer-owned banks also tend to have greater links to their local communities. “They might be supporting the local footy or netball teams, some have a more sustainability focus. Generally, these are the sorts of institutions that are quite community minded, and it’s a huge selling point.”
So why aren’t more people banking with the smaller customer-owned banks?
“People are perhaps a little complacent to shop around,” Hassan says. “And there is reluctance with some Australians to make the switch from one of the big four to one of the smaller mutuals.”
Arnold agrees: “There’s a certain affinity to the big banks. For many people it may feel like the easiest thing to do is to stick with them. You might be happy enough, but not many of us have money to waste, so if you can save even a little bit each month, then it would seem rational to give it a go.”
The tide is turning
As a group, customer-owned banks and credit unions have more than four million customers, making them the fifth largest pool of savings deposits in Australia after the Commonwealth Bank, Westpac, ANZ and NAB. And the number is growing.
Figures from the Customer Owned Banking Association (COBA) show that as at September 2016, the customer-owned banking sector is growing by 7.8 per cent annually and is collectively worth more than $100 billion in assets.
Other possible hurdles for people not choosing customer-owned banks in the past could be attributed to the cost of switching home loans and the ambiguity about their names. But these have also changed, and both Arnold and Hassan believe that as a result we will see customer-owned banks taking a bigger market share.
“It’s a lot easier to switch your home loan these days,” Arnolds says. “There used to be early exit fees, and if you left within the first five years there were some pretty heavy costs, but that’s been phased out.
“Your lender will probably charge you a discharge fee of about $200 to $300. The new lender might charge you some upfront fees – on average around $600. So in a typical scenario you might be approaching about $1000 in fees. But most borrowers can save a couple of hundred dollars a month by switching to one of the lowest rates on the market, so you are going to break even in the first year.
“For someone with a big home loan, they can break even in the first few months. If you have 20 years left in your loan, or even a few years, that’s money in the bank – or better still, more money back on your home loan every month.”
However, for most banking products – including simply switching bank accounts or credit card providers – there is no cost involved.
Taking the first step
“First you need to realise you have a choice,” Arnold says. “There are a lot of providers other than the big four offering great financial products. A great place to start is to jump online – all that information is there. Work out what matters to you most and start comparing deals.”
Hassan says that today more than ever it is easy to compare banks and their products and interest rates – and without leaving home. “You can do it all online, 24/7. Just question whether you could be getting a better deal across all your financial products – home loans, savings, term deposits and credit cards. What might seem like a tiny discount could end up saving you thousands over the life of your loan. There’s this mindset that it won’t be worth it or it’s too hard, but it really is worth doing a bit of research and making those calls.”
^RateCity.com.au, January 2017, based on lowest listed rates for an 80% LVR. Savings indicative only, excluding switch fees.
*Roy Morgan Research Customer Satisfaction Survey, 6 months to September 2016, Australian aged 14 and over.
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