Australia’s small financial institutions are linking up to survive low interest rates and an ageing demographic

The first members of the Nambucca Banana Growers Federation Members Credit Union repaid their loans in bananas. Twenty cents from every box sold at the Sydney markets was put towards paying down modest debts.

The credit union was started in 1970 by a group of 11 banana growers from the Nambucca Valley on the NSW mid-north coast. Now called the Bananacoast Community Credit Union, on 1 November it will merge with the Perth-based P&N Bank to become one of Australia’s largest member-owned financial institutions.

The merger is a sign of the times for customer-owned banking. The number of individual credit unions has almost halved in a decade, as smaller institutions join forces to achieve economies of scale, but the sector as a whole is growing at more than double the rates of the big four banks.

The director of strategy of the Customer-Owned Banking Association, Sally Mackenzie, says the demise of small independent operations like the BCU does not mean customers are getting a worse deal, despite the emotional historic ties to local communities.

“The loss of diversity that is a byproduct of mergers is regrettable, but a stronger sector overall is good news for consumers,” Mackenzie says. “Mergers are a sign of a sector that is evolving, not shrinking.”

BCU members voted last week to approve the merger, which had been sold to them as a necessary response to modern challenges: shrinking margins combined with customer demand for investment in costly high-tech services and security.

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For many the decision was difficult and emotional. Perhaps toughest was the realisation that the very thing that inspired decades of loyalty – that this was a venture owned and run by locals – might no longer be sustainable.

“There were quite a lot of other credit unions that started at the same time – about the time the credit union movement took off in Australia,” says Stephen Spear, a banana grower from Taylors Arm, whose parents were instrumental in founding and building BCU.

“Not a lot of them are still around now. They seem to have lost that generation after me. The average age of people in credit unions has increased. All my kids were members of BCU at one stage and now not one is.”

Money handed over in the street

The idea of starting a credit union began in 1970, over a beer at the Pub With No Beer in Taylors Arm, where Slim Dusty had famously wandered down the Nambucca Valley a decade earlier.

Most banana growers had trouble dealing with banks; they were leaseholders on Crown land and didn’t have the necessary security to get a loan. A group of 11 growers became the founding members; Bill Ussher was elected the chairman and Neville Spear the secretary-treasurer – both unpaid volunteer positions for the small community enterprise that would grow more quickly than they could imagine.

Neville’s wife, Beatrice, also devoted most of her time to the credit union. Her handwritten recollections, made before her death in 2016, provide an insight into the homespun early workings of the organisation. Interviews with loan applicants were initially conducted at the Spear family kitchen table at Taylors Arm. No one was rejected, and no one ever failed to pay their debts.

After a year the credit union moved out of their home and into a small space at the Banana Growers Federation building in nearby Macksville.

“In the early days I carried my portable typewriter on the school bus into Macksville of a Friday, did office work in the morning, then Neville would come in the afternoon to interview members,” Beatrice recalled in her notes. “For privacy he would take them behind the packing boxes at the back of the shop.

“Many times I was given money either to deposit into savings or pay off loan accounts from members in the street. It was a wonderful feeling to be trusted like that.

“A manual adding machine was used and we kept all the roll of paper that went through and reused the reverse side again. We tore out any unused pages from school books when our sons left school and used them in the office as note paper.

“When told by an official of the Credit Union League that we could easily have a million dollars in assets before long. I was astounded.”

The credit union did chalk up $1m in assets in 1977. It had proved so successful that banana growers from the Coffs Harbour region had been eager to join, then eventually membership was made available to anyone from the Nambucca, Coffs Harbour or Bellingen shires. When the Spears retired in 1996, BCU had about 43,000 members, 12 branches and assets of $250m.

A sad reality

While customers are drifting away from the large shareholder institutions whose lending practices were eviscerated by the Hayne royal commission, individual customer-owned banks also face challenges.

“A strategic option for all credit unions, building societies and mutual banks is a merger with a like-minded organisation,” Coba’s Sally Mackenzie says. “Customer-owned banking institutions typically merge for strategic reasons and to gain access to economies of scale and increase the geographic spread of their services into more areas of Australia.

Mackenzie says the increased costs of meeting regulatory standards is proportionally greater for smaller banks.

The BCU chairman, Steve Targett, a former ANZ executive, says those regulations and low interest rates put the credit union’s viability at risk.

“When we projected our numbers out they didn’t make sense,” Targett says.

“For all credit unions, there’s an ageing demographic and that’s where the value is in the business. Unless you can find a way to invest in digital you’re going to see your business go into decline.

“When we looked at it as a board I think we were responsible in that we said, ‘this is about members and giving the organisation the most sustainable future we can’. We looked after our people.

“It was better to do something sooner rather than later. Later we might not have had the same choice.”

Targett says the board chose to partner with P&N Bank – and members then backed the move – partly because of guarantees the BCU brand would remain, branches would stay open and staff would keep their jobs.

“We have a lot of the loyal members. We built a relationship with them, and in the end they’ve been great in terms of listening to our story.”

For Stephen Spear, who recalls the days when his father would issue loans above the maximum amount and never turn anyone away, the merger is a sad reality.

“[The board] should have been in a stronger position to have a 50-50 merger now. But the way it has panned out it’s … more like a takeover – but there was probably no other option.

“The way we’re doing it BCU has a chance to continue on for a period of time. There’s a pretty good chance it will still be there in 10 years’ time. People will be satisfied if the merger achieves that.”