Despite numerous inquiries and recommendations, including the appointment of a Regional Banking Taskforce, there is currently no support to help regional banks provide essential infrastructure and services to people in regional, rural and remote communities. This disadvantages people who live and work in these communities including older Australians, people living with disabilities, First Nations communities and small businesses.
Why is the CSO necessary?
Small regional banks are increasingly being used as de facto branches for the majors in a process known as “pass-through banking”, where small banks carry the costs of providing face-to-face banking services but receive none of the commercial benefits with home loans and deposits being held by larger or digital banks. This “pass-through banking” results in an estimated 30% revenue loss.
Regional banks are also subject to higher costs for cash-in-transit services due to their location.
The average annual operational expense for a regional or remote bank branch in Australia is estimated at $959,578.
Who will fund the CSO?
The recommendation is that the banking industry fund 100% of a CSO to support face-to-face regional bank branches, with an opt out exemption for smaller banks (with less than 1% of industry assets). We estimate that across the industry this would amount to around $153 million, or 0.17% of the total operating income of the major banks. Importantly, no taxpayer funds would be needed.
What should the funding cover?
The CSO proposal ties the level of subsidy to the metric of Full-time Equivalent (FTE) staff working in branches. As trained face-to-face services are the main reason why branch services are valued and demanded by regional communities, it is essential to directly link subsidies to the number of employees in a branch.
The advantage of an FTE base for a subsidy is that it scales according to the level of service provided. If a bank branch is open for five days of the week, then it is providing a better service than one opening just three days – all else being equal. FTE numbers will reflect this longer opening time.
It is also proposed that the base FTE costs is adjusted annually by a suitable wage price index.
Who will receive funding?
The CSO is used to provide a direct contribution to any bank which maintains or expands regional bank branches. It would ensure ongoing support to preserve the financial viability of existing branches, and incentivise banks to invest in new ones.
To be effective, the CSO must make a meaningful contribution to the running costs of a regional branch but not be so significant as to undermine market forces and competition.
Bank branches should meet criteria that the community generally expects from retail branch services, such as cash handing, home loans, transaction accounts, and term deposit management, advisory from trained staff and so on.
For the purposes of defining a branch for eligibility for a CSO contribution, it is essential that banks only include those branches providing trained face-to-face core retail services, including cash management services.