Impacts Of Commonwealth Bank's Foreign ATM Fees Removal - Essay On Agency, Legitimacy, And Institutional Theories.

In September 2017, the Commonwealth Bank of Australia (CBA) announced that it would abolish the fee charged to non-customers who withdraw cash from its Automated Teller Machines (ATM) (i.e. foreign ATM fees). The decision to remove foreign ATM fees was quickly adopted by Westpac, ANZ and NAB.

Required:
Assume you are a business consultant recently hired by the Board of Directors of CBA. The Board has asked you to prepare a business report which evaluates the impacts of removing foreign ATM fees on its business firstly, using arguments developed from an agency theory approach and secondly, using arguments from a legitimacy theory approach. The board has also asked you to use institutional theory to explain why the other major banks removed foreign ATM fees. Based on your arguments and explanations, conclude and reflect whether CBA made the correct decision in removing the foreign ATM fees.
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Agency Theory

The paper has discussed the impacts of CBA’s removal of the ATM fees on its business. The Legitimacy theory and Agency Theory have been used to determine whether it was correct for CBA to axe the ATMs fees. Both theory have presented valid arguments is support of the axing of ATM fees by CBA. The Institutional Theory has been used to explain why other Big Three Banks including ANZ, NBA and Westpac also ditched the ATMs immediately following the CBA. A conclusion reflecting whether it was the correct decision for CBA to ditch the ATMs fees is presented justifying that CBA took the right course both to maintain its legitimacy and improve efficiency by dispelling the rising customers’ complaints for being charged when withdrawing their own money.

1. Introduction

This paper is anchored on assumption of myself being a business consultant lately hired by the CBA’s Board of Directors. The Board has subsequently tasked me to generate a business report evaluating the impacts of ATM fees removal on its business.  Firstly, the evaluation uses arguments advanced from an approach of Agency Theory (AT) and secondly, utilizing arguments derived from an approach of Legitimacy Theory (LT). Further, CBA’s board has tasked me to employ Institutional Theory (IT) to explicate the rationale behind other major banks including Westpac, NAB and ANZ  removal of  foreign ATM fees following CBA’s decision to axes such fees.  A conclusion is then drawn on the basis of my arguments alongside explanations besides a reflection on whether CBA made the correct decision in foreign ATM fees’ removal.

Is It The Correct Decision Of CBA Remove The Foreign ATM Fees?

2.1 Agency theory

Agency Theory (AT) attempts to explicate how to best a firm organizes the agency relationships (AR) whereby one party undertakes to determine the work (principal) and the other party performs the work (agent). In this relationship, the agent makes the decisions and acts on behalf of the principal (Shogren, Wehmeyer and Palmer 2017). The AT tries to summarize and solve problems that arise from the AR between the agent and principal. ARs remain common in financial management because of the nature the industry nature. Having a clear understanding the application of AT in financial management can provide the stakeholders including investor, stakeholder or financial professional aspirant.

In AR, the principal hires an agent to perform the work the principal cannot or unwilling to undertake. For instance, the principals, in corporations, are the shareholders of the firm who delegate to the management, agent to undertake the work on their behalf. AT assumes both agent and principal are inspired by self-interest (SI). This AT’s assumption of self-interest dooms the AT to reciprocal inherent conflicts. Therefore, where both agent and principal are motivated by SI, agents are probably to pursue self-interested objectives in deviation of even conflict with the principal’s goals. Yet, agents are ordinarily supposed to serve the single interest of respective principals.

In determining when an agent does not or does act in the interest of the principal, “Agency Loss” (AL) standard is factored. AL has been commonly used in AT. AL describes the difference between the best feasible result for the principal and the consequences of agents’ acts. For instance, when the agent acts in line with interests of principal, the AL is zero. The more the agent deviates from the interest of the principal, the more the AL surges. When the agent acts wholly in his individual SI, against the principal’s interest, then AL becomes high.

Legitimacy Theory

Studies on AT reveal that AL is minimized when 2 specific statements hold. (i) The agent and the principal share common interests. Primarily, this implies that both parties desire similar outcome. (ii) The principal is knowledgeable regarding the agents’ activities’ consequences. Simply put, the principal knows whether the actions of their agents serve in the best interest of the principal. Where, either of the two statements is false, it automatically follows that AL is hence is probably to surface. One main objection of the AT is that “AT relies on the self-interested agents’ assumption seeking to maximize individual economic wealth”.

AT’s challenge is hence, to get the agents either to drop their SI, or work in a manner whereby they might maximize their individual wealth whereas still maximizing the principal’s wealth. Therefore, agency duty standard alongside actions is essential, not as a result of agents being universally selfish, but rather due to the existence of potential difference between the interests of either party. In AR, the agent has a moral responsibility for his actions, which he can’t dismiss merely due to fact that he serves as an agent for the principal.

According to Agency Theory, it is the correct decision of CBA to remove the foreign ATM fees. The removal of the ATM fees meant that the CBA wanted to stop ripping off their customers. Matt Comyn, the CBA group executive for retail baking service, while announcing the decision to axe these fees, he said that CBA was acting on the concerns of the consumer. This is because the Australian had complained for an extended time about the charged fees for the use of another bank’s ATM. Thus, as the largest bank in Australia, with one of the biggest branch and ATM networks, it was a wise decision to effect this change as it purposed to benefit several of Australians. This would indeed demonstrate CBA’s willingness to listen and act on the feedback of their customers.

This was a good move for customers who had been frustrated for being charged to withdraw their individual money from ATM. The Agency Theory and Agency Relationship takes shape here. The principal in this case is CBA while the ATMs are the agents. By charging the customers to withdraw their money, it is clear that the agent is serving its own interest. This is because, it has attracted complaints from the customer and this means that the CBA would lose its customers which is apparently against the interest of the Bank. For example, it is indicated that ATM withdrawals had been steadily diminishing for many years, but till recently the number of ATMs around Australia had endured to grow. The sole reason here is that the ATMs owners (agent) only serve their self-interest to bring in more machine but don’t care whether there are withdrawals. This has led to the returns for banks to crunch    

2.2 Legitimacy Theory

Legitimacy Theory (LT) asserts that business remain bound by social contracts whereby firms consent to perform a range of socially desired acts in return for the approval of the objectives of the business and additional rewards, and this eventually guarantee the business it desired continued existence. LT outlines the degree to which a corporate social as well as environmental disclosures remain influenced by the societal established borders to be appreciated as well as evade being punished by the community in which the firm operates and serves (Rogowski 2015).

Institutional Theory

LT is considered a generalized perception/assumption that the entity’s actions are proper, desirable as well as appropriate within certain socially-constructed systems of beliefs, definitions, norms and values. In conceptualization of LT, the theory has the role of explicating the organization’s behavior in the implementation as well as development of voluntary environmental as well as social disclosures of info to fulfil their respective social contract which allows the recognition of respective entities’ objectives alongside the survival in the turbulent and jumpy surrounding. The organizational activities’ social perception are reporting according to the societal perception. In the context when activities of the organization don’t respect the moral and social values, the organization is sanctioned by the society severely.   

According to Legitimacy Theory, it was the correct decision of CBA to remove the foreign ATM fees to improve efficiency and legitimacy.    This is because with rising complaints from customers for being charged to withdraw their own money, the efficiency and legitimacy were already questionable (Bitektine and Haack 2015). This is because the LT dictates that CBA remains bound by social contracts when using these ATM charges whereby the CBA consents to perform a range of socially desired acts in return for the approval of the objectives of the business and additional rewards, and this eventually guarantee the business it desired continued existence.

Without, the customer feeling that the actions or the operations of these ATMs are not legitimate or efficient, then the CBA will not get their approval as ATMs charged perceived by them not to be socially desired acts. The community will thus penalize the CBA if the ATMs fees continue to be charge by disowning or ditching the banks services as already seen when the returns from the ATMs were crunching despite the Banks spending much more to maintain ATMs that are used less (Keohane and Martin 2014).  The CBA will only thrive the wrath of the customers when the bank meets the LT tenet which is regarded as a generalized perception/assumption that the entity’s actions are proper, desirable as well as appropriate within certain socially-constructed systems of beliefs, definitions, norms and values. In absence of this, then bank will not succeed as evidence by rising complaints from clients and declining use of ATMs.

3. Why the other major banks (Westpac, ANZ and NAB) removed foreign ATM fees?

3.1 Institutional Theory

Institutional Theory (IT) hold that the institutional environment is able to strongly influence the formal structure development within the organization, usually more overpoweringly than market pressures. Innovative structures which enhance technical efficiency in early-adopting firms remain legitimized within the environment. Eventually, such innovations hit a legitimization level in which failure to embrace them is viewed as “irrational as well as negligent” (or they become legal mandates). At this juncture, novel as well as prevailing organizations shall embrace structural form even when the form does not enhance efficiency. It is argued by Meyer and Rowan that usually such “institutional myths” remain merely ceremoniously accepted to allow the organization gain as well as maintain legitimacy within the institutional environment.

The ‘vocabularies of structure” existing in their surrounding like particular job titles, organizational roles or procedures are adopted by the organizations. Both adoption alongside profound manifestations of such institutionally-acceptable “trappings of legitimacy” assist in the preservation of aura of actions of the organizations hinged on “good faith”. The legitimacy within the institutional surrounding assists ensure survival of the organization.

Conclusion

Nevertheless, such formal legitimacy structures are able to plunge the efficiency as well as bar the competitive stance of the organization in their technical surrounding. To decrease the adverse effects, the firms usually shall decouple their technical core from such legitimizing structures. Firms shall minimize or ceremonialize evaluation as well as negate program implementation to uphold external as well as internal confidence in the these formal structures whereas plunging their efficient influence.

It was summed up by DiMaggio and Powell that the net effect of institutional pressures is to boost the organizational structures’ homogeneity in the institutional surrounding. Organization shall adopt identical structures due to 3 types of pressures (coercive, mimetic and normative). The coercive one surface frim the mandates or influence from organizations they are reliant upon. The mimetic pressure to imitate successful forms emerge in the course of higher uncertainty. Normative pressures to homogeneity arise from identical attitudes alongside approaches of professional cohorts as well as associations brought into the organization via practices of hiring.

The institutional isomorphism rate is surged when the organizations: stay extremely reliant on the institutional surrounding; exist under an extremely high uncertainty/ambiguous goals; and depend lengthily on professionals. It is thus been buttressed that where coercive pressure stay high for example, under state mandate, firms swiftly adopt novel structures whereas adoption rate is much gradual with low coercive pressures. Nevertheless, surged adoption establishes legitimacy in institutional surrounding thereby accelerating the adoption rate of novel forms of structures. It has as well been validated that whereas early organizations embrace the novel structural form to enhance efficiency, the later firms adopt it to maintain legitimacy.     

Why the other major banks (Westpac, ANZ and NAB) removed foreign ATM fees?

The Institution Theory (IT) can best help explain the rationale behind Westpac, NAB and ANZ removal of foreign ATM fees following the CBA’s decision.  These the Australian big banks and they rapidly followed the Commonwealth Bank’s decision to ditch ATM fees they used to charge to customers of other institutions. This is a move that might save Australians hundreds of millions of dollars.  This is a clear case of new structural forms adoption as explained by the IT above. The banks main purpose for doing this was to maintain legitimacy in the banking institutional environment (Keohane and Martin 2014). While CBA mainly adopted this new structural form to enhance its efficiency following the rising customers’ complain, the Westpac, ANZ and NAB primarily followed suit to maintain legitimacy. This is because all these banks are highly dependent on the banking institutional environment.

Thus, a decision by one bank, CBA, will eventually have an effect in their legitimacy based on the perception of the society. Thus the isomorphism rate had to surge as witnessed because all these banks stay extremely reliant on the banking industry institutional surrounding; exist under an extremely high uncertainty/ambiguous goals; and depend lengthily on professionals (Sjostrand 2016).

All these banks fit the definition of “institution” as social structures which have attained a higher degree of resilience being composed of cultural-cognitive, regulative and normative aspects alongside the associated activities as well as resources, providing stability besides meaning to social life. They have relational systems and this explains why the decision of CBA had factored in immediately lest they lose their legitimacy and hence losing customers to CBA. The IT also reveals that institutions connote stability by definition but appreciate that they remain subject to change process, discontinuous (like in this case ditching ATM fees) and incremental.

4. Conclusion

The CBA made the correct decision in foreign ATM fees’ removal. This not only boosted the Bank’s efficiency but also legitimacy. As anchored in Agency Theory, both the principal (CBA) and agent (ATM owners) ought to have had a similar goal for the success of these ATMs. However, it appears either party was trapped in conflict of interests and served their individual self-interest at the expense of the customers that continuously complained for being charged to withdraw their own money. Also, the Legitimacy Theory, supports the removal of these ATMs fees because, they were making the customers to delegitimize the CBA and hence punching the CBA by stopping to transact through the ATMs leading to crunching rewards or returns.  

References

Bitektine, A. and Haack, P., 2015. The “macro” and the “micro” of legitimacy: Toward a multilevel theory of the legitimacy process. Academy of Management Review, 40(1), pp.49-75.

Keohane, R.O. and Martin, L.L., 2014. Institutional theory as a research program. The Realism Reader, p.320.

Luger, J., Mammen, J. and Haleblian, J., 2015. Security Analaysts' Influence on Acquisition Decisions: A Joint Agency and Legitimacy Theory Approach.

Rogowski, R., 2015. Rational legitimacy: A theory of political support. Princeton University Press.

Shogren, K.A., Wehmeyer, M.L. and Palmer, S.B., 2017. Causal agency theory. In Development of Self-Determination Through the Life-Course (pp. 55-67). Springer Netherlands.

Sjostrand, S.E., 2016. Institutional change: theory and empirical findings. Routledge.