The Bendigo Community Bank Model

This piece originally appeared in Capital Institute's Field Guide to Investing in a Regenerative Economy.

The centralization of the Australian banking industry that took place in the late 1990s caused the contraction of banking services and significant economic decline across many of the country's small rural communities. The Bendigo Community Bank model—structured as a franchise with certain characteristics of a cooperative — was a response to that troubling trend.  Initially inspired by self-organizing impulses originating at the community level, the model has helped recirculate the flow of financial capital into these local economies, and, over time, has had numerous other profoundly salutary consequences. 

The first Bendigo Community Bank branch was established as a pilot project in the communities of Rupanyup and Minyip in the grain growing regions of Southeast Australia. There are now 305 community bank branches, operating not only in rural communities but in urban centers around the country. This unique banking framework has infused, through local decision-making and empowerment, more than A$1.5 billion into local communities to date. This transfusion of funding has then gone into local salaries, rent, and other expenses associated with the community branches; A$37m has been paid in dividends to local shareholders; and, perhaps most visibly, $125 million has been paid out in grants to fund local projects.  Currently Community Banks hold a total of about $14.9 billion in deposits, and about A$12.8 billion of loans are outstanding among them. Most critically, the model is giving local leaders the skills, the business acumen, and the confidence they will need to support their communities in the coming transition to a regenerative economy.

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The Bendigo Bank Community Bank model was conceived in the late 1990s in response to a series of bank branch closures in rural Australia. Between 1993 and 2000 over 2,000 bank branches had closed across the country as government services and utilities were consolidated and/or privatized, and businesses in turn abandoned these increasingly economically challenged communities. Residents of these small rural communities were particularly alarmed by their suddenly unbanked status and the impact on their beleaguered local economies.

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Bendigo Bank also viewed this centralization of government and busines with alarm, as it lowered the resilience of both the local and nation economy and arguably the banking industry as well. 

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In what Sam Moore, head of Bendigo Bank’s Community Bank Model Development, calls a “self-organizing” response, a number of rural municipalities appealed to Bendigo Bank to reestablish a banking presence in their midst.   Bendigo Bank sensed an opportunity, but at the same time realized that a new banking model would be required with mechanisms to address the financial viability issues in communities where other banks had so recently found it unprofitable to operate. First, to assure Bendigo Bank of greater support from communities it was agreed that this would need to be a partnership, where both partners shared in the efforts and rewards. And to address the economic decline many of these communities were experiencing, it was agreed that a percentage of each Community Bank Branch’s profits would be allocated on a permanent basis to community-directed grant making. 

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The more business the community did through the branch, the greater would be the “community dividends” in the form of grant-making ability— a win/win for the bank and the community. 

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The community would also be required to put some upfront skin in the game in the form of investment capital to establish a bricks and mortar operation. In the early years the required investment was around A$300,000; today the local capital commitment is closer to A$700,000.    

Not every community that initially expresses interest in opening a Community Bank Branch has the capacity to do so. “We don’t agree to open a bank branch until the local community market has demonstrated the business case to us and its local shareholders,” says Moore.  “We don’t invest the capital in getting that local branch off the ground, the community raises that capital to establish a community enterprise which does that. We share the revenue with it. Inevitably, we don’t get the returns we would if we opened it as a company branch, because we don’t bear the same level of risk.”

In some cases Bendigo introduces an “agency” outlet when the community is unable to raise sufficient capital to open a branch.  While these provide a lower level of financial services to the community, they give Bendigo a presence at a lower risk/upfront cost, and sometimes pave the way for the establishment of a full banking branch. 

The Community Bank Branches operate under what is essentially a franchise model. Revenue is split between Bendigo Bank and the local community enterprise on a 50/50 basis on basic banking products. For more complex products Bendigo Bank’s share of revenues is higher.  In return Bendigo Bank is responsible for IT, products, capital, and regulatory and compliance issues for the bank, and undertakes staff training. 

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The local community company that operates the branch also shares some of the features of a cooperative.    ---   No individual in the community can hold more than 10 percent of the shares, and regardless of the amount of shares owned, each shareholder gets one vote. Presently, well over half of local profits (up to 80 percent) are reinvested back into the community through grants determined by the directors of the local community enterprise. A portion of profits can also be distributed as dividends to local shareholders.  

Bendigo does not dictate to its community bank branches what types of businesses should be supported.   “Every community decides what is important for them. Bendigo provides a path that the community can walk down but does not deliver a way to walk down that path,” says Moore. Bendigo is, however, in the process of reassessing how the community bank model works with the active engagement of community bank partners around the country.   

Plowing a portion of bank profits back into the community and giving local shareholders control over how those profits get spent has for the most part turned out to be a winning strategy, with a number of positive unintended consequences for community leaders and local shareholders who are critical to the rebuilding of struggling communities.     ---   “We have seen that local shareholders can prioritize what is best for their communities better than a ‘head office’  group can do,”  Moore maintains. “They also start to become better planners because their underlying banking business gives them confidence there will be future income.

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It is not like an organization that sets up to achieve a particular outcome on the basis of two- or three-year government grants. Once you have banking business under your belt you are pretty sure you have what it takes to grow it, underwriting what you are empowered to do as a community leader. Once their community company becomes profitable and they have their granting income stream, they can achieve some amazing outcomes.” 

Bendigo Bank’s corporate responsibility reputation, which is shared with the local community enterprises, is of course significantly enhanced by the tangible results of this unique, community-empowering grant-making program. “All the community granting money that is made is identified as being strongly associated with Bendigo Bank,” Moore reports. “So there is a lot of goodwill that spreads to our wider business through the grant making that the local community enterprises do.”

The local connectedness of the community banks also often allows them to achieve more significant outcomes for each grant dollar they spend than might be the case were the grant funds managed by remote decision-makers. For example, Moore reports visiting a community branch manager who happened also to be the coach of a local sports team. “I watched him coach the team and we were standing there afterwards at the community facility, in the changing rooms and the meeting hall that the community company had built,” Moore relates. “It was a significant facility, it looked like a A$500,000 facility, but he said it had cost only A$100,000.  He explained that a three-hour drive away there was a group of transportable buildings that were not being used so, with the permission of the owners, everyone got their trucks and collected them and brought them back to the town. That community ended up with a great piece of infrastructure, built collectively and seeded by the motivation and leadership and funding of that community company.” 

Most recently Bendigo has partnered with Deloitte Access Economics to create a Community Strengthening Index designed to help Community Banks evaluate both the projects they are funding as well as those they are being asked to fund by ranking them according to their economic, social, and environmental impacts. 

Economic impacts are estimated using quantitative measures while social and environmental benefits are measured according to qualitative factors on a five point scale. 

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Bendigo views the Community Strengthening Index as a tool to aid in decision-making but not as a substitute for the kind of intuitive analysis that the bank board members are able to undertake by tapping into their deep knowledge of their own communities.

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“The Community Bank Branch model is now a big part of our business,” Moore reports. “We still have a lot of work to do and continue to get many approaches from communities looking to start up a Bendigo Bank Community Bank. We have not slowed down that effort but we are now pretty comfortable from an operational point of view with the model and are looking outside of Australia, not to open community banks, but to see if there are other countries where there are retail banks interested in what we are doing and that might want to test whether they might want to partner with us in their retail branch network.”

GLYN YATES ON THE EVOLUTION OF THE COMMUNITY BANK MODEL

CONVERSATION WITH BENDIGO CEO MIKE HIRST