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Credit Union to Alliance Bank

17 October 2017 |Industry Updates

Credit Union to Alliance Bank

17 October 2017 |Industry Updates

What's your Plan A? For those interested in the Alliance Bank solution and the journey from credit union to Alliance Bank we have compiled a number of Q & As that we hope will delivery greater transparency and clarity.

Who developed the aggregated balance sheet model?

*It began with a group of credit unions and CUSCAL.
*When the CUSCAL Board decided on another strategic path, the credit union cohort was undeterred. They could see real value in the model and continued on their path looking for another acceptable ADI partner with operational scale and access to capital.
*Bendigo and Adelaide Bank Limited (BEN) was by far the best-fit partner. They had already proven themselves as a committed community partner.
*As pioneers building a first-in-market model it took 3 years to iron out the details of the model and establish an Alliance Agreement that met everyone's needs.
*The model is now operational. 
*Entry to the model will take a fraction of the time it took the pioneers.

How long has the solution been operational?

*We became Alliance Banks in late March 2015.
*The final migration of our banking systems is complete.
*New entrants to the model will enjoy a greatly reduced timeline.

Isn’t the alliance just a merger under another name?

*No it’s a true alliance.  A merger is a full transfer of business where the transferring entity ceases to exist. So it no longer has any capital. Its capital moves to the receiving entity. 
*Under the Alliance Bank model the transferring entity continues to exist. Its ownership does not change.  Each Alliance Bank Partner continues to be wholly owned by its members with its own strategy, branches, brand, staff and board.  Each continues to make decisions about product delivery, pricing and credit. And it retains all of its capital, now completely free of prudential requirements.
*Deposits and loans sit on BEN’s balance sheet, and members remain with the relevant Alliance Bank Partner.

Why did you do it?

Our objective was to:
*Achieve the scale and efficiencies to survive and thrive long-term as independent, member-owned mutual financial service providers. 
*Access our capital to grow and develop the business around our member and community purpose.
*Give us a better platform to deliver against the mutual promise.
*Give us more freedom to do what we do best - honest, ethical member service.
*Provide long-term employment opportunities for our staff.

Why Bendigo?

*BEN’s organisational philosophy is aligned with our own and it has a 155-year track record of supporting Australian communities.

What happens to members?

*Members remain shareholders, members and customers of your independent, member-owned organisation, with their deposits and loans sitting on BEN’s balance sheet.

What are the key attributes of the solution?

*We remain an independent mutual, maintaining our identity, board and management.
*We are released from prudential regulation (including our members capital).
*We are able to offer our members a full service banking offering (extended products and services, absence of credit and liquidity constraints).
*We are able to refocus our efforts on our roots, applying effort and resources to strengthen our member communities.

Who does what?

*Alliance Bank Partners (former CUs) are responsible for their own:
−Business strategy 
−Market growth 
−Brand management
−Operational risk management 
−Physical and digital footprint 
−Selection of products brought to market
−Pricing and credit decisions
−Member benefit and community support programs
−Member management

*BEN is responsible for:
−APRA interface and management
−Regulatory licences and compliance
−The banking system and digital technology
−Process administration
−Provision of white-branded retail banking products
−Provision of other products as agreed with the Alliance Bank Partners

What are the key features of the Alliance Agreement with BEN?

The Alliance Agreement governs the model. Key features include:
*Initial term. 5-year agreement, with options to renew for further 5-year terms.
*Revenue share. Margin, fees and commissions predominantly shared 50/50, Alliance Bank Partner / BEN.
*Alliance Bank Partners earn revenue on both loans and deposits.
*Margin shared is calculated using a funds transfer pricing model.
*Responsibility for setting fees remains with each Alliance Bank Partner
*Pricing discretion consistent with BEN’s discretion policy.
*Credit risk is borne by BEN. Alliance Bank Partners continue to make credit decisions under DLAs.
*Remain members of and retain access to the rediATM network.
*Alliance Bank Partners remain responsible for all staff.
*Responsible for marketing activities subject to complying with BEN brand guidelines and disclosures.

What are the advantages of the solution?

*Enhanced credibility (removed market concerns about our size and security).
*Technology, compliance and back office processing costs are BEN's, saving considerable cost and time.
*Immediate ability to grow as aggressively as we are able without capital or liquidity concerns.
*Scale with the ability to take on much larger credit and deposit positions.
*Both loans and deposits become revenue-earning products.
*Lifts our ability to take share in the business sector.
*Access to a larger product set including access to the innovative Social Impact Loan Program.
*Ability to grow our footprint should we choose to.
*Freedom to focus on our members and our market development.
*Full governance of our capital for the benefit of our business, our members and our communities.

What are the challenges?

*Gaining broad understanding of the solution within the credit union industry. 
*Need to change the ‘ADI mindset’ to account for earning revenue on both loans and deposits and sharing this revenue stream with BEN.
*Alliance Bank Partners continue to be subject to interest rate risk. However, maximising the growth of both loans and deposits and managing the portfolio mix mitigate this. The absence of regulatory restraint and improved market credibility makes both easier.
*Success in the model relies on being able to grow your business and closely manage your ongoing costs.
*Successfully maximising the benefits of the model requires a change from the mutual culture of a compliance focus to a development and growth focus.
*Regulatory risk is replaced by Partner risk (the risks in the alliance itself, with BEN  being our partner).

What advantages will new entrants have that the pioneers didn't have?

*Much faster implementation of the model.
*Lower migration costs.
*Negotiated services from known suppliers without having to manage or pay for banking system-related services from them - Ultradata, CUSCAL, TAS.
*Support from the pioneering group for efficient and successful implementation of the model.
*A brand with established social investments and mechanisms.

What's involved in migrating the banking system?

*Bendigo has partnered with Ultradata, Cuscal and TAS to provide the systems and payments solution for Alliance Bank. Ultracs will be the banking platform and Alliance Bank Partners using Cuscal payment services will continue to use their existing BSB numbers. 
*If Ultradata and Cuscal are your current banking partners a banking system migration will be replaced by an upgrade to the latest version of Ultracs. This will mean that the transition to Alliance Bank can occur with minimal disruption to service, staff and members.
− System upgrade replaces the need for a full system migration, staff retain existing system skills and training effort is significantly reduced
−Processing efficiency is maintained and processing delays and disruption associated with a migration are eliminated; and
−Internet banking set-up remains the same as do member numbers, accounts and details

*Alliance Bank Partners who are using Cuscal payment services and have Cuscal BSBs will retain them. This adds even greater benefit in streamlining the transition to the Alliance Bank model for staff and members. 
− Daily/monthly settlement process remains the same
−Minimal change to CU process protocols; and
−No need for members to change their direct debit, credit information or payroll details.

*Both of these developments mitigate the potential reputational and technological risks accompanying a change of banking system and a change of BSB. They negate the need for an extensive communications program with attendant costs and reduce the potential for member dislocation and staff morale or confidence issues.

What have you achieved for your members and/or communities by doing this?

* Member capital is preserved within the member community that built it.
*Service ethic and resources remain intact and operating as they always have.
*Increased efficiency and cost-effective operations.
*Greater security both in perception and in fact.
*Much larger product set.
*Ability to place much larger loan and deposit positions.
*Become an organisation that is interested in and now able to invest in its members and communities of interest.
*Alliance Party examples to-date:
- Development of the Social Impact Loan Program to benefit all Alliance Partners and their communities                               - SERVICE ONE Investment in the National Health Cooperative with benefits for its members, its local communities and SERVICE ONE commercially
−BDCU's investment in the" My Community Program" and the "Apprentice Support Program", both with benefits for the members, the community, local business, young people in the region and BDCU commercially
−CIRCLE'S Good Return Program that benefits the impoverished and disadvantaged

What are some of the myths circulating in the industry?

You cannot make a profit in the model. Yes you can. All Alliance Bank Partners budget to trade profitably within the final quarter FY16/17 when full model efficiencies are realised.  All Partners are operating well within budget expectations and with above system growth for the year experienced across the group.

It's too hard. There is no denying that it was a difficult process for the pioneers during the build process. It will be a very different, and a much simpler process for new entrants.  If you have the Demutualisation Procedure rule you need to consider the vote process required to pave the way, however in the experience of the pioneers this is quite doable (they all succeeded comfortably) and it served to re-energise members in their commitment to the organisations.

You will no longer be a true mutual. You will no longer be an ADI, which all of us have been only since the year 2000.  However you will continue to be an independent mutual which most of us have been for between 50 and 60 years. The difference is a positive one in that as a mutual and not an ADI you have full governance over your capital to invest for the long-term sustainability of your business and the members.

A relationship with a Bank is a bad and risky move. Given that a great proportion of the mutual industry have converted to being a Bank or aspire to do so, it is difficult to see how the connotation of the word "Bank" can continue to be held as negative.  There are risks in an alliance with a listed Bank with access to capital.  But are they any greater than the risks of losing your identity, all or a large proportion of your staff, your local industry or community presence and your capital to a larger pool of members?  And what will happen to the larger mutuals when they need access to more capital to compete than they can generate organically? For the Alliance Bank Partners our alliance with BEN has built-protections in the Alliance Agreement.

What happens if our constitution contains the Demutualisation Procedure Rule?

*Three of the Alliance Bank Partners had the demutualisation rule so can provide a step-by-step information to support you through the process.
*You can either:
− Hold two votes, one to modify the DPR, the other to vote on the Alliance with BEN.  You will need 25% of your members to vote and at least 75% of those members to vote FOR the proposal to change the DPR.  You will need a special general meeting to vote on the partial transfer of business; or
−Hold one vote to effect a partial transfer of business to Bendigo and Adelaide Bank and join the Alliance Bank model, leaving the demutualisation procedure rule as it currently reads in your Constitution.
−You will need 25% of your members to vote and at least 75% of those members to vote FOR the proposal. Then a special general meeting is needed for members to vote on the partial transfer of business.Three of the Alliance Bank Partners had the demutualisation rule so can provide step-by-step information to support you through the process.

How did staff react to the change?

*Bringing staff with you on the journey is important and clear communication is key. Once they understand the opportunities the Alliance brings and that their jobs and relationships with members are safe our teams were extremely supportive and instrumental in getting members across the line. 
*Back of house staff that work in areas that will eventually be rationalised were invited to register their interest in up-skilling so they can transition to the new opportunities the Alliance model realises. This too has been very successful.

How do I retain my brand identity under the model?

*Each Alliance Bank is unique and expresses the brand slightly differently to reflect their personality and member relationships, however there are some brand guidelines that need to be followed.
*The Alliance Brand has been structured to enable mutual brands to retain their identity and the value earned in the brand of their mutual business (e.g. ABC Alliance Bank®). Typically from a customer experience or value proposition point of view, the “ABC” part of the brand represents the following:
 Heart of a local
−Local employer
−Supports the member community
−Trusted, honest, ethical
−“One on one” personal service

*The “Alliance Bank” is a new part of the brand and it represents the following:
− Better for me, better for community
−More product, community outcomes
−Strength and security
−Community purpose

If you have furthers question please contact either: 
Carolyn Adams, Head of Alliance Bank, 0429 676 687
Tanya Schiller, CEO BDCU Ltd, 0447 112 423
Graeme Scannell, CEO AWA Mutual Ltd, 0417 301 043
Andy Smith, CEO CIRCLE Mutual Ltd, 03 9363 2530
Matthew Smith, CEO SERVICE ONE Mutual Ltd, 02 6215 7119
David Franklin, CEO NOVA Mutual Ltd, 02 4926 1428

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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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