How Australia’s Big Four banks became the Big Two: Report

A new report on the market shares of Australia’s major banks has found that Australia’s Big Four model is rapidly become a Big Two, with Commonwealth Bank and Westpac now holding more than 50% of the mortgage market and just under 50% of the retail deposits market.

The new report from research firm CoreData shows 76.5% of all outstanding mortgages by value were held by the big four banks – Commonwealth, Westpac, ANZ and Nab – at the end of June, up from 73.7% in June 2009.

But within the big four, two banks are starting to dominate, with 50.6% of all outstanding mortgages at the end of June held by either Commonwealth Bank (26.1%) or Westpac (24.5%).

CoreData principal Andrew Inwood says that despite Government efforts to encourage non-bank lenders and tier two Australian banks, the smaller players cannot keep up with the dominance of the majors.

“The banks all really provide the same products, so the separation is around service and it’s around brand and brand recognition,” he says.

“Australians continue to feel more secure borrowing from the majors, even though they are not necessarily the cheapest in terms of interest rates and fees.”

It’s a similar story with retail deposits, a crucial battleground for the banking sector as pressures on overseas funding sources increase.

Inwood’s Big Two control 48.5% of all retail deposits, with Commonwealth Bank enjoying a 27.7% share and Westpac a 20.8% share.

He says Commonwealth Bank’s strong performance is a reflection of high investment in back-end systems, which has allowed it to cut down processing times, and strong staff incentives for customer service.

Despite the dominance of the Big Two, Inwood says competition isn’t the problem, and argues that there are a large number of players in the market with similar services. Those that are prepared to innovate in some way will do well.

However, he does believe the growing dominance of the big banks does raise some questions over traditional non-bank lenders such as building societies and credit unions, who appear to be losing ground.

Inwood says consumers judge banks in two ways: according to the economic utility (the price and value of their service) and their social utility (how a bank makes them feel).

Building societies and credit union have been able to trade on social utility for some time, but Inwood says this approach is losing its impact.

“People don’t care. They care about what does it cost and what does it do?”

CoreData is currently completing research into the business banking sector, which will be released in the coming weeks.