Kiwibank faces tough rivals

The big banks will respond, but will be careful to preserve their bottom lines. KEVIN TAYLOR reports.

Banking experts say Kiwibank is in for a tough time.

Born in controversy, the state-owned newcomer to the banking sector is now facing off against the competition.

However, Kiwibank says the other banks will do little that might affect their own profitability, although they will try to look as though they are responding effectively to the challenge.

Touted as a low-fee banking alternative for ordinary New Zealanders, Kiwibank opened its first seven branches last week in Palmerston North and Hawkes Bay.

One man, a 57-year-old ANZ customer and self-employed cleaner, took a bus from Auckland to open a savings account at the first branch.

But a Herald reporter trying to open an account at the same branch the same day could not - staff were too busy with customers wanting to join.

However, it's too early to tell if that is a sign of things to come.

Kiwibank needs 100,000 customers over three years to meet its required rate of return, and chief executive Sam Knowles says if they get between 100,000 and 165,000 after three years they will be happy.

NZ Post's projections of the new bank's customer base, written in August 2000, hoped for 76,000 customers in year one, 142,000 in year two, and 192,000 in year three.

Mr Knowles says those customer projections are out of date, and the calculations now are for a slightly lower number. He won't give details.

But he says the mix of customers Kiwibank expects to get has also changed, with more business being expected from each customer.

The bank will not reveal how many customers it has signed up so far - and it won't release a running tally either.

The 2000 KPMG financial institutions survey of the market's reaction to the then unnamed bank predicted: "New Bank is likely to change the dynamics of the retail banking industry, the result of which may well be the lowering of fees or sharpening of interest rates by existing competitors."

But what astonishes Act MP and Kiwibank critic Rodney Hide is that NZ Post's business case assumed no strong competitive response.

He points out both Treasury and the Cameron and Co reports leaked to him on the bank plan were highly critical of the assumption.

Just two days before Kiwibank revealed its products and services this month WestpacTrust introduced a lower eftpos fee and ANZ offered a new children's account. In January ANZ offered a new account it claimed was low-fee, with the first 10 electronic transactions free.

ANZ and WestpacTrust denied these were competitive responses, a claim rubbished by banking experts.

ASB, however, acknowledged it was taking on Kiwibank when it cut its mortgage rate on the day the newcomer announced its super-low floating and one-year fixed 6.1 per cent rate.

Mr Hide says Kiwibank chairman Jim Bolger is trumpeting the competitive response as though that proves Kiwibank is a success already, when it fact the bank's whole business case relied on no response.

"I think they are dreamers ... they believed they could pinch 100,000 customers off other banks without there being a response."

But Mr Knowles says it's the degree of response that is important, and nothing so far suggests other banks have reacted strongly.

"By strong competitive response, we mean are they prepared to forgo significant profits in order to compete with Kiwibank. Our assumption was banks wouldn't be."

He says the banks have responded only to get media headlines, and he doubts their moves will impact on their bottom lines.

He cites WestpacTrust's move to cut its eftpos fees on one account - and at the same time remove the five free transactions it offered on another account.

Mr Hide believes competition is one factor that could cause Kiwibank grief.

The other is the response of the 170 franchises that make up more than half NZ Post's existing network. Many have complained about the 53c transaction fee Kiwibank wants to pay them and some don't want to act as a branch at that price.

David Tripe, director of Massey University's banking studies centre, says Kiwibank might head towards breakeven point after a "couple of years".

"But we should not expect them to be profitable in the very early stages."

He says Kiwibank is targeting a residential mortgage market share similar to that of AMP Banking, which has 2.9 per cent. But achieving a change in market share in mortgages can be "quite a struggle".

"Kiwibank is starting from a zero base, and any mistakes they make will no doubt engender some rather unpleasant publicity."

Mr Tripe points out HSBC, despite undercutting other banks, has a residential mortgage share of around 1 per cent.

"If price is everything, why isn't HongKong Bank doing a lot better? It consistently undercuts the banks but it struggles to get any presence."

Mr Knowles says Kiwibank is confident.

"We have had a very positive early reaction."

* In Forum tomorrow: David Tripe and Dr Mark Colgate on Kiwibank's prospects.

nzherald.co.nz/kiwibank