MemberFirst a viable alternative to banks

All our Members will know the benefits of MemberFirst Credit Union, but if your friends and family need persuading, take a look at the following article in this month's Money magazine.

"Credit unions and building societies have a lot going for them – Maria Bekiaris from Money Magazine debunks five myths about them

If I told you that Canstar Cannex estimates you could save, on average, $172 a year by switching from one of the four major banks to a credit union or building society, would you be interested in making the move? What if I also told you that Roy Morgan customer satisfaction data for June shows that 88.8% of building society customers and 85.7% of credit union customers say they are satisfied with their institution, while only 72.7% of bank customers can say the same?

Big savings and great service – what more could you want? In theory not much, but there are a lot of misconceptions about credit unions and building societies that stop people from making the switch.
There’s the one that you have to be a member of a particular group to join, or the product range is not as good; they’re not as safe as banks, accessing your money is too hard, and switching is too much of a hassle.

In this special report we debunk the myths surrounding building societies and credit unions, starting with the idea that you have to be a member of a particular group to join.

Myth 1 - I have to be a member of a particular group to join

Although a few credit unions are still "bonded", meaning they are open only to people working in a certain industry or for a particular employer, most credit unions and building societies are open to everyone.

Generally there are fewer with restrictions and those that do have restrictions are becoming more lenient,” says senior financial analyst with Canstar Cannex, Harry Senlitonga. That means even those that are bonded might not be as difficult to join as you think.

Qantas Staff Credit Union is bonded but membership is available to current and former employees of "eligible organisations" including the Qantas Group, other airlines, airport staff, government agencies and travel agents.

Membership is also available to the immediate family of employees of eligible organisations – including spouse, partner, children, parents, brothers, sisters, grandparents, grandchildren, uncles, aunts, cousins, nephews and nieces!

Some of the teacher and police credit unions have similar criteria, meaning that if you’re related to someone who is eligible to join, chances are you can become a member too.

If you do join a credit union you’ll have to buy a "share" that will set you back somewhere between $2 and $10. If you leave the credit union you’ll get this back. Mutual building societies, on the other hand, don’t generally ask you to buy a share.

Myth 2 - The products are not as good as a bank's

"One of the major hurdles we face is the awareness in the marketplace that we do offer all the main products and service offerings of the banks," says the CEO of Qantas Staff Credit Union, Scott King. Whether you want a home loan, transaction account, personal loan, credit card or savings account, chances are a credit union will have something to suit your needs and often they’ll pay a better rate or charge lower or fewer fees.

"Infochoice recently showed that by having a mortgage with us you can knock three years off the life of a loan," says Louise Petschler, CEO of Abacus, the industry body for credit unions and building societies. "ASIC reported last year we have the lowest average loan fees. Canstar data shows we regularly beat the banks on deposit rates. We’re a full-service, competitive and member-owned alternative to the banks."

As you can see from the tables below, when comparing banks with credit unions and building societies, the second group often comes up better.

Mortgage Rates Comparison Table

Personal Loan Rates Comparison Table

Credit Card Rates Comparison Table

Credit Card Annual Fee Comparison Table

Comparing home loans shows that at 5.46%, building societies offer the cheapest standard variable rates on average.

Using an example of an average mortgage of $354,000 paid over 25 years, you’d save $14,600 with a building society compared with the 5.69% rate, which is the bank average.

This is backed up by the research from Infochoice that Petschler refers to. It found that Australian home owners taking out a loan with a more competitive credit union, building society or non-bank lender than the Big Four (banks) could reduce their interest bill by almost $1500.

And customers who reinvest the money saved back into their mortgage can cut the total cost of their loan by up to $32,000.

And don’t be turned off if you don’t hear about credit unions and building societies through a mortgage broker. It’s not common for credit unions and building societies to use them as a distribution channel.

The CEO of Teachers Credit Union, Steve James, for example says the fact that Teachers doesn’t use mortgage brokers lets it keep mortgage fees lower.

Senlitonga says personal loans, in particular car loans, are a real strength for credit unions and building societies. Not only is the table on page 74 proof of this, so is Canstar Cannex’s July star ratings report on personal loans. Canstar Cannex gives five-star ratings to loans it considers “superior” value and credit unions dominate these ratings.

The difference between paying 8.48%pa on a $25,000 car loan from a credit union and 11.86%pa with a bank works out to be almost $2500 on a five-year loan!

And if you’re sick of paying fees on your transaction account, a credit union or building society is worth considering. According to Abacus over two-thirds of credit union members pay no fees at all.

On average, credit union members pay far less than customers of their competitors. That’s because a lot of credit unions offer loyalty rebates or discounts, depending on how much business you have with them.

Credit unions and building societies are very competitive when it comes to credit cards. In the list of Top Low Rate credit cards, Credit unions account for more than half. Also 16 credit unions shared top spot in our Credit Card Issuer of the Year category in our 2009 Consumer Finance Awards.

Most agree that it’s the mutual status of credit unions and building societies that gives them the advantage over banks.

"We believe that our mutual ownership structure provides a competitive advantage compared to shareholder-based organisations, which are driven by the need to maximise profits in order to generate dividends for shareholders," says Michael Leach, head of marketing for Newcastle Permanent.

"As a mutual, our customers, who we call members, are also our owners. So we do not have the distraction of managing shareholders as a separate stakeholder group that may have interests not completely aligned to customers'."

The CEO of Community First, John Tancevski, shares this sentiment. "The fact that we don’t exist to benefit shareholders means that on any given day, credit unions and mutual building societies will make decisions to keep fees lower, pass on better interest rates, or invest in service standards that are superior to the banks," he says.

They also don’t lag behind in offering new and innovative products. Senlitonga points to Australian Central Credit Union's Cheers Everyday Account, which received an award in Canstar Cannex’s Innovation Excellence awards. It actually pays you! Instead of charging you a fee on BPAY and Visa debit transactions, a reward of 10c or 5c for each transaction, respectively are credited to your account.

The monthly account fee is waived plus a $2 bonus is paid to you if a minimum balance of $2500 is maintained throughout the entire calendar month, explains Canstar Cannex.

Senlitonga says CUA’s fixed-rate loans are also attractive. Not only are they competitively priced, they also offer 100% offset which you don’t find on many fixed-rate loan products, he says.

Many credit unions and building societies also offer first-home saver accounts, whereas only two major banks can say the same. "We are also participating in the federal government’s green loan initiative, whereby consumers can gain interest-free loans funded by the federal government to install environmentally friendly products and services," says Community First’s Tancevski.

"These products have largely been avoided by banks," says Adam Alsbury, executive manager, strategy and marketing with Victoria Teachers Credit Union.

"Community First has also supplemented this program by offering consumers lower-interest-rate personal loans for larger purchases, so that the cost burden of being green becomes even more financially affordable," says Tancevski. In fact several credit unions offer "green loans" charging lower rates for purchasing environmentally friendly products.

Myth 3 - They’re not as safe as banks

Making people aware that credit unions and building societies are just as strong as banks in terms of security is another big obstacle, says King. Of course, wanting to be certain your money is safe is a natural concern, but worrying is unnecessary.

"We meet all the same high standards as the banks and are covered by all the same protections," says Petschler.

"Credit unions and building societies are governed by APRA [Australian Prudential Regulation Authority] and therefore follow all the same rules and regulations as other authorised deposit-taking institutions [ADIs}, such as banks," says Alsbury.

King points out: "We’re all covered by the government’s deposit guarantee." From late last year the federal government said it would guarantee deposits in Australian-owned banks, credit unions, building societies and locally incorporated subsidiaries of foreign banks. A fee is payable for amounts of more than $1 million. This scheme will be reviewed in 2011.

"Most credit unions place strong emphasis on responsible lending practices, which means they have lower loan losses than many other financial institutions," says James. They also don’t engage in sub-prime loans and do not invest in complex securities based on sub-prime loans, explains Petschler. And more than 80% of their lending comes from retail deposits, not the volatile wholesale market (borrowing from other institutions).

James adds that credit unions and building societies have higher capital-adequacy ratios than the banks. This is the proportion of assets available to meet liabilities.

According to Abacus, credit unions and building societies have capital adequacy ratios of 16.25% and 14.5% respectively, compared with around 11.4% for banks.

It’s also worth noting that many of these mutual building societies and credit unions have history on their side and have been around for many years. Newcastle Permanent Building Society, for example, has been around for 105 years!

Tancevski, of Community First, which is celebrating its 50th year of operation, sums it up well when he says: "I would argue that the combination of strong prudential regulation, 50 years of absolute member focus and more conservative risk appetite means we are even safer than the banks!"

Myth 4 - It’s too tough to access my money

You can definitely cross this one off your list! A recent study by Canstar Cannex completely busts this myth about the convenience of banking with a credit union or building society.

"Many people are under the mistaken belief that banking with their home-town credit union or building society may be restrictive in terms of accessing their money, particularly in different parts of the country," says Canstar Cannex head of research, Steve Mickenbecker.

"The fact is that lots of these mutual banks are members of the Rediteller ATM network, which has signed an agreement with the National Australia Bank to join forces and bump its total number of ATMs to 3100." This will make it the second-largest ATM network in Australia, behind Commonwealth Bank.

"For 7 million Australians, rediATM will mean easily accessible 'direct charge-free' banking," says Teachers’ James. "These ATMs will be found on high streets, in shopping centres and in many rural and regional locations – giving our members 24/7 access to their money, direct charge-free".

"The combined network will come into effect later this year, once regulatory approvals have been received."

Of course ATMs and branches aren’t the only ways to access your money. These days anyone with a phone or internet connection can do their banking without too much hassle. "Generally our members transact remotely, with more and more using the internet," says the CEO of Community CPS, Kevin Benger.

Some, such as Teachers Credit Union, don’t even have a branch network, but that can be an advantage. "One of the good things about not having to support a branch network is that we’re able to keep our fees and charges lower," says James.

Myth 5 - Switching is too hard

One reason many of us stay with our current institution is that it seems like too much of a hassle to change. This is especially the case when it comes to transaction accounts – particularly if you have a whole lot of direct debits or periodic payments coming out of the account. The good news is the government has introduced measures that are intended to make it easier to switch from one institution to the other, and both the institution you are leaving and the one you’re moving to have to help you."With our 'Switch me' program we do it all for them. We had that set up even before the government measures," says Benger.

There are four steps you need to follow according to the Australian Payments Clearing Association (APCA):

1. Open a new account with the new institution. At this stage leave your old account open and keep some money there just in case any payments come out before you’ve had a chance to change things.

2. Ask your old institution for a list of all regular payments made to and from the account in the past 13 months. It doesn’t hurt to double-check old statements yourself too. Remember to check on automatic payments between your transaction account and any other account such as an online savings account.

3. Take the list of regular payments that your old financial institution gave you to the new institution and ask them to set them up on the new account. You will then need to complete forms advising each organisation of your new account details. The new financial institution will pass these on to the organisation concerned. Remember to tell your employer the details of the new account to make sure your salary goes there.

4. Once you’re sure all your regular direct debits and credits have been successfully re-established, you can close your old account. APCA suggests that before you close your old account you should access it through internet banking and print out your "pay anyone" list.

Convinced about making the switch yet? At the end of the day, credit unions and building societies may not suit everybody. But with all these myths busted, at least if you choose to stick to a big bank you’ll be doing it for reasons other than some misguided belief about credit unions and building societies."

Story by Maria Bekiaris, Money magazine, September 2009, ACP magazines.
Subscribe at http://www.magshop.com.au/Money.htm or call 136 116.

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