New bank takes on big boys

By KEVIN TAYLOR

Kiwibank chief executive Sam Knowles is a relaxed man. He believes the bank, which opened its doors in February, forced its big rivals to rethink their products and prices last year.

New Zealand Post's concept of a bank with a big branch network appears to be working. There have been no major botch-ups with the launch of the state-owned bank that cost taxpayers $80 million to establish.

By the middle of last month Kiwibank had more than 90,000 customers and was continuing to sign them up at the rate of about 500 a day. On December 10, for example, 491 joined.

Kiwibank is a vindication of the work Knowles, former marketing head at the huge National Australia Bank, has put into the concept since starting on the bank's business plan more than two years ago.

Questions remain over whether Kiwibank is attracting the right mix of low and high-value customers but it appears on track to meet the business plan's aim of 160,000 customers after three years.

Last year began with Kiwibank in the gun from Opposition politicians over just about every aspect of its plans - from security to the reluctance of some Post franchisees to host a branch.

But by mid-December Knowles and NZ Post chief executive Elmar Toime were claiming vindication of the concept.

Toime points to two events in November that he says show the strength of the Kiwibank concept.

They were the announcement that internet and telephone banker AMP Banking would leave New Zealand after several years of losses and the imminent arrival of supermarket banking through a joint venture between Australia-based St George Bank and New World operator Foodstuffs.

"You can't operate a bank without connecting with the public in some way," Toime says.

He believes Kiwibank has changed the face of banking in New Zealand with its low fees and attractive products.

He claims Australian banks, noting Kiwibank's launch, have also changed their tune and are no longer talking about closing branches.

"If the banking system charged Kiwibank's prices and interest rates, there would be hundreds of millions of dollars put back in the pockets of ordinary citizens," he says.

"There's a place for Kiwibank."

Knowles also points to the St George/Foodstuffs move, due to get under way in the first quarter of this year, as confirming Kiwibank's strategy.

He says Kiwibank sparked early moves from competitors to revamp their offerings. ANZ and ASB were out of the blocks even before Kiwibank opened, announcing new lower-cost accounts.

Both banks denied that the moves were a competitive response to Kiwibank, but nobody but their PR departments believe those claims.

Knowles says Kiwibank has changed the dynamics of the market by adopting a low-cost, low-fee model.

"It's a sea-change event in that it's the first time other banks have actually started putting their prices down."

But he hastens to add that does not mean an enormous amount of business has come Kiwibank's way.

Faced with claims from some of the banks that they were not responding to Kiwibank, Knowles simply says: "They have never put their prices down before."

Kiwibank made a planned-for loss in the year to June of $10.2 million and Knowles says it is on the way to meeting the business plan.

Deposits and mortgage lending are ahead of plan, and it will probably hit the 100,000-customer mark next month.

While Kiwibank lost money and grew, the big five banks continued delivering record profits for their overseas owners.

Tallying the latest full-year figures, ASB, ANZ, BNZ, Westpac and National Bank among them made total net profits of $2.2 billion. National Bank will be the last to report for 2002 - next month.

David Tripe, of Massey University's banking studies centre, has noted that all achieved higher than the commonly cited benchmark 1 per cent return on average assets.

This, he thinks, is verging on excessive.

Knowles says there is still a big issue around bank profits.

"It is still going up at three times that of inflation. It will be close to $2.5 billion this year. It has gone from 1.2 per cent of GDP to well over 2 per cent of GDP.

"It is taking an enormous amount of New Zealand's wealth outside the country."

Asked how healthy banks were hurting the country, Knowles says the question is why is the market not working properly.

"Why can a mature business earn 30 per cent return on equity and not have it competed away?

"How can it happen in a competitive market - every single competitor can increase its profits? It has been the stuff of royal commissions of inquiry in the UK and Australia."

But he says the big profits also mean opportunities for Kiwibank.

Those profits are why Kiwibank was able to provide banking services at a much lower price, yet still make a return.

The vocal Finance Sector Union says the four biggest banks - ANZ, BNZ, Westpac and National - among them made more than $15,000 a minute in the past financial year.

Staff cuts and branch closures contributed heavily to the profits, adding greatly to staff stress, the union says. Last month it launched a "work-life balance" campaign, and invited employers to join.

It remains to be seen what impact the campaign will have on the banks, but the union is clearly driving hard for better and less stressful conditions for staff.

KPMG banking and finance group chairman Andrew Dinsdale is critical of claims that banks are making excessive profits, or are some sort of cartel.

"Who's suffering if they make good profits?" he asks.

"The other thing is we don't want banks to fail."

Dinsdale says that in the 1980s banks had huge margins on interest rates, and no fees.

During the National Government's wage and price freeze in the early 1980s banks' interest margins were around 11 per cent. Today that has shrunk to about 2.6 per cent.

In the 1980s there was only one way to bank - through a branch.

Today there are many "fantastic" options, some of them - such as the internet and ATMs - open all hours.

People also have unlimited access to money.

For example, banks are prepared to lend on most of the value of a property.

Dinsdale predicts that banking competition will increase further this year.

Last last year Westpac, which had just dropped the word "Trust" from its name, declared it was going to launch a renewed campaign on the Auckland market, taking on ASB on its home turf. The bank also shifted its head office to Auckland and a plush new home in the PricewaterhouseCoopers Tower.

Competition appears as intensive as ever, particularly in Auckland where the heated property market is ensuring plenty of potential homeowners are chasing fat mortgages.

Dinsdale says the big banks strongly pushed customer satisfaction last year by concentrating on staff happiness, on the theory that if staff are happier customers are more likely to get a positive experience.

He also points to the histories of ANZ boss Greg Camm and Ann Sherry of Westpac as hints of a new focus on customers.

Both Australians have a background which he describes as customer-focused, ensuring both banks - which have lagged in past customer surveys - will put more emphasis on customer service and satisfaction.

Dinsdale says it is too early to tell what is happening with Kiwibank customer satisfaction.

Herald feature: KiwiBank