Banking Explained: Customer Owned vs. Investor Owned

What’s the difference between customer owned banking institutions and the ‘Big Four’ banks?

Many Australians would be familiar with the ‘Big Four’ banks and their focus on generating big profits to keep their shareholders happy. Every year media report on the billions of dollars in profits and the bank’s focus on maximising “returns to shareholders”.

What some Australians may not know is that there is an alternative - the customer owned banking model. These are banking institutions that put the customer at the heart of every decision.

The customer owned banking model has been around in Australia for hundreds of years. Credit unions, building societies and mutual banks are all customer-owned.

As the name suggests, customer owned banking institutions are owned by their customers. When someone becomes a customer of a credit union, mutual bank or building society, they also become a part-owner and can have a say in how that business is run.

As an owner, customers also benefit when profits are made. One hundred per cent of profits benefit the customer, through competitive rates, low fees, investment in community projects and better customer service.

This ownership model is the key structural difference between customer owned banking institutions and investor owned banking institutions.

Investor owned banks maximise profits to pay dividends to shareholders. This creates a tension between customers of the business and its owners (shareholders).  In many cases, the majority of these shareholders are large institutional investment banks – not mum and dad investors.

This tension doesn’t exist in the customer owned model because the customers are the owners. They are one and the same. There is no question about who comes first – customers or investors. At all times, the customer remains the focus.

This creates a different culture where customer satisfaction is key.  The customer owned banking sector consistently achieves superior performance in customer satisfaction ratings, as measured by independent research houses such as Roy Morgan. The sector’s performance on the Net Promoter Scale also eclipses the major banks. The major banks are at minus-6 compared to credit unions and building societies at plus-29.

While there are big differences in ownership structure, it’s important to note that customer owned banking institutions are held to the same high regulatory standards as the ‘Big Four’. This includes government protections for consumers that mean their money is safe with a customer owned banking institution under the Australian Government’s financial claims scheme.

 

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