Impacts Of Removing Foreign ATM Fees On CBA: An Agency, Legitimacy, And Institutional Theory Perspective

Agency Theory

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

Agency Theory (AT) tries to give an explanation on how best an organization can organize the agency relationships (AR). AR should be organized in a manner that a party determines the task (principal) and other one does the task (agent) effectively. Here, an agent reaches decisions as well as serves on principal’s behalf (Hannafey and Vitulano 2013). This theory summarizes as well as solves issues arising from the agency relationships between the principal and agent (Song, Wang and Cavusgil 2015). Agency Theory makes assumption that both parties are enthused by self-interest (SI). The self-interest assumption fates the theory to an inevitable inherent conflicts. When both parties are SI-motivated, agents are inclined to seek self-interested goals in nonconformity to principal’s goals (Shogren, Wehmeyer and Palmer 2017).

In determining when the agent acts or not in the principal’s interest, standard of “Agency Loss” (AL) is employed. AL designates the variance between the best practicable outcome for principal and the agents’ acts’ consequences. When the agent acts according to principal’s interest for example, AL becomes zero. The more the deviation an agent is from the principal’s interest, the more the AL increases. Where an agent exclusively pursues his own SI, vis-à-vis interest of the principal, AL the shots high.

AL becomes minimal where two 2 precise statements stay true. (A) Both parties share similar interests. (B) The principal remains knowledgeable about the consequences of the agents’ activities. AT’s objection is that “the theory depends on the assumption of self-interested agents in pursuit of own economic wealth maximization (Keohane and Martin 2014).

In accordance with Agency Theory, CBA took the correct move to ditch the fees on foreign ATMs. The elimination such fees connoted that the Bank swore to halt ripping off their clients (Luger, Mammen and Haleblian 2015). The CBA group executive for retail baking service, Matt Comyn, while proclaiming the decision to ditch ATMs fees, asserted that the Bank stood addressing consumers’ concerns. This is due to the continued complaints amongst Australian regarding ATM charges for foreign Banks ATM. The CBA acted wisely to axe the punitive charges. This was purposed to not only benefit Australians but the banks itself through improved efficiency and legitimacy.

It was hence a well-thought step toward benefiting customers already feeling frustrated when charged for withdrawing their money. The Agency Relationship and Agency Theory are highly suitable when explaining this move. The CBA was the principal in this case whereas ATMs owners, the agents. It remains apparent that the agents (ATMs owners) are pursuing the maximization of their own personal wealth interest by charging the clients for an ATM withdrawal fee. This is justified because it has been met with severe complaints from the clients. The implication remains that the Bank would be losing even its loyal customers leave alone the potential ones at the expense of the Agent (ATMs owners). This is seemingly contrary to the CBA’s interest and customers. It is shown from the literature that ATM withdrawals is already steadily lessening. However, until lately the ATMs’ number around the country had continued to expand. The primary explanation for this is that the owners of ATMs (agent) merely serve their self-interest and thus bringing in more ATMs to benefit from the charges against the will of the Bank. This has made the returns for CBA to go crunching.     

Legitimacy Theory

Legitimacy Theory (LT) holds that a corporation is bound by social-contracts in which companies agree to undertake an array of social-desired acts to get approval of business goals as well as objectives alongside extra rewards (Bitektine and Haack 2015). LT highlights the degree to which a particular corporate’s social alongside environmental disclosures stay dictated by the established borders by the society to be valued and dodge being chastised by the underlying community firm operates in and serves.

The theory is regarded a generalized assumption or perception that the actions of a company stay appropriate, anticipated as well as suitable within some socially-constructed norms , definitions, beliefs,  and values systems. LT helps understand the need for explaining the behavior of an organization in implementing and developing voluntary environmental besides social disclosures of information to accomplish their corresponding social contract. This permits the acknowledgement of corresponding entities’ goals and objectives and the survival in the tempestuous and nervous environment. Where the organizational activities fail to respect both social and moral values, the firm will be severely sanctioned by the community or society.   

Based on the Legitimacy Theory (LT), CBA took a correct move to axe the charges on foreign ATM to improve efficiency and legitimacy and to benefit the Australians.    This is due to increasing complaints from clients for being compelled to meet withdraw fees despite withdrawing own cash. The efficiency alongside legitimacy of the CBA were already hanging in the balance. This can be understood via the lens of LT  which connote that CBA remains bound by social contracts as it use fees on ATM withdrawal because it has to agree to undertake various  socially-desired actions in exchange of  approval of its business’ goals and objectives. It also consents to behave in a societal-approved manner in return for extra rewards. This definitely, will guarantee the CBA its sought-after continued survival.

When the clients do not feel the legitimacy and efficiency of these ATMs’ actions and their operations, they will not approve the CBA’s business objectives nor will they reward the business in terms of transacting through the ATMs. This is because they are convinced that the charges makes the Banks business goals and objectives illegitimate and inefficient as they are never socially anticipated acts. The clients or the community respond via punitive actions hence penalizing the CBA if the ATMs fees continue. They have done subsequently by  ditching the banks services as has seen manifested by crunching returns from ATMs even when the Bank spend much money to maintain ATMs.  CBA shall thus solely thrive the customers’ punitive wrath by meeting the Legitimate Theory tenet regarded as a generalized perception or assumption that CBA’s actions must be proper, desirable and appropriate in some socially-constructed systems of definitions, beliefs, norms alongside values. In its absentia, then CBA shall never thrive by charging the ATMs fees. This is why it evident that CBA had to meet the increasing complaints and feedbacks from customers as ATMs use was already in the decline.

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

Institutional Theory (IT) states that the institutional environment can strongly impact the development of formal structure in affirm, typically more overwhelmingly than pressures in the market. Technical-efficiency-enhancing innovative structures in early-adopting organization become legitimized in the environment. Finally, these innovations reach a level of legitimization whereby failure to adopt them is perceived “irrational and negligent” (or they can as well turn out to be legal mandates). Here, new as well as predominant corporations will embrace structural forms irrespective of its effects on efficiency. Meyer and Rowan have argued that typically these “institutional myths” stay just ritualistically accepted to permit the firm gain alongside maintain its legitimacy in the institutional environment (Rogowski 2015). These formal legitimacy structures can plunge the efficiency and blockade the competitive position of the firm in their respective technical environment. The organization usually decreases the adversative impacts by decoupling their technical core from these legitimizing structures. DiMaggio and Powell summarized net effect of institutional pressures as one that enhance the organizational structures’ homogeneity in the institutional environment. Firms will adopt similar structures because of 3 kind of pressures (mimetic, coercive or normative).

Institutional Theory

The rate of institutional isomorphism is escalated when the establishments: stay tremendously dependent on the institutional environment; exist in enormously high uncertainty or vague goals; and be contingent interminably on professionals. While early firms adopt the new forms of structures to increase efficiency, the subsequent organizations do it for legitimacy maintenance.     

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

The Institution Theory (IT) is helpful in explaining the why Westpac, NAB and ANZ axed their respective foreign ATM charges immediately after CBA’s move.  This is a change that will save Australians 100 million of dollars.  It is a typical case novel structural form adoption that IT has explained overhead. According to IT, the primary purpose axing ATM fees was to maintain legitimacy in banking sector institutional environment. Whereas CBA largely adopted such novel structural form for efficiency enchantment following the increasing complaints from clients, the NAB, Westpac, and ANZ chiefly axed fees to uphold legitimacy. This is because all these banks are highly dependent on the banking institutional environment.

The decision by CBA ultimately has a corresponding impact on the legitimacy of ANZ, NAB and Westpac hinged on society’s perception. The rate of isomorphism had to increase as observed above because banks: are tremendously dependent on the banking sector institutional environment; exist under an enormously high indecision/equivocal goals; and rely interminably on professionals (Sjostrand 2016). Banking industry fits the “institutional” definition as social structures already attained an advanced degree of pliability being self-possessed of cultural-cognitive, regulative as well as normative elements and the associated happenings as well as resources, presenting stability and connotation to social life. Banks have relational systems that explicates the reason for factoring in the CBA’s decision to axes ATM charges instantaneously so as not to lose their corresponding legitimacy. This might have made them lose their clients to CBA. The Institutional Theory further unearths that institutions by definition, mean stability, yet goes a notch high to acknowledge that they banks remain subject to change process- discontinuous (for example, dumping ATM fees in the case) alongside incremental.

Conclusion

The Commonwealth Bank of Australia made the right decision to axe charges in ATM for withdrawals. This did not only increased the CBA’s efficiency, but also bolstered its legitimacy. As fastened in Agency Theory, both the agent (ATM owners) and principal (CBA) ought to share a comparable goal for the ATMs fees’ success. Though, it seems either party stood imprisoned in conflict of interests.  Each party served own self-interest at the expense of their clients. This is the reason why the customer have continuously protested for being charged when withdrawing their individual funds. The Legitimacy Theory backs the ATMs fees’ removal because they made clients delegitimize the CBA. This penalized the CBA by discontinuing transacting via ATMs culminating in rewards or returns crunch.

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.

Hannafey, F.T. and Vitulano, L.A., 2013. Ethics and executive coaching: An agency theory approach. Journal of business ethics, 115(3), pp.599-603.

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.

Song, J., Wang, R. and Cavusgil, S.T., 2015. State ownership and market orientation in China’s public firms: An agency theory perspective. International Business Review, 24(4), pp.690-699.