St George Banks On Keeping Its Customers
The Age
Saturday November 25, 1995
THIS week St George Bank did something almost unheard of. It gave its existing customers a break by reducing its variable loan rate for borrowers who have been with it for five years.
Apart from last year's National Australia-led absorption of about 95 basis points of interest rate increases, established home-loan customers of the banks could have been forgiven for occasionally thinking that they were second-class citizens.
There are now dozens of special offers for people wanting a home loan for the first time, people refinancing, or those who are between homes and home loans in other words, people who can be won away from their existing bank on the basis of price.
The banks have generally been careful not to reduce the profitability of existing home loans by throwing away margin on customers who are unable or unlikely to move with the exception of the NAB's actions last year.
With the slump in the level of activity within the housing sector there has been a reduction in new demand for home loans.
The banks are all so well capitalised that they have no alternative but to compete ferociously for whatever volume of new business there is, particularly as the newer source of competition in the home-loan sector the mortgage originators are still increasing their market share.
St George's actions would suggest that there is at least one significant bank worried about its ability to retain established customers and that it has recognised the bankers' truth that it is cheaper to retain a customer than win one.
This is a particularly important moment for the regionals, which rely on home lending for their profitability. The issue of how to respond to increased competition, however, isn't confined to regionals and, if there is one bank prepared to acknowledge the vulnerability of an established customer base, there are sure to be more that are concerned about it.
Indeed, over the past week, it has become clear that all the banks have contingency plans for meeting their lowest- cost competitors head on. They all appear to have, tucked away out of sight for the present, their own no-frills bank- bill-based home-loan products.
Some, at least, plan to establish their mortgage originators at some distance from the bank itself using a different brand name presumably to avoid giving the bill-based product too much credibility.
That they have such plans, however, says they have accepted that originators are not only a permanent feature of the banking landscape but one growing at a sufficient rate for the bankers to start thinking about joining them and about how to stop their existing customer bases being cannibalised by their peers and the new competitors or at least about how to slow and share in the inevitable.
So far the most radical response to the new competitive environment that has been emerging in domestic banking is by Westpac, which will trial in Western Australia, following its takeover of Challenge Bank, an attempt to change its culture and relationship with its customers and its cost structures by turning itself in WA into a Challenge- branded and managed regional player.
In the United States, where the mortgage originators have pushed the banks out of home lending and the mutual funds and other competitors have reduced banks' share of savings to less than 50 per cent, Wells Fargo is attempting something even more radical.
It is closing vast numbers of branches and opening more modest and automated sites in supermarkets. It has abandoned home loans and funds management. It has made the biggest hostile bid in US banking history, for the Los Angeles-based First Interstate Bancorp, hoping to buy the bank, close its branches and shift its customers to the Wells Fargo's electronic banking network.
Wells Fargo is trying to do quickly what most bankers think will evolve gradually. Most believe it will be possible to shift customer bases to electronic banking ultimately rendering the massively capital and cost-intensive branch networks of traditional banks redundant but that this will be a long and slow process.
In the meantime there would be, as US bankers say in relation to the Wells Fargo strategy, extraordinary risks in rushing the process in case the bank wiped out its traditional infrastructure only to find it didn't have sufficient customers left to make the electronic bank viable.
To survive in the long term, however, organisations that are inherently high-cost have to be able to deal with competitors who, because they are generally one-product businesses with limited physical infrastructure, are inevitably going to be lower-cost providers of banking products.
NAB last year, and now St George, appear to have accepted that banking will inevitably be lower-margin than in the past and that to prolong the life of existing franchises will involve an investment of today's core profits in what might potentially be tomorrow's non-core business.
That involves risk. Promising sustained discounts on margins to large groups of existing customers to whoever qualifies reduces flexibility. A downwards shift in rates could make the St George move, for instance, very costly.
For banks to exploit their biggest competitive advantage, however their ability to offer and cross-promote, and occasionally cross-subsidise, a broad range of financial products in a full-service environment they have to retain their core relationships with customers.
St George's move may be a rare instance of a bank voluntarily shifting a significant level of margin from its shareholders to a large group of existing customers. In an increasingly competitive market, however, it is unlikely to be the last.
© 1995 The Age