Many small businesses hoping their banks would pass on the entirety of the Reserve Bank’s latest cut to the official cash rate will be left disappointed this morning, with two of the country’s biggest lenders deciding to defy the federal government in the face of worsening economic conditions.
But as the big banks try to protect their turf with an increasingly difficult hand, small lenders are seizing the moment, passing on the rate cut in full to demonstrate a point of difference that even has the Treasurer singing their praises.
The Reserve Bank yesterday decided to cut the cash rate by 25 basis points to a historic low of 0.75% amid persistently low inflation in Australia and across developed economies around the world.
But in the hours after the cut Commonwealth Bank (CBA) and National Australia Bank decided to withhold a significant portion of the cut from their customers.
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CBA said it will reduce its standard variable rates by 0.13% while interest-only investor rates will be reduced by the full 0.25%. NAB followed soon after, saying it will cut rates for owner-occupiers by 0.15% and 0.3% for investors.
“As the Reserve Bank cash rate has reached record lows, we face a difficult balancing act between the multiple, valid interests of our stakeholders,” CBA’s group executive of retail banking services, Angus Sulivan, said in a statement circulated Tuesday afternoon.
“It is currently not feasible to pass on the full rate reduction to more than $160 billion of our deposits which are at, or near, zero rates.”
At the time of writing on Wednesday morning, neither Westpac or ANZ have publicised how they will respond to the cut, but Treasurer Josh Frydenberg, who yesterday said he hoped the big banks would pass on the cut in full, has encouraged Aussies to “shop around” in a Today show interview.
“It’s not just the government they’re going against here, they’re also going against the advice of the Reserve Bank and its very disappointing,” Frydenberg said.
“The banks have a lot of explaining to do … customers should vote with their feet.”
The advice echoes that offered by RBA governor Phillip Lowe earlier this year and comes as the big banks deal with unprecedented challenges to their business models, born from a post-royal commission world where financial technology companies are increasingly nipping at their heels.
“Some of the smaller lenders have actually passed on this rate cut in full, and I saw Athena today is offering a variable rate at 2.84% … people should shop around and get the best deal,” Frydenberg said.
It’s somewhat of a perfect storm. In the wake of an excruciating royal commission into the banking sector, confidence in Australia’s largest financial institutions is shaken, while small business competitors are benefitting from lower barriers to entry and market mobility at a time of economic uncertainty.
One such company is online lender Athena, which passed on the entire cut on Tuesday afternoon — a move which led to a shoutout from the Treasurer and no shortage of mentions in newspaper articles on Wednesday morning.
Athena, which has also passed on the last two RBA rate cuts in full, said its enthusiasm has landed it more than $2 billion in loan applications so far.
Co-founder Michael Starkey tells SmartCompany customer attitudes towards smaller lenders have changed in recent years, while a smaller and more efficient business model is aiding the company in delivering savings where other banks aren’t.
“Customers in the past were attaching a lot of importance to the brand of the bigger banks, whereas now they’re more open to us,” Starkey says.
“Funding costs have come down for everyone, we don’t have large bank profit margins to defend so we’re able to just set a course where we’re passing through cuts with relative transparency and ease.”
Other smaller lenders such as Homestar Finance are also passing on the full cut, but the big banks still account for the vast majority of the home lending market in Australia, meaning their influence on the macroeconomic needle is much greater.
David Gandolfo, president of the Commercial and Asset Finance Brokers Association of Australia (CAFBA) and a director of Quantum Business Finance, says the big banks find themselves in a difficult situation.
“Even though the wholesale cost of money comes down, the fixed cost of lending doesn’t,” Gandolfo tells SmartCompany.
“The smaller banks are just swallowing the cost and passing it on.
“They don’t have the same market share as the majors, so there’s an opportunity for them to have a point of difference and attract some new customers.”
With market expectations of another rate cut by next February swirling, Gandolfo says the big banks will be under enormous pressure to pass on any further movement in the official cash rate.
“There will be an expectation that whatever fixed costs they’ve got that have prevented the full cut being passed on in the past will have been absorbed,” he says.
With consumers holding purse strings tight and broader uncertainty about what the Australian economy will look like in 12 months after a weaker-than-expected 1.4% expansion in GDP for the year to the June quarter, the stakes are high.
Business lobbyists are urging the banks to pass on the cuts in full, worried that small businesses, particularly those in the ailing retail sector, are in need of a Christmas boost.
Australian Chamber of Commerce and Industry (ACCI) chief executive James Pearson said a lack of discretionary spending has been hurting small companies.
“Although we are still to see the full impact of the earlier reductions in the cash rate and personal tax cuts, we believe the timing is right to boost parts of the economy that continue to struggle,” he said in a statement circulated Tuesday.
“With slowing economic growth and lower consumer confidence, small businesses have been doing it tough over the past year.”