Dialogue: Anderton's dream won't fly

Among its other faults, the People's Bank could threaten rural banking services, says consultant PAT FORBES*.

Holy cow, Batman - Jim Anderton has a plan. It involves having a bank branch on every corner to look after low income earners and superannuitants, charging them fees 30 per cent lower than other banks.

It will simultaneously smack all those smug, naughty old foreign banks which rip off the innocent, without of course damaging all those nice little locally owned outfits. All this plus a whopping great return for the "ordinary New Zealander," the taxpayer, who has the privilege of investing without even having to read the prospectus.

But will NZ Post be able to deliver the promises made by the Alliance leader while maintaining a viable business, or will it leave him out in the cold as the reality of today's banking environment bites? I predict the latter.

We will not see a branch on every corner. NZ Post has 321 outlets, consisting of 153 Post Shops, 137 franchised Post Shops, and 31 Books & More stores. You can bet NZ Post doesn't maintain Post Shops in low-density areas, for the same reason banks don't - it is unprofitable. The issue of who bears the cost of upgrading security in franchisee-controlled outlets is also under debate, leaving only 153 "guaranteed" outlets.

Any banker will tell you that being the sole bank in a rural area creates difficulties when considering closure, as "the last to go" inevitably draws an emotive response.

NZ Post may well provide banks with a ready excuse to exit marginal locations, accelerating the loss of services, particularly to small business, a segment that NZ Post will not serve.

Low income earners will be as unpopular with the People's Bank as they are with other banks, and will not be welcomed with open arms. Internet banking, credit cards and mortgages are hardly the products offered to those on low incomes, so who do you think is being targeted?

Banks make money from the top 15 per cent of customers. The bottom 60 per cent are known as "value diluters," and as has already been leaked, the bank will have to put up its fees if it gets too many low-income customers.

Banks look after their profitable customers pretty well, and are unlikely to hand them over without a fight. Most of these customers have fairly sophisticated needs and over the years have built a series of direct debits, automatic payments, and other facilities that are time-consuming to change. This combined with the "inertia" factor will make it difficult to persuade them to change banks.

Mr Anderton says fees will be 30 per cent lower. NZ Post says they will be 20 to 30 per cent lower. Is this a case of managing expectations already?

Bank fees do not cover processing costs, are already low compared with most other countries, and are rarely paid anyway, unless you are a "diluter" of course. Most customers who maintain reasonable balances, hold mortgages or deposits, or who "organise themselves," pay a lot less than the standard fees - or better still, no fees at all. It is a tad difficult to reduce nil by 30 per cent and maintain profitability.

Fees are affected by risk and economies of scale. The more transactions pushed through the processors, the less the cost per transaction. Trading banks have moved to combine their processing with those of their parent companies, reducing their costs to a level simply not achievable locally.

NZ Post will most likely look to contract out its processing and, rather than creating its own products, will sell those of others. It already has arrangements with Travelex and Western Union. These arrangements line the pockets of overseas providers, and don't fit with Mr Anderton's desire to retain profits within New Zealand.

Banks also charge each other "interchange" fees for customers who use competing ATM networks. This ensures that all banks have an interest in keeping ATM networks alive. Costs range from about 75c to $1.50 a transaction. Receipts and payments fairly much cancel each other out, leaving nobody out of pocket.

The People's Bank will not operate an ATM network, but will issue cards. This will leave them with a substantial "interchange shortfall" which will either have to be passed on as a fee to customers, or be written off at the expense of profits.

NZ Post claims that "our niche is to provide services to those seeking a bank with local ownership." But New Zealand already has a number of locally owned banks, such as Taranaki Savings Bank, Southland Building Society, PSIS and a number of credit unions. Those who for strong philosophical reasons prefer locally owned operations have probably made their move already.

NZ Post has also apparently found superhuman staff. Most banks have difficulty keeping staff trained in the large number of complex products they sell. There is no such thing as a simple transaction account. Add all of NZ Post's other products, throw in a touch of Finsec and some second-hand security equipment, and you have a recipe for increasing staff costs.

Standard & Poor's has recognised the risks in this proposal, and has downgraded NZ Post's credit ratings accordingly.

The taxpayer is being told this is a great investment, and that NZ Post has demonstrated it is a capable manager.

Yet NZ Post suffered a $3.8m tax-paid loss for the three months ending June 30, and is predicting a fall in annual profits.

Its core business is fast being eroded by internet use, and it must find other revenue streams. On average, banks return about 23 per cent on their capital, yet NZ Post predicts a return of 11 per cent.

As for management experience, postal services are all about logistics, while banking is all about risk. The Government's involvement has been disastrous in the past. The BNZ lost its capital twice, DFC went belly-up, and it sold Post Bank once before.

NZ Post needs new revenue streams, and in Mr Anderton it has found a champion who ideologically sees no difficulties in using $80 million of taxpayers' money to establish a business to compete with many existing and locally owned financial services providers. His blindness precludes him from understanding that to match the returns generated by the trading banks, NZ Post will have to operate as they do.

Labour is unlikely to have initiated the People's Bank itself and has effectively bought the Alliance's support, thereby allowing the views of a paltry 7 per cent of the population to be foisted on the rest of us who probably don't much care if there is another bank in the market. But we do understand the financial realities and, unlike the Alliance, don't see international conspiracies around every corner.

When NZ Post fails to deliver on Mr Anderton's promises, I suggest we try a new idea which I am sure will be popular.

I am heartily sick and tired of petrol prices, as are most "ordinary Kiwis." Perhaps it would be timely to float "The People's Pump" line of petrol stations. I am sure Mr Anderton will be able to find a state-owned enterprise looking for new revenue streams. With $80 million of taxpayer funding, it is sure to be a winner, for a while at least.

* Pat Forbes spent 27 years in the banking industry and is now an independent consultant.