Bendigo gives a lesson in community banking

Rupanyup and Minyip are typical of many small Australian towns – perhaps of small communities everywhere – that have fallen on hard times. 

Over the years, these two struggling wheat-farming towns, set 20 kilometres apart on the dusty plains of Australia’s Wimmera region and with a combined population of just 1,200, were ravaged by a lethal combination of drought, soft commodity prices and bloodless corporate decisions made far away.

Yet this Australian backwater proved the unlikely spawning ground for a new international model for retail banking in the internet age, the surprisingly successful Bendigo and Adelaide Bank. 

Bendigo has grown to become Australia’s fifth-largest retail bank and is teaching the ‘big four’ lenders a thing or two about community banking.

When times were good in the wheat belt around here, Rupanyup and Minyip were prosperous places, lubricated by six banks whose managers were an integral part of their communities’ commercial and social life.

But the steady decline in the regional Australian economy and a sharper edge to corporate Australian practices through the 1980s and 1990s changed everything. 

At the big four – ANZ and NAB (which were both headquartered in Melbourne, the Victorian state capital and big smoke city 350 kilometres away) plus Sydney-based CommBank and Westpac – the bosses came to regard regional branches as expensive burdens on the balance sheets that were best shut down.

When the big city banks abandoned Minyip and Rupanyup, townsfolk were left with little choice but to trek to regional centres in faraway Horsham or Stawell, an expensive round trip of 200 kilometres, several times a week to do their banking in places where they had no customer history.

The ripple effect of the big four’s exodus was quickly felt in town. If a Rupanyup local didn’t do that long run to the bank in Horsham, a tab would be run up at the local stores. Others did likewise and debts quickly multiplied. 

Squeezed local businesses had less cash to replenish the shelves, refill the petrol bowsers, or pay for crucial farming equipment that helped generate agricultural income from beyond the towns. 

When the locals went to Horsham and Stawell to do their banking, they would also do their shopping there, for example at the butcher and the chemist, or visit the doctor and the dentist. Businesses and services in Minyip and Rupanyup went bust, jobs were lost and people moved away in search of livelihoods. The commercial centres of small towns such as Minyip and Rupanyup, symbols of romantic rural identity in the Australian heartland, died.

In 1997, community leaders from the two towns decided to fight back.

“We had right-wing farmers cooperating with left-wing unions,” remembers local wheat farmer Dave Matthews, who led the effort.

Matthews’ delegation travelled 170 kilometres east to the larger town of Bendigo, to see if the local Bendigo bank would fill the vacuum in Minyip and Rupanyup. 

It was a big ask at the time for Bendigo, which had begun life in the 1850s as a building society for fortune-seekers on the town’s goldfields and had barely moved away from those local roots. 

It was also in the expensive throes of formalising its conversion from a building society into a bank, in part by buying the Australian operations of Italy’s Banca Monte dei Paschi di Siena.

“My predecessor Rob Hunt told them that if no one else can make a quid there, why would he go there?” says Mike Hirst, Bendigo’s chief executive. But Hunt was persuaded to at least visit the two stricken towns and canvass the locals. Despite his initial reservations, he sensed an opportunity.

Hunt came up with a novel joint venture arrangement for Minyip and Rupanyup. Bendigo would provide its branded banking system, balance-sheet backbone and access to a full-service financial network beyond the two towns. In return, a community-owned startup partner would provide the real estate and meet the operating costs of the new branches, staff salaries and their upkeep. 

Profit from this new community bank would be split evenly between Bendigo and shareholders of the local startup, with the proviso that the bulk of the local share be ploughed back into their communities.

In June 1998, Bendigo’s first community bank serving the two towns opened for business in a building that had housed a branch of Melbourne-based ANZ.

Two decades on, Bendigo has 320 such joint-venture community banks across Australia. 

These have injected a collective A$183 million ($140 million) from their profits into the local economies to breathe new commercial life into their home towns. 

The revenues generated by its banking network have a multiplier effect on wages, new businesses and jobs.

“We used to have protest meetings. Now we have planning meetings,” says farmer Matthews.

“It’s a fundraising alternative to running a chook raffle in the pub on a Friday night,” says the plain-speaking Hirst, evoking a time-honoured rural Australian tradition of auctioning off live chickens and other produce to raise money for a worthy cause. “It’s just 100 times more powerful.”

Hirst is quick to point out this is not a form of charity.

“It’s not entirely altruistic,” he says. “We think the role of a bank is to feed into the prosperity of the community, not off it. It’s obvious. We’re not running a charity here. It’s a proper business. We don’t do anything for nothing. We can charge a little bit more [in fees] because of the value proposition we bring, the superior product. If your customers are doing well, you’ll make a buck. It’s really hard to run a successful business in a poor community.”

Hirst describes the system as a kind of franchise model.

“We split the revenue generated by the branch 50/50. Of the profit that the community company makes, 80% of it has to go back into the community for its benefit and the other 20% goes to its shareholders,” he says.

“For many of the communities that started this,” he says, “their motivation wasn’t profit, it was simply having the convenience of a bank and its services.”

Hirst says the local partner enterprise needs to be broadly owned within the community. Individual shareholdings are limited to 10%, which discourages regional empire building and power imbalances.

“Typically,” says Hirst, “we won’t allow just 10 people to own the local partner. It needs to be 200 to 300. It could be a cooperative that owns it. It obviously needs a strong community with good leaders in it to work. You have to have absolute trust in the people that you bank with.”

Today, Bendigo’s 320-strong national family of community banks has around 1,900 local directors.

While Bendigo was conceived as a rural initiative, often for areas abandoned by the big four, its community model has since made a push into Australia’s big city suburbs where it is luring those customers who are disillusioned with what Hirst describes as the “oligopoly” of the big four.

Bendigo’s inner-city branches have proved successful in regions that tend to vote progressive left or green. Hirst says these are often districts “where there’s a whole lot of money and made up of people who regret not demonstrating against the Vietnam War, and now they want to do something for their community.”

Hirst says about half of Bendigo’s community banks are now in these urban areas, often competing head-on with big four banks. 

When the big four shut branches, “they tend to do so in places where we are,” Hirst says. “I think they figure we’re not going anywhere because we’ve got the community partnership, so that community is not going to be left without a bank.”

Indeed, Hirst says Bendigo’s most successful community bank branches are located along the Mornington Peninsula, which takes in Melbourne’s prosperous outer southeastern suburbs.

“They’ve been returning around A$1 million a year to the community,” Hirst says. “We have the most success on the urban fringe, where there’s a lot of new development.”

Today, Bendigo is Australia’s fifth-biggest retail bank, although its ranking is somewhat flattered by the big four’s gobbling up of Bendigo’s bigger rivals such as Perth-based BankWest, which was bought by Commonwealth Bank in 2008, and Sydney-based St George Bank, which was taken over by Westpac in the same year.

But Bendigo is the biggest bank based outside a state capital, with around 7,000 staff in 500 offices and branches around the country. It has group assets of A$70 billion. 

While Hirst sees that as “not insignificant,” he’s quick to point out that the assets of Australia’s fourth-biggest bank – widely seen as NAB – are more than 10 times larger. “There’s a fair gap to us.”

Bendigo reported net profit of A$430 million in the year to June 30, up 3.4% from the previous year. Hirst has flagged flat growth for the coming year, which prompted sector analysts to slash earnings forecasts for the 2018 financial year. 

Speaking at the bank’s October annual meeting, Hirst blamed new lending rules from the Australian Prudential Regulation Authority, which would force Bendigo to “slam on the brakes”. 

Hirst adds: “Some of the growth momentum we experienced in the year just gone has been interrupted.”

UBS described Hirst’s remarks as a profit warning, and local stockbroker Shaw and Partners issued a sell recommendation on Bendigo stock.

Bendigo has steadily collected its own brace of smaller banks and building societies, including Rural Bank, Adelaide Bank and Delphi Bank, the re-branded, former Australian operations of the Bank of Cyprus. 

It has also batted away takeover overtures, notably from Bank of Queensland in 2007, which it soon overtook in size. 

Like the big four, Bendigo has no single dominant shareholder as a public company.

Bendigo’s community model may have breathed new life into once-declining towns, but it has also become its corporate raison d’etre as a do-gooder. 

That’s been handy for costs; Bendigo’s emphasis on renovating rural communities means it garners subsidies from politically sensitive local, state and federal governments, helping it to set up new branches and expand its network.

But despite the official handouts, the fact that it’s not seen as part of the city establishment has been good for Bendigo’s business and its image. 

Its marketing credo is “we might not be the biggest but we are big where it matters…in the community.”

Indeed, Bendigo presents almost as the antithesis of the big four’s perceived bloodlessness and their recent litany of scandal, excess and alleged market abuse. 

It also helps that Bendigo has rural roots, trading off the Australian bush values of integrity, mateship and thrift. 

Bendigo frequently receives national gongs for its corporate citizenship, and was recently ranked 13th in Fortune magazine’s 2017 worldwide list of 50 companies that change the world because of its community bank model, putting it behind Apple and ahead of Airbnb.

“As far as we can tell, our community bank model is unique around the world,” Hirst says. He frequently receives delegations from abroad seeking to know more about Bendigo’s community bank model. “We’ve looked all around the world to try and find someone who is doing this sort of thing, to try and share experiences and grow the model quicker, but we haven’t been to uncover anyone,” he says.

“Even one of the major banks here had a look at our model in a serious way to see if they could implement it in a country where they owned a bank,” he adds.

One place abroad where Bendigo has replicated the community model is the tiny mid-Pacific island of Nauru, population 10,000. Bendigo opened its first offshore division there in 2015 at the invitation of the Nauruan government, which described Bendigo as its chief financial partner. 

But the bank’s expansion in Nauru has come at some cost to its do-gooding image: controversially, Nauru has become a detention centre for Australia-bound asylum-seekers that Canberra is desperate to keep offshore. In return, Nauru receives millions of dollars in economic aid and support.

In 2016, Bendigo faced pressure to withdraw from the island after Westpac had stopped banking the government there, reportedly after compliance concerns were raised about alleged money laundering and terrorism financing.

Sarah Hanson-Young, a senator for the Australian Greens, castigated Bendigo over its stance on Nauru, saying that if “Westpac have their concerns about issues of money laundering, other financial risks, it’s staggering to see that Bendigo – a bank that is promoted as being one of community and social value – is entering into a financial relationship with the Nauru Government.”

Hirst faced down Bendigo’s critics, claiming that the bank “has sophisticated monitoring strategies in place to prevent, detect and react to suspicious activity. Any inference that we are backing detention centres because of our presence in Nauru misrepresents our intentions. We’re in Nauru to support the local people, giving them a hand up rather than leaving them without the ability to operate in a financial sense.”

A career banker, 60-year-old Hirst comes across as bluff and democratic. 

He greets his office visitors himself and makes his own – and his guests’ – tea and coffee. He was born in the bush – the rural Victorian town of Ballarat, not far from Bendigo. Fittingly – and obsessively – he supports the Geelong Cats, a foundation club in the Australian Football League and traditionally the team most associated with rural communities. 

Geelong’s theme song has a line: ‘We play the game the way it should be played’, which Hirst says is what Bendigo strives for, “banking the way it was meant to be done”.

While the bank has “all the apps, all the toys”, Hirst says Bendigo can still maintain its values with its digital platform.

Matthews, the Rupanyup wheat farmer who led the original delegation that helped launch Bendigo’s community model, reckons that with the subsequent advance of technology and fintechs, today’s banks would be less inclined to “give it a go” as Bendigo did back then. 

“But can we still capture the same spirit, as a virtual community?” Matthews asks. “I think we can. I think we must.”

There are other areas Hirst considers no-go: “We don’t have an investment bank, and I can’t imagine we ever will.” 

To underline that point, he adds: “During the global financial crisis, there was only one Australian bank that didn’t use a government guarantee and that was us.”

Hirst has been with Bendigo for 16 years, and has been chief executive since 2009. He started out at the old Commercial Bank of Australia (today absorbed into Westpac) before joining Chase AMP in Sydney after Australia opened its doors to foreign banks in the middle of the 1980s.

His route to Bendigo came via the State Bank of New South Wales in Sydney, where he was treasurer, a job he kept when Colonial Ltd took over SBNSW in 1994. Though later bought by CommBank in 2000, the Colonial brand lived on in the wealth management division of CommBank and in the branding of Melbourne’s second-largest sports stadium in the city’s Docklands district (and as things panned out, today, Hirst’s office in Bendigo’s Melbourne tower is just 20 metres from that Docklands stadium.)

Sports-mad Hirst was on the management board of that stadium; a fellow director there was the Bendigo chairman Robert Johanson. Bendigo wanted some help with its wealth management side and asked Hirst for advice. That led to Bendigo hiring Hirst as a consultant and to something of a Damascene conversion for him, having been accustomed to the sharper school of Australian banking. 

“I sat in on a few of their executive meetings early on and I thought these blokes have got no idea,” recalls Hirst. “All I ever heard was customers, community, doing the right thing, where I was used to ‘how can we screw the customers’ and ‘how can we put the fees up’,” he adds.

“But six months down the track, I thought these blokes have got it right. I’d initially thought they didn’t know anything about business, but what I worked out was that I didn’t know anything about business.”

Hirst says Bendigo represents a return to capitalism’s original values. 

“At its core, capitalism was about putting capital to work for the benefit of the community,” he explains. “It was about how are we going to grow this pie for the benefit of everyone, instead of how we are going to cut this pie up so I can get the most.”

He points to the example of Henry Ford who “established his company, built towns for the workers, set up schools, set up healthcare and there was a real symbiotic relationship between the community and business.” 

Up until the late 1980s and early 1990s, he says, businesses had been run for all stakeholders, to generate a fair reward for effort, but after that, businesses started to be run for management and shareholders.

“We have seen in Australia where customers feel they are not getting a fair reward for what they put in, and that’s led to the backlash against banks. You reap what you sow. Business has been run for all the wrong reasons.”

Hirst isn’t a big fan of banks and businesses that promote their own corporate and social responsibility initiatives. 

“CSR has become what you write in an annual report about how wonderful you are. We don’t write any of that stuff. We like our deeds to talk for us,” he says. Indeed, Bendigo’s corporate literature notably avoids using the term CSR, but rather stresses the community.

“CSR too often gets defined as environmental and philanthropic,” he says. “Ours is about helping people help themselves. It’s our business model.”

As for the oligopolistic big four, Hirst knows them well, not least because he worked within that banking club for more than half his career. Today, as deputy chairman of the 16-member Australian Bankers’ Association, he sits alongside their chief executives.

“I see them using a lot of our language these days. I think they recognize that our position in society is very different to theirs. They’ve all done very, very well, they make billions, they have good returns on equity. The only criticism that you can have of them is that they are not well regarded. Reputation counts for a lot, and right now they are struggling on that front.”

That said, Hirst does not welcome the federal government’s announcement of a royal commission into the banking industry and its practices, a move mostly directed at the big four.

“Some say we should welcome a royal commission because it will contrast the difference between ourselves and others, but I personally don’t share that view,” he says.

“It is an industry issue and will be bad for the industry. It will waste a lot of money. People know what the issues are and are busy addressing them.”