Mar 01, 2010
Why mutuals work
The arguments for mutuality are pretty simple. Co-operatives and mutual organisations differ from their PLC competitors in one crucial respect, they exist to provide a service for their members rather than to generate profits for external shareholders. This means that there are no conflicts of interest between the claims of consumers and owners, and no incentive to exploit customers for short term gain. Profits are shared amongst the members (customers), rather than external shareholders.
But what about when we move beyond theory to existing institutions? Do co-operative and mutual financial organisations really deliver for consumers in the way that their ownership structure would suggest?
The Building Societies’ Association has estimated that a mutual ownership structure provides them with a cost saving of approximately 35%, which is distributed straight back to the members - through the provision of low cost borrowing, high returns on savings and dividends. Before the recession, the average margin between mortgage and savings rates, an important indicator of the efficiency of an institution in providing financial services to customers, was typically 0.9% for mutuals and 1.5% for PLC banks. Between 1997 and 2007, Nationwide has estimated that the mutual pricing benefit that it enjoyed as not having to put shareholders ahead of members totalled over £3.7 billion.
Mutuals can act as a positive force for all customers in the marketplace. An example of this can be seen in the controversy over ATMs. Whilst in 1999, there were no charging cash machines in the UK, in 2006, there were over 25,000, with consumers paying £250 million to access their own money.The only real opposition to banking charges for cashpoint machines came from the mutual sector, particularly Nationwide and other building societies. Nationwide’s longstanding campaign resulted in the Government monitoring the growth of charging cash machines and significant improvements in the transparency of charges. This positive development would not have occurred without mutuality.
Mutuals can also favourably influencethe pricing policy of their competitors. A PA Consulting international study in 2003 showed that the size of the mutual sector in most countries had a direct influence on the size of bank’s profits, finding that the ‘profitability of the banking sector is inversely proportional to the market share of mutuals within the banking sector.’ A large mutual sector is therefore crucial in keeping the exploitation of customers by retail banks in check.
Their structure of governance also allows mutuals to lead the way in providing financial services to many citizens who are often excluded from mainstream products. In the UK, credit unions offer affordable credit and banking services to thousands whose only alternative would be that of financial exclusion or dealing with loan sharks.
Perhaps most importantly, the fact that these organisations operate using democratic voting systems, on a one-member-one-vote basis, allows them to take a long term view of their members’ interests. This has meant that they have weathered the global crisis much better than their shareholder counterparts. While they have not been immune to the crisis, they have on the whole shown themselves to take fewer risks with savers’ money; and have not required the same level of assistance from Government as required by the private sector.
As we collectively count the costs of our financial institutions’ previous short-term thinking, this approach to business should unquestionably be the future direction that we are looking for.
But what about when we move beyond theory to existing institutions? Do co-operative and mutual financial organisations really deliver for consumers in the way that their ownership structure would suggest?
The Building Societies’ Association has estimated that a mutual ownership structure provides them with a cost saving of approximately 35%, which is distributed straight back to the members - through the provision of low cost borrowing, high returns on savings and dividends. Before the recession, the average margin between mortgage and savings rates, an important indicator of the efficiency of an institution in providing financial services to customers, was typically 0.9% for mutuals and 1.5% for PLC banks. Between 1997 and 2007, Nationwide has estimated that the mutual pricing benefit that it enjoyed as not having to put shareholders ahead of members totalled over £3.7 billion.
Mutuals can act as a positive force for all customers in the marketplace. An example of this can be seen in the controversy over ATMs. Whilst in 1999, there were no charging cash machines in the UK, in 2006, there were over 25,000, with consumers paying £250 million to access their own money.The only real opposition to banking charges for cashpoint machines came from the mutual sector, particularly Nationwide and other building societies. Nationwide’s longstanding campaign resulted in the Government monitoring the growth of charging cash machines and significant improvements in the transparency of charges. This positive development would not have occurred without mutuality.
Mutuals can also favourably influencethe pricing policy of their competitors. A PA Consulting international study in 2003 showed that the size of the mutual sector in most countries had a direct influence on the size of bank’s profits, finding that the ‘profitability of the banking sector is inversely proportional to the market share of mutuals within the banking sector.’ A large mutual sector is therefore crucial in keeping the exploitation of customers by retail banks in check.
Their structure of governance also allows mutuals to lead the way in providing financial services to many citizens who are often excluded from mainstream products. In the UK, credit unions offer affordable credit and banking services to thousands whose only alternative would be that of financial exclusion or dealing with loan sharks.
Perhaps most importantly, the fact that these organisations operate using democratic voting systems, on a one-member-one-vote basis, allows them to take a long term view of their members’ interests. This has meant that they have weathered the global crisis much better than their shareholder counterparts. While they have not been immune to the crisis, they have on the whole shown themselves to take fewer risks with savers’ money; and have not required the same level of assistance from Government as required by the private sector.
As we collectively count the costs of our financial institutions’ previous short-term thinking, this approach to business should unquestionably be the future direction that we are looking for.
