As a former banker, I have a soft spot for Australian banks. I have worked for a couple of them. What I have always failed to understand is why people continue to use these banks despite their strong personal feelings opposing them. Let me explain.
Many of us have a home loan. More than half of us use a broker to facilitate a home loan for us. Those brokers would quote from a source of many lenders (23 in our case). Time and again the cheapest quote is not a major bank. In fact, currently, they wouldn’t even finish in the top five.
Given the following:
- that home loans are now a commodity,
- there is a perception that the major banks are ripping us off,
- the service from these banks is lacking
- with a home loan you have their money not the other way around…
I could go on but my point is that more than 90% of borrowers are with the four major banks or their discount subsidiaries.
Often when I’m perplexed by a client’s choice and I ask why they have chosen the lender that they have. The answer is somewhat surprising given the above. They trust these banks. Or more accurately, they don’t trust the other lenders – “never heard of them”.
Yes, despite all of the negative press regarding dodgy behaviour by banks’ financial planners, repeated systems outages, not passing on all of the RBA rate cuts and interest rate manipulation (which by the way is such an overblown story). Coupled with people’s direct negative experiences with long queues in branches or waiting forever on phones or even nonsensical policies. People still trust these institutions.
The above is akin to knowing your neighbour is sleeping with your spouse but you keep having them over for a drink. Really?
The reality is we trust them because of their size. The fact that they’ve never let us down (that is, our money’s there when we go to withdraw it (and we have recently read about how that is not the case in some other parts of the world – Greece for example). We are in awe of these behemoths.
Sure the service is lousy (even our private bankers are retail bankers with shinier branches) and they’re frustrating to deal with but they provide an essential service and – in the main – it works (unlike our telecommunication industry…but I digress).
In truth, the smaller lenders provide a very good service. They will provide you a loan – their money is every bit as good as a big bank’s. They’ll be cheaper. They will provide all of the bells and whistles that the big banks do. You can choose to keep your savings at a big bank and have a loan from a small bank.
But 90% of us ignore this sensible and cheaper strategy. Why?
Because of trust.
In finance, it’s not advertising that reels in customers, it’s trust. If you don’t trust people or institutions, you will not transact with them financially. That trust has been won by the majors over a couple of centuries. It’s going to take a while for the little guys to catch up.
If you doubt this, then have a look at all of the money spent over the past 10 years by people offering a substitute to the banks. Fintech comes to mind. Their market share is a rounding error. Why? Because they are not understood or trusted as yet by the average person. If by chance they happen to get bigger, then the major banks will just buy them. As they have in the past with building societies, securitisation warehouses (Aussie and RAMS), regional banks, etc.
The only exception to this will be the large tech companies offering incremental banking services (like Apple and Google). This may be a game changer, if we trust them.
While we will continue to quote all lenders big and small, the truth of the matter is that the big banks will continue to dominate. The only way the small lenders have a chance is if the big banks are prevented from acquiring the smaller lenders once they threaten their market share. Except, of course, in cases where the condition of the smaller lender threatens the financial stability of the local economy.