Dialogue: Low fees likely to cause problems

By DAVID TRIPE

It is no longer relevant to ask whether the launch of Kiwibank was good policy for the Government and New Zealand Post. The bank is in business, with branches in Palmerston North and Hawkes Bay.

The issue now is to consider the bank's prospects of success and its actual and potential influence in the banking market.

The history of the plans for Kiwibank are relevant, however, in that they created a set of expectations.

Initial expectations were that the bank would charge no account or transaction fees, which made it very popular in the eyes of the public, who regard bank fees as a particularly onerous impost.

We were then told that the bank would have to charge fees to cover the cost of providing its services, but the fees would be lower than those of other banks.

There was, therefore, considerable interest in the fees actually announced on February 7, on how these compared with the charges of other banks, and how they related to the payments offered to NZ Post franchisees for processing transactions.

Kiwibank has undercut fees previously charged by other banks, although the bank's pending arrival coincided with moves by some banks to realign their fee structures.

To some extent, then, the public have benefited from Kiwibank's arrival before it even opened its doors.

But other banks have not cut their fees across the board. Reductions have generally been selective, and in some cases fees have risen.

What we are seeing, therefore, is greater effort to align fees charged for accounts and transactions with the actual cost of providing them.

An obvious example of this is WestpacTrust's reduction in charges for Eftpos transactions from 35c to 15c.

One of the charges Kiwibank has announced is 30c for some electronic withdrawal transactions (Eftpos, automatic payments, bill payments and direct debits), and which also applies to branch withdrawals.

This relatively small fee for withdrawals at branches makes an interesting contrast with the proposed payment to franchisees of 53c for handling these transactions (a figure that not all franchisees have agreed to yet).

The new bank will thus be making a loss on these transactions, even while it struggles to get franchisees to agree to handle them at what already seems an artificially low price.

There may be consequences for the bank's overall business from this 30c fee for branch withdrawals.

Other banks charge from 50c up to $5, and the actual cost of such transactions is unlikely to be less than $2. (It is difficult to find agreement as to the cost of transactions, which vary in any case according to the complexity of individual transactions.)

In many instances, therefore, the other banks are losing money on processing withdrawal transactions at their counters.

We can therefore anticipate that Kiwibank will lose money on over-the-counter withdrawals, even if its more modern technology will reduce costs.

But these fees are set so that people who prefer to withdraw over the counter will find Kiwibank more attractive.

This could increase the bank's costs relative to revenue, whereas those banks who lost these customers - with their costly behaviour - would benefit.

Perhaps this scenario is wrong, and from taxpayer's perspective we should hope so, but it does seem that there are important questions about Kiwibank's product range and pricing.

We have looked at only one example, and there are likely to be others. We cannot assume that everything will be easy for Kiwibank.David Tripe is senior lecturer at the Centre for Banking Studies, Massey University.

Dialogue on business

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