Australian mutual banks must accelerate digital transformation investments or face losing market share to larger, more technologically advanced competitors, according to a new S&P Global Ratings report.

The analysis of 18 rated mutual banks including Beyond Bank Australia, Credit Union Australia (Great Southern Bank), and Police Bank,  warns that failure to modernise could result in zero loan growth, compared to their historical above-average performance of 6% annually.

S&P Global Ratings analyst Lisa Barrett said "savings from process automation could offset initial spending, whilst greater investment may help prevent market share losses to larger banks."

She added that "faster loan processing and digital onboarding of members would support growth, whereas failing to modernise could erode competitiveness and weaken business profiles."

The report highlights fundamental infrastructure challenges facing the sector. "The information technology stack of mutual banks is aged and fragmented compared with that of larger better resourced banks that are further along the digitalisation path. The onus is now on Australian mutual banks to keep pace."

While most rated institutions have begun digitalising lending products, none operates a fully automated home loan process from member initiation to mortgage fulfilment.

Manual Processes Persist

The degree of digitalisation varies dramatically across basic banking services. For account opening, some mutual banks enable prospective customers to become members and open accounts completely online within minutes, while others require branch visits for identity verification.

Many institutions fall between these extremes, using contact centre-assisted processes with online identity verification.

Home loan applications remain largely manual across the sector. While members can typically submit online inquiries or begin applications digitally, they are "referred to a lender early in the process" requiring human intervention.

This differs to some of the larger banks where much of the home loan application, credit decision, and approval process can be done online.

The report notes “According to the Australian Prudential Regulation Authority, mortgages on average comprise about 90% of mutual banks' loan books. A digital home loan offering is therefore key.

“A digital home loan product would include features such as digital identity verification, automated document checks, and real-time credit assessments. It would also be integrated with third-party service providers, including brokers for origination, insurance providers for lenders mortgage insurance, income verification providers to assist in the credit assessment, external core banking systems, and customer relationship management systems for marketing.

“A straight through digital lending system could lower the cost of processing a home loan application by multiple factors, decrease potential errors due to manual entry or reentry, and cut approval times to less than one hour from several days or even weeks under old, manual systems, and processes.”

Personal loan and credit card applications show mixed digitalisation levels. Some rated mutual banks offer complete online applications with instant conditional approval notifications, while others maintain manual processing requirements.

Even where digital capabilities exist, they often apply only to the simplest products. Larger banks restrict fully online home loans to basic refinancing for salaried owner-occupiers with loan-to-value ratios below 80%.

Vendor Concentration Creates Strategic Risk

The mutual banking industry's technology infrastructure relies heavily on just two core banking system providers - Data Action Pty Ltd and Ultradata Australia - servicing 15 of the 18 rated institutions.

This concentration presents both opportunities and challenges for digital transformation initiatives. While it enables collaboration on system investments across multiple institutions, it also creates vendor dependency that makes mutual banks "beholden to the costs and services of these key third parties."

The report emphasises that individual mutual banks must ensure they use the most current core banking system versions to prevent cyberattacks and access the latest application programming interfaces (APIs).

APIs enable faster approval processes, reduce errors, and enhance member experiences compared to manual processes or robotics for structured data exchange.

Third-party risk management has become increasingly critical under the Australian Prudential Regulation Authority's CPS230 (Operational Resilience) protocol. The regulation introduces strict obligations for managing operational and third-party risks, including detailed requirements for service provider oversight and incident response.

While the compliance burden may be significant relative to mutual banks' size, CPS230 helps formalise risk practices and improve resilience in an increasingly digital environment.