Digital Challenges & Solutions for Australian Mutuals

The Mutual Industry Review 2023 , released on 23 Nov by KPMG Australia , provides valuable insights on the key priorities and hurdles faced by customer owned banks & mutuals in Australia.

This article delves into the digital banking aspects of the insights and explores what a solution would need.

Financial Operating Environment

The survey found a good improvement in cost-to-income ratio, reduced from 81% to 73.7%, although this is still high when compared to 51.4% for the majors.

In their analysis, KPMG noted that mutuals will try bridge this gap through organizational simplification, investment in productivity-enhancing technology and the use of commodity (or utility) services like shared payment services.

The survey also called out the two significant mergers from 2023:

1. Newcastle Greater Mutual Group and
2. Heritage Bank and People's Choice Credit Union - now People's First Bank

KPMG's analysis showed that inorganic growth options (strategic alliances, joint ventures and mergers) will continue to be important ways for mutuals to access the benefits of scale.

Take Away 1: look for a solution that provides a way for merged entities to consolidate systems and simplify integrations.

Industry-Wide Challenges

KPMG called out multiple sector-wide challenges facing mutuals including cyber incidents, risk and regulation, data protection, new competition, and access to talent.

I was particularly interested in the challenge of "Investing for the future through digitisation and modernisation".

Digital Transformation

With these challenges in mind, I was not surprised to see that Digital Transformation was the second highest priority for mutuals, chosen by 54% of executives.

The KPMG report doesn't really expand on what ‘Digital Transformation entails’, but based on what we've heard I'd call out a few key areas of focus:

1. Addressing the?limitations of existing core banking and customer experience solutions (commonly provided by, and tightly entangled with, core banking) which often result in out-of-date digital banking experience.
2. The need for a road map out of 'legacy system entanglements'. This is made urgent by concerns about the?responsiveness and long-term viability?of some core banking platforms. Mutual’s I've spoken to have said they need to have a 'plan b' to decouple their systems to allow for a greater degree of flexibility, reduce vendor lock-in risk, and deliver a better digital experience.
3. Continuing to replace monolithic and proprietary systems with modern, cloud-native, microservice based, loosely coupled systems that leverage commonly used 'commodity' technology.

Customer experience and technological innovation

These digital transformation areas of focus match closely to the top strategies to improve customer experience found by KPMG.

Four of the top five are related to digital channels:

• Reducing ‘points of friction’ at the customer level (95%)
• Digital/automated workflow (81%)
• Anytime, anywhere banking (59%)
• Improve web design (49%)

Unfortunately, it can be hard to be innovative and deliver these outcomes if you are restricted by legacy systems or expensive software that no longer fits your needs. This quote (on pg 27) sums it up well:

[..], there’s a growing expectation for more innovative products and digital services, even amongst the mature customer segments that often are highly represented in mutual banks. Many mutual banks are still using legacy core banking and loan origination platforms, as well as operational and regulatory reporting systems, which may not be easily updated to incorporate customer and regulator expectations.

Adding to this is the fact that many mutuals might want to differentiate by creating new digital experiences & apps from scratch, but don't have the in-house skills, budget or appetite for risk & compliance efforts.

And don't just take my word for that - KPMG found that "personalised member service / experience" was the top source of differentiation for mutuals, yet "Innovation" was the second highest challenge, only slightly below Data Integrity.

Take Away 2: Seek out digital banking solutions that let you keep existing systems by providing an abstraction layer and a modern user-friendly mobile and internet customer experience that reduces friction points.

Take Away 3: Look for solutions that have pre-built modules to helps reducing the burden on the limited IT budgets and allows mutuals to invest strategically in features that differentiate or help them 'meet their purpose' (more on that later).

Cyber amp; Compliance Risks

Before returning to the topic of 'meeting their purpose', I wanted to call out the Top 3 risks identified by KPMG:

• IT, including cyber risk (92%)
• Compliance & regulation (43%)
• Attracting & retaining talent (30%)

Take Away 4: Make sure your digital solutions are built, from the ground up, with modern security practices so you can be confident it will pass the most demanding security audit and keep your customers & members as safe as possible.

Take Away 5: Seek out solutions that align with multiple standards - including CPS 230, 234 & 235 from APRA (Australian Prudential Regulation Authority), PCI DSS & PII from the OAIC (Officer of Australian Information Commissioner), ISO 27001 and SOC 2 - to provide a set of controls across Resilience Risks, Security and Data Risks, Technical Risks (Architecture), Operations Risks (Service Management) and Application Deployment Risks.

In relation to the third risk of attracting and retaining talent, read on…

Meeting Your Commitment to the Community

On page 14 of the report, KPMG wrote:

"Mutuals maintain powerful bonds with their members and the communities that they support, which continues to be a strength of the sector"

How does this bond and commitment to community relate to digital channels and customer experience??

You digital solution needs to provide the foundational elements of a digital banking customer experience. These are the standard features like viewing transaction lists or making payments, that you must have but don’t give you any real competitive advantage.

Then, since you don’t need to rebuild these features (or recreate the wheel) it means that you can save your money and development efforts for new or unique features that help you supporting your members and the community.

For example, you might:

• Offer a way for people to support local businesses or donate to local charities.
• Integrate with a new fintech or other financial service offering, such as the digital bank guarantee service that Avenue Bank is releasing.

But it goes deeper: you need to look a company with matching values

Take Away 6: Look for a digital solutions partner who will work alongside your staff, to scale and grow their capacity.

Look for a partner won't just sell you a product and introduce you to a third party system integrator, then ignore you until it is time to renew. Someone who:

• Encourage a truly collaborative way of working, which means that they have staff located in Australia who will become part of your team for the project duration and beyond if needed.
• Will also uplift and mentor your staff to be self-sufficient during and after a successful delivery by focussing on knowledge sharing

In short , you want to find someone that will keep it local and help empower your teams, as this is very much aligned to the mission and purpose of a community owned bank – to support the local community.

More importantly, by upskilling your team, this sort of partner will help address the risk of attracting and retaining talent. Your staff are learning new skills with popular modern technology as well as innovative product-led customer-centric approaches.

Doing it All within Limited IT Budgets

KPMG found that tech spend has again increased, reaching 11.1% of total costs in 2023.

Even with slight increases to budgets, the I've been team hearing that it's getting harder and harder to deliver innovative solutions that address these challenges within the budgets available. Part of the solution might be to develop a shared service, but this can take time would require the sector to work together in a way that hasn’t been seen in some time. In the meantime, you need to ensure your digital banking solutions will ‘play nice with others’.

Take Away 6: Ensure your digital banking solutions are designed to be part of a larger ecosystem so they integrate easily with your chosen partners and vendors. This means you can continue to leverage your investment in existing technology without compromising the customer experience.

Conclusion

The KPMG Mutual Industry Review 2023 highlights key challenges faced by Australian customer owned banks & mutuals. To address these changes you need to invest in digital banking solutions that

• Provides pre-built module for modern cross-platform digital banking, so you can deliver the foundational, table-stakes, features and then differentiation through unique member services.
• Address security and compliance risks but also contributes to talent retention by fostering collaboration and up-skilling local teams. Its community-centric approach aligns with the ethos of community-owned banks.
• Provide easy integration with existing technology investments.

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