Diana Clement: Co-ops prove worthy rivals to Aussie banks

Who's sick of the Aussie-owned banks? They're milking us customers to make record profits.

That's probably a little unfair. There are, however, alternatives, as Kiwibank keeps telling us. The lesser-known alternatives include dozens of co-operatively run credit unions and building societies that are locally run and not focused only on returns for shareholders.

Banks can also be co-operatives, as the former PSIS, which became The Co-operative Bank in October, has shown. It plans to pay a share of its profits to its customers.

These co-operatives are mainly simple organisations. They're owned by their customers who have a say in how they are run. "Profits" are returned to members or to the community. They say they have better rates, fairer fees, personalised customer service, responsible lending and that they keep all the profits in New Zealand.

When a Bank Transfer Day was held this month in the United States, 650,000 dissatisfied bank customers switched to credit unions, including more than 40,000 on one day alone. A Facebook campaign showed that plenty of Americans were sick and tired of hard-hearted, greedy banks.

Many Kiwis have antiquated views of what credit unions and other co-operatives such as building societies do. Most of these organisations provide the modern trappings of 24/7 banking such as ATM access, Eftpos cards, internet and telephone banking, credit cards, personal loans, mortgages and KiwiSaver accounts.

Some also offer unusual products, such as Aotearoa Credit Union's Credicare Bereavement Fund, which pays $4000 to the family or beneficiary of a member who dies by taking up to $2 from each participating customer.

"Banking" with co-operatives isn't just about keeping the control, money and profits in New Zealand. Credit unions, says Henry Lynch, chief executive of the New Zealand Association of Credit Unions (NZACU), have a responsibility to customers enshrined in law. They have a culture of money-coaching and help customers who need it with budgeting and savings plans.

There are many examples, says Lynch, of people who couldn't get accounts with the mainstream banks opening them with credit unions.

Tauranga beneficiary Rosalie Sawyer benefited from becoming a credit union customer after a bad experience with her former bank. She was joint owner of her home with her mother. Following her mother's death, Sawyer ran into difficulties in 2004 paying the mortgage singlehandedly, only to find that her high street bank was completely unsympathetic.

A Ngai Te Rangi iwi budget adviser recommended Sawyer take her business to the NZCU North credit union, where she was offered a mortgage, debt consolidation and, most importantly, ongoing advice to help her budget for the payments.

The support and assistance has lifted Sawyer's money worries, which included overspending when she experienced periodic bouts of mild depression.

With her budget and the support from the credit union, she now keeps those spending sprees in check.

"Members like the fact their credit union really does care about helping them improve their financial situation, and that the benefits of any money invested in their account stays in New Zealand rather than going offshore," Lynch says.

As well as providing savings and mortgage products, credit unions help keep people from the jaws of loan sharks. Many personal loan customers can't borrow through other mainstream channels. Others are attracted by the (currently) lower interest rates than mainstream banks and much smaller establishment fees.

Business is business and Australian banks are no different from other multinationals operating in all sorts of fields in New Zealand. Even so, I feel slightly affronted when I think of them repatriating record profits back over the Tasman as their customers struggle financially. The battle the Aussie banks had with the Inland Revenue Department to pay their taxes in Australia instead of here wasn't a good look.

In these economically uncertain times, however, it has to be noted that the credit unions and building societies have lower credit ratings than the high street banks, meaning they are more economically vulnerable. Heartland Building Society and The Co-operative Bank both have reasonably good BBB- ratings, which just slip in as "investment-grade". Many of the credit unions, such as CU Baywide and First CU, are rated lower than investment-grade at BB.

Credit unions and building societies are, however, now regulated by the Reserve Bank of New Zealand, which gives consumers better protection than they had. That regulation has come into existence progressively over the past few years as a result of the collapse of finance companies. The regulation means that the co-operatives have to meet higher standards, such as having recognised credit ratings, having set capital requirements and risk-management programmes.

Lynch is keen to point out that no New Zealand credit union failed during the global financial crisis. He puts this down to the fact that all borrowing and lending is done in New Zealand and credit unions can only provide services to individuals, not businesses.

Because credit union loans were small, they faced reduced risk of one or two large borrowers failing and bringing the organisation down with them. This meant that credit unions weren't reliant on foreign borrowing and also didn't lend to property developers and other high-risk businesses, which led many finance companies to fail.

Heartland Building Society does all its business locally, not internationally. Unlike credit unions, it lends to businesses. But the types of businesses are strictly limited, reducing risk. It might lend, for example, to meat- and dairy-related businesses, but not to kiwifruit and viticulture operations. Likewise, while it might provide funding for the machinery related to forestry, there are aspects of the forestry business that it wouldn't lend to.

Defaults by banks, building societies or credit unions aren't impossible. One credit union, the Hibernian, was struck a fatal blow when an employee defrauded it of $1.2 million, which shows they are not immune to risk.

"Bad management decisions" could affect credit unions, says Lynch, but generally they are conservative organisations.

What's more, credit unions have a very low level of delinquency (non-payment) on their personal loans and mortgages. In part that's because they are member-owned.

Lynch says if a customer falls behind, it will be pointed out to them that they are affecting all the other members. "It is different from a bank ringing up," says Lynch. "[Banks] are thinking about their shareholders. Credit unions are starting from a different place." While some of the building societies have a very similar co-operative structure to credit unions, the Heartland Building Society is different because its parent company is listed on the NZX.

Heartland's group treasurer, Craig Stephen, says Heartland is a hybrid. It has 50,000 depositors and 8000 shareholders, most of whom are customers.

All of these organisations need to be competitive to survive.

Before the financial crisis, when our main banks were fighting a price war, the rates offered by co-operatives often didn't look as attractive. That cycle may turn again at some point.

Stephen says although Heartland doesn't engage in Kiwibank-style Aussie-bashing, the building society, which hopes to convert to a bank, would philosophically like to be part of the movement to recapture control of New Zealand banking from foreign interests.

"The financial crisis demonstrated why it is important to have control over bank security and, in particular, access to credit," he says. Since the GFC hit, the Australian-owned banks have made access to capital tighter here than in their own country. "We don't have most-favoured nation status [with the Australian banks]," says Stephen.

A number of factors stymie people from switching banks. One is the hassle of setting up direct debits and automatic payments, another is "fee-free banking", although co-operatives also provide this. There may be other factors such as Fly Buys and other points on credit cards. Plenty of people do make the switch, however.

Finally, both the Friendly Societies and Credit Unions Act and the Building Societies Act 1965 are currently under review by the Government.