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A Director's Perspective

16 July 2018 |Industry Updates

A Director's Perspective

16 July 2018 |Industry Updates

It’s been 3 years since BDCU Ltd became an Alliance Bank®. We spoke with Allen Cupitt a Director of BDCU Ltd to find out what it’s like to partner with Bendigo and Adelaide Bank, if the Alliance Bank® solution has proven to be financially sustainable and to explain the value proposition.

Allen Cupitt

Lets talk about the elephant in the room - you’ve formed an alliance with a Bank. Why did you choose Bendigo and Adelaide Bank (BEN) and have they lived up to your expectations as a partner?

As everyone in the Credit Union Industry would know we originally tried, along with a large number of other Credit Unions, to create an in industry aggregated balance sheet. Like many other industry projects, this initiative was doomed by an industry made up of players with diverging objectives and an inability to collaborate for success. So for a Credit Union like BDCU who had independence ambitions and sought a strong independent future the industry danger signs were clear.

BDCU wanted to unlock the potential that was being hampered by the capital restrictions being imposed by the regulator, not throw in the towel and sell out our community in a merger.

Despite fond memories for those occasions of collaboration, we also recall many occasions when co-operative collaboration was lacking and opportunities missed as a result.

We along with a number of like-minded CU’s approached Bendigo and Adelaide Bank and seriously it was a breath of fresh air. BEN was open to listen and their team worked with us on the idea of creating a new solution for Credit Unions that had a goal to continue serving their members, to grow without the constraints of APRA, to remain independent and best of all, to keep their capital in their communities. I have been in business for many decades and have had many business negotiations in that time. I can honestly say that our dealings with BEN have been a true collaboration on a clear vision that has resulted in a new way of being a member owned Mutual providing Banking services to our Members and this is because we have a respectful partner in BEN.

Does BEN’s obligation to serve the interests of its shareholders come at the expense of your obligation to your Members?

This old chestnut. The implication of this is thrown in by those who have other plans for the industry.

The fact is that BEN is a listed company and their shares are for sale every day the market is open. Another fact is that BEN will be celebrating a 160-year heritage with a culture grounded in their building society roots. They have a strategy of collaborative partnership, not takeover.  

But, importantly, BDCU operates as a completely independent entity, owned by its members, with control over its capital, strategy, footprint, staff, products, pricing and brand.

We have a contract in place defining how we share the margins made on our deposits and loans, so the success and growth of the Alliance Banks will benefit both parties, BEN’s shareholders and our Alliance Bank® shareholder members. We are seeing strong, above system growth as a result of our partnership.

How is the Alliance Bank® solution different to Community Bank®?

BEN’s Community Bank® branches have been successfully embraced by many communities as a solution to their local needs. They operate very differently to the Alliance Bank®solution, using the Bendigo Bank brand, products, pricing and discretions.

In the Alliance Bank® solution each of the Alliance Partners controls these aspects of their business to meet the needs of their members and communities.

Our contractual arrangements are quite different from that of a Community Bank®, and allow for options for all parties in the event of a dissolution of the partnership.

Many in the industry believe the Alliance Bank® solution is an exit strategy. Is this the case and if not, why not?

I have heard this comment too, which is disappointing as the best time to choose the Alliance Bank® solution is when you are in control and want to grow. This model is not for the weak, you have to believe you have a future and one that can grow and better serve your members, not abandon them.

Is the model suitable for Boards and CEO’s that feel they are no longer able to manage the obligations that come with holding an ADI licence?

It should not be a matter of not being able to manage the obligations. BDCU had a positive relationship with its APRA team and was comfortable with meeting its obligations. It is a matter of choosing to focus on growth and member/community benefit rather than the constraints on both of these by being an APRA regulated entity.

I know there is a trend in the industry that I am not comfortable with, for the CEO and Chair to merge themselves into retirement, this is, in my opinion, at the expense of the Members.

Having said that I am sure that ethical Boards and CEO’s who are up for the challenge of operating a member owned Mutual providing Banking services in the best interests of their Members will find the freedom and opportunities of the Alliance Bank® solution compelling.

Does the Board still have autonomy in the area of business strategy and pricing and how has the Board’s responsibility changed since becoming an Alliance Bank®?

Yes, the Board sets our strategy and the product pricing policy to meet the needs of the Members.

The most interesting thing for the Board is that they do not have to spend 90% of their efforts meeting the needs of APRA. We still have responsibility to comply with good business and lending practices and ASIC regulations of course, but we no longer have to focus on APRA requirements at the expense of our members and our business. What any Alliance Partner Board will need to do is refocus on the strategy to grow and to service a broader member community as many limitations for loan and deposit size and type are removed. For example, you can now have strategies to service small and medium businesses without bumping into to capital constraints. So the Board will need to reinvent itself as Directors will have the time to focus on the Business of Members first. It’s a lot of work, but very positive work.

How do you grow your business without eroding your member capital?

Again this is the furphy thrown in by the deceptive or the ignorant. It has always been the case that the Board would determine how profits are spent. It has just been that the regulator has imposed uncommercial capital retention requirements for those holding a banking license. In a normal business the Directors should either invest the Capital in order to grow the business or return excess capital to the shareholder Members.

The objections to the Alliance Bank® solution are, in my view, often influenced by the self-interest of those Credit Unions that want to subsume the target Credit Union’s Member Capital.

I for one believe that shipping the community’s wealth to a credit union, potentially in some other state, and demolishing the employment opportunities in the community as an exploitative act. I favour investing excess capital in positive ways in the community it was earned from, but that’s just me.

In the Alliance Bank® solution, you only have to make enough profit to meet your strategic objectives. Directors need to clear their minds of this profit maximisation obsession and get back to the business of Members which, after all, was the Credit Union model.

Alliance Bank® Future?

I think the work that has been done by the pioneering Credit Unions and Bendigo and Adelaide Bank has cleared the path for those who see a future for their Credit Union. The hard work has been done for them. New entrants are coming on board to a proven solution where profit is being made. It now becomes an ethical and moral choice as to whether Boards and CEO’s seriously consider the solution for their Members or to drift towards the merger because it is the ‘known solution’.

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Bendigo and Adelaide Bank Limited, ABN 11 068 049 178 AFSL / Australian Credit Licence 237879. AWA Mutual Limited®, BDCU Limited®, CIRCLE Mutual Limited®, NOVA Mutual Limited® and SERVICE ONE Mutual Limited® (Alliance partners) are independent mutual entities that have formed an alliance with Bendigo and Adelaide Bank. AWA Alliance Bank®, BDCU Alliance Bank®, CIRCLE Alliance Bank®, NOVA Alliance Bank® and SERVICE ONE Alliance Bank® are trademarks of Bendigo and Adelaide Bank Limited.

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