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THE distinctions between non-bank lenders and the large banking institutions are becoming increasingly blurred as the two sectors of the financial services reform their operations and encroach on each other’s turf.

Deregulation is presenting both opportunities and threats to the emerging, low-ranked credit unions and building societies.

Also forcing change in the non-bank sector is the stubbornly high costs to income ratio, as the struggle to find the middle ground between meeting expected customer demands and increasing margins continues.

To achieve this, lenders are seeking to increase revenue on a flat cost base by selling non-traditional, high-yield products.

For Home Building Society Ltd, which listed in March this year, the answer over the past four years has been to actively engage itself in property development. In the past financial year, property development accounted for around one-third of the society’s turnover.

But, over the past year, Home has been building its financial planning business, which according to Home Building Society chief executive Jim Freemantle will become the new focal point for the society.

Home already has approximately $130 million in member funds under management with the expectation that that this will more than double within the next four years.

But Home is not the only financial service provider wishing to capitalise on the growing demand for specialised financial planning and wealth creation specialists.

Homeloans Ltd managing director Tim Holmes said his company was watching for an opening into the wealth creation management business the big four banks have moved into, along with BankWest through Plan B.

But while diversification is seen as instrumental in achieving higher yields, the non-bank lenders are also continuing to bite into the banking cherry by maintaining a strong focus on customer service and face-to-face transaction banking.

A report last year by KPMG into the profitability of credit unions and building societies found dissatisfaction with the banks and the perception of better customer service provided by non-banks were key factors behind the increase in members (around 6 per cent) to the year ending June 30 2001.

During 2001, total aggregate assets for building societies and credit unions increased by 8.8 per cent and 12.6 per cent respectively for the year to June 30 2001.

But the thorn in the side of the non-bankers remains the high costs of achieving the more personal customer service.

The KPMG study indicates that the average cost-to-income ratio for building societies still hovers at around 75 per cent, while for credit unions the costs approach 80 per cent.

Mr Freemantle said he was battling costs at around 90 per cent of income, which he was endeavouring to bring down to around 65 per cent within the next two to three years.

Banks meanwhile are achieving relatively big margins, with cost to income ratios being slashed from 63 per cent to 47.3 per cent during the period from 1997 to 2001.

While the non-bankers are dealing with high relative costs, those in the sector maintain that being small gives them the flexibility to adjust their business model quicker than the big four banks.

Police and Nurses chief execu-tive Fred Huis believes size can work against the large banks in the favour of non-bank institutions.

StateWest chief executive Greg Wall shares this sentiment, telling WA Business News that the point of differential between StateWest and the large banks was a strong focus on maintaining customer loyalty.

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