For those that are unfamiliar with the Dollarmites program, it was a savings program linked to the Commonwealth Bank of Australia CBA that was open to school students. One of the largest child-targeting marketing schemes in Australia involved cartoon characters on chequebooks, encouraging deposits. Every week the teacher or ‘banking coordinator’ would collect deposits from students that would be transferred to their Commonwealth Bank account.

On the school’s part, they would receive a share of the profits depending on the quantity of deposits received.

Schools were incentivised to keep using the program and encourage children to contribute to these bank accounts. In 2018, the ABC revealed the Commonwealth Bank had paid almost $400,000 to Queensland state schools alone during 2017, to sign children up to its school banking program.

Choice found that these practices led to 46% of people getting their first bank account with Commonwealth Bank (2017). One third of these people still carried their Commonwealth Bank accounts in adulthood. Reji Eapen, an independent researcher, conducted analysis around how much Dollarmites has added to Commonwealth Banks’ value. He estimates $10 billion at the time of the program’s closure – which equated to 8% of the firm’s market capitalisation.

ASIC decided in 2021 to ban the program. They found that it provided little value for children and the largest outcome was that children were being exposed to ‘sophisticated’ marketing tactics.

Commonwealth Bank will maintain that this program was designed to increase financial literacy for children. The process of depositing, saving and understanding how interest accrues could be perceived as beneficial to a practical understanding of saving and investing. They maintained this implication of community goodwill even after it was revealed that sales staff opened thousands of Dollarmites accounts fraudulently in order to receive bonuses.

There are a few lessons that investors can take from Dollarmites:

  • Walking the fine line between action bias and responsible management
  • Switching costs benefit companies but not consumers
  • Governments and regulatory bodies can be slow to regulate, it is important to advocate for yourself

We discuss them in this week’s episode of Investing Compass. Listen below:

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You can find the transcript below:

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Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

Mark Lamonica: Okay, Shani, before we get into this episode today, we always talk about how my email address is in the notes.

Jayamanne: We're not doing that – I know what you're going to ask me. I'm not doing it.

Lamonica: I've had multiple people write in and ask me to get you to say sponge.

Jayamanne: Okay, how about we make a deal?

Lamonica: Okay.

Jayamanne: All right. If we get five reviews of the podcast on Apple podcasts, I will say the word. I feel like that's a pretty good trade-off.

Lamonica: Okay. That'll give you some time to practice.

Jayamanne: Yes.

Lamonica: All right. So, let's get into today's episode. So, Shani, we're going to speak about your childhood.

Jayamanne: I normally have to pay money to do that.

Lamonica: That's very funny, Shani. But we're going to talk about something that most Aussie kids grew up with. So, it's not unique to your childhood.

Jayamanne: No.

Lamonica: And I've only heard about this. I did actually live in Australia and went to school here for, I think, a year-and-a-half when I was younger.

Jayamanne: Okay.

Lamonica: But I don't remember this program. And the program is Dollarmites.

Jayamanne: It's because you went to a much fancier school than me. And they probably had investment accounts instead of Dollarmites with CBA. But I think of me explaining it, maybe it'd be great for me to hear how an outsider would explain Dollarmites. So…

Lamonica: I mean, I've heard of it.

Jayamanne: Okay.

Lamonica: Well, so like the critical view is that CBA manipulated a bunch of kids into starting bank accounts and then charged them a bunch of fees when they hit 18.

Jayamanne: Don't give it all away now, Mark.

Lamonica: You asked me to describe it.

Jayamanne: Okay. So let me tighten that up. So, Dollarmites was a school banking program, but it was a corporate program, and it was linked to CBA. And it was a program where you would be given a little yellow checkbook and deposit money into your bank account. It would be collected by your teachers, and it was normally about once a week. And when I was writing this article, I asked friends from all over Australia, so Victoria, South Australia, Queensland, they all participated in this program.

Lamonica: And it was considered, as far as I know, a financial literacy program. And it could have been, but it also didn't mask what I was talking about, this childhood marketing program. It had cartoon characters on the checkbooks, which are quite strange looking and every week it would be collected by teachers in front of the other students. And on the school's part, they would receive a share of the profits depending on the quantity of deposits received.

Jayamanne: And I can only talk about myself in this situation, but it was a ritual that became so ingrained into school culture that it wasn't openly questioned, and it was just accepted as a strongly encouraged extracurricular.

Lamonica: Yeah. And of course, as Shani said, the schools were incentivized to keep using the program and encourage children to contribute to these bank accounts. And in 2018, the ABC revealed that Commonwealth Bank had paid almost $400,000 to Queensland state schools alone during 2017. And that's just, of course, to sign children up to its school banking program. CHOICE found that these practices led to 46% of people getting their first bank account with Commonwealth Bank, and that's once again in 2017. One-third of these people still carry their Commonwealth Bank accounts in adulthood. Reji Eapen, an independent researcher, conducted analysis around how much Dollarmites has added to Commonwealth Bank's value. He estimated $10 billion at the time of the program's closure, which equated to 8% of the firm's market capitalization.

Jayamanne: ASIC decided in 2021 to ban the program. They found that it provided little value for children, and the largest outcome was that children were being exposed to sophisticated marketing tactics.

Lamonica: Commonwealth Bank will maintain that this program was designed to increase financial literacy for children. The process of depositing, saving, and understanding how interest accrues could be perceived as beneficial to a practice of understanding saving and investing. They maintain this implication of community goodwill, even after it was revealed that sales staff opened thousands of Dollarmites accounts fraudulently in order to receive bonuses.

Jayamanne: Realistically, the situation and outcomes were quite different to CBA's declared intentions. I believe it's easy to see that the program didn't translate to an improvement of financial literacy, and all we really need to do is look at the number of customers that CBA managed to keep for a lifetime from the program. So today, we're going to speak about some of the investor lessons that we can take from Dollarmites, even if it didn't result in financial literacy back when we were kids.

Lamonica: And the first lesson is walking the fine line between action bias and responsible management. Warren Buffett once…

Jayamanne: Drink.

Lamonica: Exactly. Exactly. And I need one, especially for this two-hour meeting I have after this, Shani. But Warren Buffett once famously said, only buy something that you'd be perfectly happy to hold if the market shut down for 10 years. Investors are told all the time that long-term investing increases the probability of success, and we tell you that all the time. It is the process of ignoring action bias. And what action bias means is that investors have a tendency to want to take action when if those actions are to your long-term detriment.

Jayamanne: The impact is particularly pronounced in volatile markets. Sitting on your hands in the face of market swings feels wrong. You want to act; you want to do whatever you can to protect yourself and your financial goals when markets fall. When markets surge, you want to do whatever you can to not miss out on the returns that others might be getting in the market.

Lamonica: And long-term investing only really works when you've gotten the foundations right in the first place. This requires aligning your investments and structuring your portfolio to your long-term financial goals. And it's important to act when there is a misalignment between your financial goals and the securities and structure of your portfolio.

Jayamanne: So, I left school with $116 in my Commonwealth bank account, and I continued to bank with CBA because there was no reason for me to think about other options. There was nothing actively agitating me or pushing me to do the paperwork to switch banks. But when I turned 18, they switched my account type to charge me a $4 fee per month. That would mean that within two-and-a-half years, my account balance would be zero. When I did research for this piece, I found countless individuals whose accounts had whittled down to $0 because of the same circumstances. So, I took action early on to switch my bank to increase the interest I was receiving. And this was only because I started my career in financial services and understood the importance of reducing fees and of compounding.

Lamonica: Shani shut down her bank account. She's reduced her fees. All very good news. And when we're talking about investing, it is a blurred line to walk between action bias and the responsible management of your portfolio. And we talk a lot about the investment policy statement. And we have a couple of episodes on it. But the summary is that it stipulates what types of investments align with your goals. If you're looking at securities outside of your investment criteria, it may be a sign of speculation. Same time, it also outlines when you sell. It also limits poor decisions. So prematurely and unjustifiably selling assets can make it harder to achieve your goals. Understanding what you're invested in and why you're investing in it will build confidence and ensure your portfolio is aligned to your goals.

Jayamanne: So, before we go on to our next lesson, just a reminder, if you want to hear the top five global market updates from around the world, click the link in the description for 5 in 5 with ANZ, the podcast.

Okay. So, our next lesson is that switching costs benefit companies but not consumers.

Lamonica: And this is a good one. So, we've gone through the statistics that show that the first bank account you open often sticks with you for life or for at least a couple of decades. JPMorgan estimates that Commonwealth Bank is the main financial institution for around 45% of Australians aged between 14 and 17 years old. It is likely that many of these children will not switch their banks in the near future. It's because switching banks is a pain. Some goods and services like banks require significant effort to switch. Once a company has captured significant market share, it is difficult to pry customers away since the effort involved in switching providers requires overwhelmingly better features or prices.

Jayamanne: And when it comes to your bank, high switching costs are a result of becoming entangled within their multiple products and services. So, you might have a bank account, but you might also have a credit card with the same bank. You might also have a mortgage or your friends banking details, bills and direct debit to set up. People just don't want to deal with the hassle of switching banks.

Lamonica: So how did this work for you? So, we say that there are switching costs, and this is where moats come from, but you switched for $4 a month.

Jayamanne: Yeah, I don't have any friends and I don't have a mortgage – I didn't have a mortgage, so it was pretty easy for me.

Lamonica: Okay, there you go. The exception to the rule. But all of the banks have this advantage and – or all of the big four banks in Australia have this advantage and they've all received a wide moat rating from our analysts. Switching costs, of course, is one of those reasons. A wide moat indicates our analysts believe the company can maintain a sustainable competitive advantage for at least the next 20 years and moats are great for investors.

Jayamanne: However, they aren't necessarily good for a consumer. It's unlikely that staying with one bank is the optimal decision over decades. It's unrealistic to change your bank account every time banks change their interest rates. But it is, however, worth looking at whether the bank or the particular account you have makes efforts to compensate the depositors and consistently put the interests of their customers last.

Lamonica: And as we mentioned, Dollarmites was closed in 2021, Shani. And instead, Kit was opened in 2022 by CBA for the same reasons that they originally touted for Dollarmites to improve financial literacy. So it is, of course, also, as we said, a valuable funnel to gaining customers for life.

Jayamanne: So, our next lesson is that governments and regulatory bodies can be slow to regulate, so it's important to advocate for yourself.

Lamonica: And in many facets of life, it's folly to rely on government and regulatory bodies to regulate and legislate in your individual interest. Each of our circumstances are different and in theory, governments form policy that benefits the majority. It's likely that many policies will not be enacted to maximize your best interests.

Jayamanne: And Dollarmites is a great example of where regulatory decisions were introduced too late to protect consumers. A company was able to influence and market to children which created substandard outcomes for many Aussies.

Lamonica: And it's a lesson in ensuring that you're advocating for yourself even when regulation may fail to do so. Financial literacy is crucial in creating and maintaining a comfortable life. In this instance, the government didn't and doesn't provide adequate measures for children to develop those skills. Instead, it was outsourced to a private company with a profit motive from the enacted program. However, self-advocacy is difficult when you don't have the skills or knowledge.

Jayamanne: Investing is one of the best ways that you can advocate for yourself and provide a better life for yourself. It starts with investing in yourself through financial education. And there are many free resources now, including Morningstar's, that are looking to help with this gap.

Lamonica: And we know most of us should contribute over and above the mandated employer super contributions to enjoy a comfortable retirement, especially those that are self-employed. We know that structuring and tax minimization can increase your total return outcomes. We know that until legislation catches up, mandatory superannuation contributions during career breaks do not cover the average time that a person may take off work, needing proactive additional contributions. There are many examples that show we as consumers and investors must not rest on our laurels and advocate for ourselves.

Jayamanne: There are a few lessons that we can learn from Dollarmites. It was hugely successful, and it was a campaign that spanned just short of a century. It fed many customers into CommBank's funnel for a lifetime. The reluctance of consumers to switch banks resulted in good outcomes for the salespeople, the company and the shareholders. So, investors did win.

Lamonica: On the other side of the coin, it resulted in poor outcomes for consumers. As consumers, we need to advocate for ourselves and ensure that we are looking out for our best interests. Sometimes we can't rely on government policy and regulation to maximize our outcomes.

[Advertisement: Investing Compass is a podcast we started to explore the fundamentals of investing and help you with achieving your financial goals, whatever they may be.

ANZ's 5 in 5 have sponsored this episode of Investing Compass. We also listen to 5 in 5 ourselves to keep up to date with the latest economic, markets, and business news each weekday. One of the things that we like about the podcast is that it has a similar approach to us. They leverage the insightful experts that they have across their global network to provide a rounded and level-headed analysis of news and insights each weekday.

You can find them in your preferred podcast player or click the link in the episode description to follow them and have a listen after us.]

Lamonica: All right. Thank you very much for listening. Shani and I are going to go try to open a Kit account after this episode and we can see what that is all about.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)