The trends and issues highlighted are based on over twenty years of analysis and presentations by Mike Roberts, who until recently held the title of Senior Industry Advisor at Cuscal.
What is a Mutual Financial Institution?
Mutuals differ from non Mutuals in that their ownership model is based on members and not shareholders. This difference in itself has in the past been used in an attempt to attract new members, but essentially being a Mutual in itself has not been shown to attract members or increase the value of their relationships. For many years Mutuals were called Credit Unions, but recently larger Credit Unions can now call themselves Mutual Banks.
Why Mutual Financial Institutions Evolved
Basically Mutual FI’s evolved in a regulated financial marketplace where the basic Banking needs of a significant proportion of the population was not met by Banks because their business was not profitable.
Mutual FI’s were granted various tax and regulatory breaks by the Government to ensure that they could meet the basic Banking needs of the population and make a return that was reinvested in the membership. The main concession was that Mutual FI’s did not pay tax. This combined with other regulatory concessions ensured costs were minimised.
To counter the regulatory concessions Mutual FI’s had restrictions on lending with loans restricted to small personal loans.
Profile of a Mutual FI in a Regulated Environment
- Mutual FI’s were born in local communities or work places
- Basic financial services such as transaction accounts and payroll delivered to members whose needs were not met by Banks
- Transaction facilitators
- Personal loans main income generating product
- Secondary financial institution of many members especially as needs grew (e.g. mortgages)
- Positioned in Governments view as a social service to low profit segment
- Rewarded with tax and regulatory concessions for providing financial ‘social service’
- Met needs of basic financial needs of communities with common Bonds
- High levels of satisfaction from members due to friendly service
- Low levels of sophistication results in low level of Financial ‘respect’
- Mutual FI’s had 25% of the adult population as members, but only 4% market share of loans
Impacts of Deregulation
- Beginning in the 1980’s the Financial marketplace was increasingly deregulated to increase competition for the major Banks
- Mutual FI’s able to provide a wider range of services including mortgages
- Loss of tax concessions increases need to improve efficiency and relevance
- Increased regulation increases need for improvements in prudential, management and marketing skills
- Competing priorities (efficiency, innovation, cost cutting, marketing)
- Mutual FI’s became more relevant to needs of members and broader public
- Mutuals have opportunity to reposition
- Potential to position as provider of financial services to niche markets
- Need to better understand their target market
- Opportunity to target segments more effectively than competition
- Require cost effective analytical and target marketing capabilities
Impacts of Technological Change
The era of regulatory change has been accompanied by significant technological change.
Issues include
- Transaction channel innovation ensuring a move from face to face to an increasingly sophisticated range of electronic and digital transaction channels
- Online innovation resulting in relationship building via the internet using mobile technology
- Increasingly sophisticated and costly analytical/marketing tools employed to increase product sales and build more valuable relationships
Conclusions:
- Mutual FI’s historically transaction facilitators with modest relevance and value
- Deregulation have provide the Sector with significant challenges and opportunities
- Major opportunity is for Mutual FI’s to provide services to a niche market more effectively than competition due to the niche needs of its target market
- Technological advancement will help to identify niche segments and their needs
- Accessing cost effective technology and understanding how to best use the technology will help Mutual FI’s meet their potential and provide the completion for the major Banks that deregulation was intended to provide.
In our next article we will discuss the various trends in Mutual FI member behaviour identified over the past twenty years.