Has the banking royal commission made you think twice about where you keep your money? (ABC RN: Ben Hays)
In the wake of the banking royal commission, many people are fed up with the big institutions, and are hunting for alternatives.
But the growing number of options — everything from stashing your money under the mattress to investing in cryptocurrency or switching to a credit union — can be pretty overwhelming.
And if you’re thinking of completely ghosting your bank, it might not really be feasible — yet.
“In Australia our entire payment system is mediated through the major banks … essentially you have to go through a bank to pay for anything,” says Brendan Markey-Towler, an economist and researcher with RMIT’s Blockchain Innovation Hub.
But, he adds: “Watch this space.”
“We are definitely seeing a convergence of technological advance which is providing some serious competition,” he says.
The good news for now? There is no one-size-fits-all approach to managing personal finances, and you can keep shopping around until you find an approach that works.
Stashing your cash
Distrust in the big banks is nothing new, but it’s reached new levels after the royal commission’s scathing assessment of a sales culture with poor customer outcomes — findings that may result in some parts of the financial sector being legislated out of existence.
Some people told RN’s Life Matters the big banks were a distant memory; they’ve instead opted for what they deem a more ethical alternative.
Ange switched to a bank that she describes as “ethical and carbon neutral too … They also invest in conservation projects. Big thumbs up from us”.
Others have lost faith in institutions altogether.
“Money under the mattress. Doesn’t earn a pittance of interest but also not subject to account keeping fees either.” — Kristen
Laura Higgins, the senior executive leader at ASIC’s free information service MoneySmart says it’s great to see people exploring their options.
“It’s really inspiring that lots of young people in particular are looking at different and creative ways of investment and exploring things beyond, perhaps, the traditional financial institutions,” she says.
Dr Markey-Towler says as an economist he never makes a recommendation one way or the other — each option has its own pros and cons.
“It’s always insecure to take your money out and put it under a mattress, and you’re foregoing interest, but you might have your reasons,” he says.
Brendan Markey-Towler says a lack of regulatory framework is holding back the take-up of digital currency. (Supplied: Facebook UQ)
He instead advises all consumers to keep their wits about them when exploring other ways of doing finance.
“There are alternatives out there to dealing with the traditional banks; you just have to be careful, savvy and willing to engage with them,” he says.
What are your options?
So if you’ve decided, “It’s not me, it’s you” when it comes to the banks, what are some of those alternatives?
Aside from the mattress option, you could turn to:
We’ve been hearing about cryptocurrencies — think bitcoin — for the best part of the past decade, but for many people, how they work is still shrouded in mystery.
And is it cryptocurrency or blockchain? It’s both, as Dr Markey-Towler explains.
“Blockchain is the technology that underlies cryptocurrency,” he says.
“Think of it almost like a bank ledger, which keeps a record of how much purchasing power everyone in a network has.
“You communicate to that network at large when you want to transfer that purchasing power … [using] a currency that is created by that network, for that network.”
That seems straightforward enough — but we’re not currently seeing too many people handing over their hard-earned bitcoin to the local coffee house for their morning heart-starter.
Buying a morning coffee with bitcoin isn’t commonplace but some cafes offer the service. (ABC RN: Ben Hays)
So could cryptocurrency actually be a bank alternative in the near future?
Dr Markey-Towler thinks so, and believes what’s holding back a concerted dive into cryptocurrency is regulation, or rather, a lack thereof.
“As those [regulations] become clearer, we can potentially expect these cryptocurrencies to be taken up by bigger and bigger institutions,” he says.
“Eventually you should be able to pay for something like your groceries or your rent.”
Ms Higgins agrees cryptocurrencies will likely play a significant role in the future of personal finance — but she also understands the need to exercise caution.
“I think that there is a lot of risk involved in cryptocurrency, and there’s no recourse if things go wrong because the exchange platforms are not regulated,” she says
Seeking peer support?
Then there’s peer-to-peer lending, which Dr Markey-Towler describes as the “antithesis of the financial sector”.
“What we’ve observed in the past few years has been the emergence of platforms which connect lender directly with borrower,” he says.
“You don’t go through a bank … a platform matches you directly, if you are a borrower, with somebody who is a lender.”
While this may appear to favour the lender, this service is regulated by ASIC and generally licences are required.
Ms Higgins says consumers “may be able to secure a lower interest rate than a traditional lender”.
“But all of those old-school traditional rules apply about people understanding their risk appetite,” she adds.
If you’re a business seeking a peer-to-peer loan, be aware that lenders may not be required to hold an Australian Financial Services Licence, which means the loans won’t be subject to the same consumer protections that cover individuals.
Be sure to check the small print and the interest rate you’ll be charged — otherwise you could find yourself agreeing to a loan with exorbitant interest rates, for which you will have little recourse.
Of course, a complete reinvention of the financial wheel is not required if you all you want to do is avoid giving your money to one of the big four.
Ms Higgins says credit unions are just as safe as a big bank and are an option worth exploring.
“The difference between the customer-owned banks and the big four would be that they are owned by members instead of shareholders, so their accountability is a bit different,” she says.
And it’s a tried-and-tested path.
As of mid-2015, according to CHOICE, there were 93 customer-owned banks — made up of credit unions, building societies and mutuals — with about 4 million customers between them.
But keep in mind that the finance sector, like any other, is subject to mergers and acquisitions.
Like Life Matters listener Rosemary, you may find one day your smaller financial institution ends up getting swallowed by a larger one.
“We went to a credit union years ago, and a few mergers later it turned into a bank.” — Rosemary
Whatever road you go down, Ms Higgins says it’s important to regularly review your financial arrangements to see if they still suit you.
“I would like everyone to look at their current plan and really engage with their finances and say, ‘Is what I’m doing at the moment working for me? Is this right for me?'”