Four banks dominate banking in Australia for decades now, and they are:
- Commonwealth Bank of Australia
- National Australia Bank
- Westpac Banking Corporation
- Australia and New Zealand Banking Group
Just like any other country, there are other smaller banks and financial institutions or groups, including credit unions and mutual banks.
There are a few foreign banks in Australia as well. However, the banks mentioned above, known as the Big Four, are the leading forces in the country’s banking scene.
In this article, we discuss the recent shift in the attention of consumers directed to second-tier lenders and smaller lenders.
How Big are These Major Banks?
The financial services sector in Australia has been the most significant contributor to the country’s economy. It contributes approximately $140 billion every year. The sector alone is equivalent to $4.7 trillion. When combined, these four major banks have assets totalling over $3.6 trillion.
They are a part of the seven giant firms on the stock exchange based on their market value. A report in 2016 even showed that the four banks had assets that generated the most significant profits in the world at 2.9% bank profit share per GDP. They beat China, Sweden, Spain, the US, and the UK.
Out of the four, the largest firm is the Commonwealth Bank. At several points of Australia’s financial history, this bank had become the country’s most valuable company. Currently, the Commonwealth Bank is second in ranking next to BHP, the mining giant.
Indeed, it is easy to see why these four banks are renowned in the country. They are truly the largest institutions, making it difficult to compete with them – until recently.
Cracking the Big Four’s Dominance
According to statistics, more than 80% of consumers have a loan with at least one of the Big Four banks. Its profitability even increased over the past few years, thanks to mortgage lending. As a traditional means of borrowing funds, consumers would view these banks as the much safer option than other factors.
The four banks have almost $1.4 trillion in debt, particularly mortgages. The years showed that they were able to maintain their market dominance. However, things are starting to change. Consumers have become much wiser and pickier. They are now willing to read the terms and conditions of the banks while demanding better deals when it comes to loans.
It may seem like the halcyon days are over for the Big Four. Critics and financial experts agree that they are starting to lose ground. Investors are not happy with loan growth, which have become slower than ever. The competition has become tougher for the banks, which may not be something they have anticipated.
Over the last few years, the banks are facing a rare period of smaller profitability in their collective histories. Add to that, and they continue to struggle as they try to re-establish their reputation right after the Royal Commission investigation. It was such a huge enquiry that led to the exposure of misconduct, which happened to be a widespread problem in the financial sector.
In recent months, it may seem hard to believe, but the Big Four are facing tough threats to their dominance. Foreign rivals and wealthy, private lenders have become the preferred options of consumers in the country.
The Effect of the Royal Commission on the Major Banks
The year-long investigation by the Royal Commission showed that the financial services industry has become dishonest, greedy, and full of bad behaviour. The report was published and publicised back in February, which confirmed that the banking system in Australia is extremely flawed.
The capital, Canberra, has now begun to impose stricter regulations of the major banks. Meanwhile, the Australian Competition and Consumer Commission told the press that it is time to fix the oligopoly. The solution was to make the Big Four that they are under threat by boosting competition.
After the exposure of the Royal Commission’s report earlier this year, the banks, except for Westpac, have removed their wealth management divisions. These divisions caused embarrassment after the enquiry. According to the report, they got paid without offering services to customers, including providing advice. They also did not benefit their superannuation customers. They were also quite unfair as they did not give pay-outs on insurance policies.
Meanwhile, Westpac continues to support its wealth management. However, it will not be surprising if it also distances itself from this controversy.
Apart from this issue, the banks may also face different regulatory reforms that can affect their services and how they provide them. The changes will be applied on loan approvals, which are already underway. The regulatory reform has seen a decline in both credit card and housing loans. Borrowers have now become quite smarter as they look for better alternatives to these four banks.
Consumers’ Problems with Australia’s Big Four Banks
According to an article, consumers are complaining about several things relating to the services of the major banks. There have always been issues even in the past. However, people are made aware that they have other options, including private lenders and even smaller banks.
While the banks may have limited services and loan products available for the consumers, private lenders and foreign banks are gaining the people’s trust. In the same article, the Big Four were not bothered by complaints of the consumers for several years. They would not change their ways, although the Royal Commission investigation did help resolve some issues.
Among the top problems that consumers have with the banks are:
All companies know that they have to be willing to communicate with their customers at all times to keep them. However, the Big Four have always had a cosy reign that made them feel comfortable as they remained on top of the financial services industry in the country.
Now, the customers are well aware that they should be treated better. If they have questions, they should be answered as quickly as possible. They did not get this treatment from the banks. Instead, they would have to wait several days to weeks to get a response. Most of the time, the answers are not even helpful, prompting them to ask more questions. Unfortunately, it meant they had to wait a few more days once again.
Banks offer loans and other products, along with the guarantee that they are trustworthy. Before, many consumers would view the other lenders that are not affiliated with the Big Four as scams. The rates were too reasonable to be true, as some people would claim. However, they later found out that the banks could offer better rates for them – except that they would not.
Enter private lenders: they are more than happy to provide better rates for Australians. It is why it should not be surprising that many people are leaning towards these funding sources.
If the rates seem favourable, the approval of applications is quite challenging to attain. Banks would have ridiculous requirements for an average Australian to get a loan. Unfortunately, many Australians have debts to settle. According to reports, personal debt in the country is the highest in the world.
With numerous people needing funds, banks have not become helpful over the years. In fact, they would quickly turn down applications, especially those with low credit rating. For those with existing debts, it has become a challenge to not only consolidate their debts but also make repayments.
The good news is that private lenders other smaller banks are more enthusiastic about saying “yes” to customers. Even those with poor or non-existent credit, they can now apply and have a fair chance of getting approved.
In line with few approvals of mortgage and other loan applications, banks would also make the consumers wait. It can become a huge problem for borrowers. What if they have a debt that they need to settle right away? What if they have an upcoming building or renovation project that cannot wait? The answer is simple: they should not turn to certain banks for a quick source of funds.
According to an online home loan platform, Lendi, the big banks take almost three days longer when approving loans.
Add to that, these banks even charge up to 22% more based on their median rate compared to other lenders. The Australia and New Zealand Banking Group even admitted that the bank takes more than 20 days to approve a loan application.
Consumers would typically borrow money because of the urgent need. If the bank takes a while to lend money, they would certainly look for other lenders. It should be noted though that trying to borrow from various institutions may hurt an individual’s credit rating. Before applying, it is best to ensure that the firm where the application is sent will be the final and ultimate choice.
To top it all off, the Big Four try to offer less than appealing loan terms to consumers. However, people today have become vigilant before signing a loan agreement. They review everything first to make sure they did not miss unfavourable terms. There are even some consumers who would ask a lawyer to be with them during the time of signing.
These individuals are now much bolder than ever. They know how to negotiate upfront to guarantee that they have a good deal out of the loan.
The banks surely want to maintain their profitability. However, zero-bound rates may affect them and cause them to sacrifice even their market share. Keeping their Net Interest Margin (NIM) may require them to pass the reductions to the borrowers. It is why alternative funding becomes a more helpful funding source for consumers.
The Alternatives to the Big Four
Today, customers should know that they have other options apart from the four banks. As the Australian Competition and Consumer Commission has stated, the country waits as the rivalry between other financial institutions and the Big Four takes place.
An initiative was approved back in February where banking data would easily be accessed. The banks were required to share certain data regarding customers with other companies. This way, Australians can switch accounts with not much difficulty.
Foreign and smaller banks are ready to take the financial services sector in the country. At the same time, several private lenders have also emerged, which have provided consumers with many alternatives:
- HSBC: For many Australians, HSBC is a bank that is mainly for expatriates. However, it has slowly penetrated the banking industry in the country even as an overseas rival of the Big Four. HSBC has begun to take a fair share of investments with many locals trusting this financial company more than the big banks in Australia.
- ING Bank: This lender from the Netherlands has now set a strong foothold in the country. It has accumulated mortgage loans of up to $50 billion.
- Citi: The US bank is also gaining supporters in the country. It has been around in Australia for a few decades now. It was even one of the first banks from another country that acquired a banking licence. The government granted it to operate in Australia way back in the mid-1980s.
- Rabobank: This bank has acquired more than $22 billion in assets and has become one of the top options of Australians looking for agricultural financing.
- Private Lenders: They provide numerous selections of loan products, including construction loans, mezzanine, and short-term loans. They work just like banks, except that they are not as strict and even give better rates. Alternative lending sources, including private, wealthy individuals and firms are now the most preferred in the country. These groups offer easier applications with fast approval, which make them the ideal source of funds for many individuals.
The challengers have seen a share in the industry that is rapidly growing, specifically in the mortgage market.
Foreign and smaller banks, along with private lending, are still a small fraction of the financial services market in the country, especially compared to the Big Four. However, they are slowly but surely outdoing these banks when it comes to providing better service and loan offers. In particular, private lenders are now easily accessible with the help of a reputable company.