Cooperative Banking

Leveraging the cooperative difference to adapt to a new environment

Oliver Wyman is pleased to present its third report report on Cooperative Banking in Europe. In previous years we have examined how cooperative banks developed a distinctive banking proposition with their clients (Oliver Wyman, Cooperative Bank: Customer Champion, 2008) and how this contributes to the financial sector and the wider economy (Oliver Wyman, Banking on values, building on agility, 2012).

In this report we look at how the cooperative banking model is adapting to the current environment through two of its distinguishing characteristics: cooperative banks’ relationships with their members and other clients and their contributions to local communities.

Throughout the financial crisis and in post-crisis years cooperative banks in Europe have taken advantage of their customer-centric values to differentiate themselves from shareholder-owned banks in a context where the sector has been struggling to regain the trust of consumers. Cooperative banks have simultaneously increased their number of customers and the proportion of their customers who are members.

Many cooperative banks have reinforced their “community role” by continuing to lend to their members and to local businesses when some shareholder banks have been prone to withdrawing from depressed markets in order to deleverage or re-allocate resources elsewhere. This has provided a lifeline to many areas, especially outside major cities.

Despite these trends, cooperative banks face three main challenges that may hinder their contribution to the “highly competitive social market economy” the European Commission seeks:

1. Differentiation on values. Cooperative banks risk losing some of their differentiation for being seen to put customers and local communities first. This is partly a consequence of their success. Some cooperative banks have grown well beyond their community of origin and now have many more customers than members. In these circumstances it is more difficult to sustain the defining member- and community-focused ethos. At the same time, shareholder-owned banks are increasingly evolving their own service models and brand positioning to mirror some of the historic strengths of cooperatives – in particular, trust and proximity to customers – in an attempt to restore the tarnished reputation of the sector. If these efforts succeed, cooperative banks may suffer dilution of one of their main competitive advantages.

2. Technology and cost management. As new technology emerges and customers’ behaviour changes, banks must revisit the way they deliver services across the various channels (physical branches, internet, mobile, etc.). Cooperative banks have typically relied on dense branch networks and face-to-face interaction with customers. In an increasingly digital world, cooperatives risk falling into a cost, and therefore price, disadvantage, unless they are able to adequately manage their channel mix and serve those customers for whom face-to-face remains an essential channel.

3. Economic context and regulation challenges given the specific governance of cooperative banks. Basel III regulations require banks to hold higher levels of capital and liquidity. Cooperative banks cannot increase their capital as rapidly as shareholder owned banks because they do not have the same access to financial markets, and cooperative banking groups do not have the same ability to quickly re-allocate capital across activities and entities. On top of this, the new “risk weights” of Basel III are particularly burdensome for lending to some of cooperative banks’ key customer segments: namely small businesses and sub-sovereign local governments. Regulators are also increasing the operational costs of risk management, demanding more rigorous risk measurement, monitoring and reporting. Since this is largely a fixed cost per bank, it is more burdensome for smaller banks, which many cooperatives are, as well as for cooperative groups comprising many different legal entities. Due to their membership structures and underlying community ethos, cooperative banks need to balance a wider set of interests than shareholder owned banks. It also creates potential conflicts where commercial decisions have to be made around uneconomic products and services where there remains an underlying need to be addressed.

Cooperative banks should meet these challenges by preserving and building on their distinctive characteristics.

Cooperative Banking