Smaller banks at higher risk of reputational damage
Mutual banks have been warned not to rush headlong into advanced artificial intelligence (AI) without fully understanding the risks, with the Australian Prudential Regulation Authority (APRA) cautioning that smaller institutions in particular could jeopardise their viability if they treat AI as a quick fix for cost and productivity pressures.
Speaking at the Customer Owned Banking Association (COBA)’s Director Forum this week, APRA board member Theresa Hockey highlighted the growing appeal of AI-driven tools in the mutual banking sector.
“We completely understand why the potential for reduced costs and improved productivity is appealing for smaller banks,” said Hockey, but “the key concern for regulators is that industry usage is expanding faster than understanding of the long-term risks and impacts”.
She warned that banks of all sizes “need to be thinking carefully about how they manage the risks associated with incorporating advanced AI into their businesses”.
The regulator stressed that pursuing AI without strong guardrails is not worth the risk.
Banks must invest in governance and “secure controls” to avoid “automation and automated decision-making without proper human accountability”.
That is a particular challenge for smaller mutuals with fewer financial resources that may struggle to absorb the fixed costs of AI deployment, cybersecurity, model validation and ongoing risk oversight.
“While all banks are feeling the squeeze as they seek to mitigate new and growing risks, we’ve seen that banks with greater economies of scale are better able to make the necessary investments and absorb the fixed costs of digital transformation,” said Hockey.
Size matters
The customer-owned banking sector’s consistent outperformance of the wider banking market “is evidence of the enduring appeal of the customer-owned business model”, said Hockey.
Local knowledge, deep personal relationships and a commitment to investing back into communities remain powerful differentiators for mutual banks.
But size is also “not nothing”.
Customer-owned banks, for their part, know this all too well, which is why large scale consolidation has reshaped the very fabric for the sector.
Over the years, the number of mutuals in Australia has been whittled down from the multiple hundreds, to barely more than 50 today.
Larger players have swallowed up the smaller fish, which mergers of equals have created new banking heavyweights.
Just this month, Teachers Mutual Bank Limited and Australian Mutual Bank members agreed to merge to create a singular entity with over $14 billion in assets under management.
In recent years, Heritage Bank and People’s Choice merged into People First Bank; Newcastle Permanent and Greater Bank combined into NGM Group; Bank Australia and Qudos Bank tied the knot; and Bank Australia also acquired Australian Unity.
As this consolidation trend accelerates through 2026, APRA expects the structural gap within the mutual sector to widen further.
“While some of the smallest mutuals will continue to punch above their weight, others will struggle with high cost-to-income ratios and declining profitability,” said Hockey. “In certain dire cases, there is a risk that these banks are not seen as attractive partners because the merger and integration costs outweigh the prudential and member benefits, leaving them few options to arrest the slide.”
