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Chapter 5 - Competition in the banking industry - winners and losers
Competition and contestability in the banking industry
The Wallis report argued that ‘free and competitive markets can produce
an efficient allocation of resources and provide a strong foundation for
economic growth and development’.
Indeed, the language of recent reforms paints an encouraging picture of
increased efficiency and better performances by business. The effects of
deregulation and the influences of globalisation, however, are mixed—there can
be both winners and losers.
The banking and financial services sector in country Australia has been
no exception in that some sectors of the community have benefited from
competition while others have not. This chapter discusses broadly the effects
of competition on the provision of banking and financial services in regional,
rural and remote Australia.
According to Mr Stan Wallis, his Committee placed a high priority on
improving contestability in the system when formulating recommendations to
ensure an efficient, responsive, competitive and flexible financial system. By
‘contestability’, he meant ‘the opportunity for newcomers to challenge the
established firms and compete with them wherever they see opportunities to do
The Wallis Report observed, however, that:
Competition and technology have facilitated the emergence of
specialist providers who target products and customers where margins are
highest. New entrants (and indeed other exiting competitors) are able to
‘cherry pick’ the attractive products and customers without having to provide
complementary services at a loss.
This tendency to ‘cherry pick’ in the banking industry has meant that
while the reforms that have taken place over the last two decades have improved
business competitiveness, the effects have not been uniform.
Indeed, evidence suggests that the benefits of competition in the banking
industry have been lopsided—that they fall unevenly on sectors of the
population with some, notably small rural towns, experiencing a disproportionately
negative impact. In other words, there have been sectors of the economy in
regional, rural and remote Australia that have prospered under competition
while others have struggled.
The following section considers two sectors in rural Australia where the
experiences of competition in the banking industry are very
different—agribusiness, where competition is strong and retail banking in small
rural towns where competition is weak.
Agribusiness provides an example of a sector in rural Australia where
competition in the financial services industry is generating improved services
for country people. The KPMG research report, Small Business Banking in
Australia, found that over recent times, the agribusiness sector in Australia
has emerged as one ‘of strong importance to the Australian economy’. According
to the report, agribusiness has seen some significant developments in the
provision of banking and associated services.
The involvement of the major banks in this area demonstrates the growing
importance of the agricultural sector to them. The National’s Agribusiness
Financial Services is a specialist division and is committed to the long-term
viability of agribusiness in rural Australia. It informed the Committee that
the division consists of over 200 Agribusiness Managers, supported by
Agribusiness Analysts located in over 100 regional centres throughout Australia.
The National explained that agribusiness managers and analysts are
specialists with their focus on agriculture and related businesses. They live
in the local community and contribute to local community activities and events.
Many of the managers are from rural backgrounds and can relate directly to the
events that affect agricultural communities.
By locating agribusiness in the regional centres, they have direct contact with
customers in the region which allows customers one on one access to an
agricultural finance specialist. They also understand the time constraints of
their customers and regularly travel to their premises (that is, rural
properties to conduct interviews).
The National’s Agribusiness Financial Services have grown over the last
decade from 20 per cent to just under 30 per cent. This increase is a direct
result of the specialisation of the segment and the increasing understanding of
agriculture demonstrated by specialised products tailored to meet the needs of
agribusiness customers. The bank focuses on recruiting people with farming
backgrounds and agricultural training, predominantly from rural Australia.
As with the other major banks, the Commonwealth Bank outlined the
service it offers to the agricultural sector of Australia. It noted that its
AGRIOPTIONS package is a complete product, combining lending, investment, risk
management, business and personal financial services, designed to provide
maximum flexibility and certainty in managing agricultural businesses.
Agribusiness also forms an important component of Westpac’s Country Business
Direct service which has been established in three major regional locations.
Mr Carroll, ABA, supported the banks in their evidence that agribusiness
is an area where banks have targeted their resources. He stated:
Those services have been developed over probably a decade now.
Most of the banks servicing that market are employing agriculture graduates and
typically they look for agriculture graduates who have a background in family
farming so that there is some empathy there. They are delivering the services
to the farm—visiting the farm to talk business—rather than the customers having
to travel. In that sense, the issue of distance is being addressed. Also they
are obviously available to deal with any problems that customers might be
having with their banking services. They are generally supported by specialised
Mr Burke, NFF, confirmed the view that the agribusiness had certainly
captured the banks’ attention. From information obtained from members, Mr Potter,
also from the NFF, told the Committee:
...there has been a great improvement in the quality and quantity
of agriculture-specific products. More people have been employed. There are new
agribusiness centres and all that sort of stuff. My impression is that there is
some good work being done out there, for farmers specifically.
He noted further that agribusiness banks are applying themselves to
providing mobile banking service. ‘They go out and do trips to catch up with a
couple of their clients in a day and that sort of thing. In light of the
current banking atmosphere, it is probably on the increase rather than on the
In summary, the NFF noted that agribusiness is seen as ‘a bit of a
It is not provided to everybody, and we accept that it will not
be able to be provided to everybody. It is still for the select few at the
Without doubt, agribusiness is a sector where competition in the banking
industry has generated improved services. Mr Anthony Harman, Department of
Agriculture, Fisheries and Forestry, observed ‘with a lot of farmers, because
they have such big debts and outstanding loans, there is fairly strong
incentive for the banks to service them to the level of their satisfaction’.
It should be noted, however, that even within this sector, there are
groups more valued than others. One industry commentator observed:
It is not surprising given the polarisation in the financial
performance of the farm sector that lenders have analysed in detail the
revenues generated from clients and aligned both their product mix and level of
servicing accordingly. At the ‘bottom end’ of the farm sector, where the
finance needs are both simple and low volume, servicing via generic lending
products and centralised telephone service centres is the only way in which
lenders can deliver services profitably. At the other end, the product mix
options provided are more sophisticated and are supported by personalised
Retail banking transactions in country Australia
Although there is robust competition within certain sectors of the
financial service sector in rural and regional Australia, there are areas of
service provision that are not driven by competition—where the market is
sluggish in responding to consumer needs. Basic retail banking transactions is
one such area.
In looking specifically at the banking industry, a study by the
Productivity Commission in 1999 found that there were pockets of the Australian
community that had not gained from competition in the banking sector:
Bank branch closures have been part of the decline of some small
country towns. The spread of newer bank technologies and the deregulation of
the financial system have reduced the demand for and supply of traditional
banking services and seen the emergence of new financial services and new ways
of providing traditional services. While benefiting many, it has disadvantaged
some, particularly people reliant on traditional banking services in those
small rural communities where all branches have been closed and only of limited
range replacement services have emerged.
Conclusions reached by the ACCC in 1998 and 2000 support the contention
that banking deposits and retail transaction accounts may be one such area
where deregulation has not produced sturdy competition. In considering the
merger proposal of Westpac and the Bank of Melbourne and the proposed merger of
the Commonwealth and the Colonial, the ACCC was concerned about competition for
transaction accounts, deposit products and small and medium-enterprise banking.
It found in the case of the Commonwealth/Colonial merger that the
Commonwealth acquisition of Colonial would likely cause a substantial lessening
of competition in five markets—transactions accounts, deposit products and
small business banking in Tasmania and transaction accounts and small business
banking in regional New South Wales.
In further support of these findings and consistent with the evidence
presented in chapter 3, Mr Chris Connolly and Mr Khaldoun Hajaj found that:
Australia has one of the most concentrated banking markets in
the world...despite the level of concentration, there are some areas of
reasonable competition, such as the home lending market. However, everyone from
the Australian Competition and Consumer Commission (ACCC) to the Prime Minister
agrees that the areas of weakness in bank competition are retail transaction
accounts and small business banking.
Mrs Zerbst, Secretary, Nanango Progressive Community Ltd, encapsulated
the views of many community leaders trying to improve banking services to their
areas, ‘it is quite common knowledge that the large banks like the National
Bank here really do not care if their customers leave, as long as their
business customers do not leave’.
Thus, while a retail network in the banking industry may be important to
customers for the delivery of transaction and term deposits, the relatively
high operating costs associated with traditional bank branch services renders
this approach to retail banking unattractive for both incumbents and potential
In many instances, the small country town is a low value market that banks have
chosen to jettison.
Put succinctly by the Hindmarsh Shire Council:
Sometimes it seems that the major banks are in a race, to avoid
being the last branch in town.
Professor Ian Harper took a pragmatic approach to the future of banking
worldwide and in Australia. He stated bluntly that banks do not need rural
branches, they are ‘too expensive’.
He told the Committee:
I would be less saying to the people who are departing: ‘Stop!
Stop! Come back here. Get back to your posts.’ That is Canute-like. It is not
because the banks, in my opinion, are seeking to be antisocial. They are
responding to forces which are very strong and my concern is that they be
allowed to respond to these forces, because the consequences of not doing so
are severe. Instead I suggest asking, ‘Right. What fills this space when the
banks have departed, and can we as representatives of the public do something,
if necessary, through the public mechanisms to assist to catalyse the
development of what comes afterwards?’
He warned that there were difficult times ahead for the
banking industry and adjustments would not be smooth—that the market was not
going to be flawless in this transition.
Most witnesses accept that banking, like the rest of society, has changed
and cannot go back to old ways. Nonetheless, it is a matter of concern to the
Committee that there are pockets in the Australian community where competition
in the retail banking industry is not strong and where the withdrawal of bank
branches has created a void in the provision of banking and financial services.
Evidence presented in chapter 3 suggests that the market has been slow to
respond to the withdrawal of traditional bank services and is causing problems
for some groups in country Australia.
The Committee is very interested in the question posed by Professor Harper—
‘What fills this space when the banks have departed?’ The following chapter
looks at the way in which service providers have moved into the vacuum left by
the closure of bank branches in regional, rural and remote Australia and
overall how they are meeting the challenge of delivering banking and financial
services to country people.
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