Two of the largest customer-owned banks in Australia have gained approval from their members to merge.

The provisional approval from members - votes are still being verified and confirmed - comes after the banks' respective boards approved the deal back in April.

The deal has been more than a year in the making, with the two mulling over a merger since August 2021.

In terms of assets current as of July 2022, the combination of the two would create an entity worth nearly $27 billion, eclipsing Great Southern Bank as the largest customer-owned bank in Australia.

It would also eclipse that of the recently-agreed merger between Greater Bank and Newcastle Permanent, with assets worth $24.28 billion.

The merger between the Toowoomba-based Heritage, and the Adelaide-based People's Choice would mean a mutual bank comprising of more than 1,800 employees and 720,000 members.

Melina Morrison, CEO of the Business Council of Cooperatives and Mutuals, said this cements a "critical pillar" of Australia's banking industry.

"Significantly, this demonstrates that scale and competitive advantage do not need to be pursued through demutualisation - a process that turns organisations into shareholder-owned, profit-driven institutions," Ms Morrison said.

"Instead, banking can be provided to Australian customers in a way that ensures profits are returned to them in the form of better services.”

A finalisation of member vote tallies is expected in the coming days.

Over the past 10-12 years, the number of mutual and customer-owned banks has reportedly halved with fewer than 70 existing today.

Customer-owned banks are collectively known as the 'fifth pillar' of banking, competing alongside major banks CommBank, Westpac, ANZ, and NAB.

However the top ten customer-owned banks have about $121 billion in assets, around one-sixth that of the smallest major bank, ANZ, with around $688 billion.

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