The People's Bank to some, a waste of money to others

Kiwibank chief executive Sam Knowles.

Act leader Rodney Hide, who thinks the Government should not be bankers, says Kiwibank has not cut banking prices and has negligible market share.

Three years after Kiwibank's launch, Jim Anderton, the political father of the "People's Bank", still receives as many as 30 letters a week from customers.

It is a mere trickle compared with the hundreds that flooded in after the bank opened in February 2002.

But with the exception of the occasional note berating him for a failed loan request, Anderton says most are from happy customers.

"I think some people think I run the bank, but I'm not even a shareholding minister,"Anderton says.

In fact, Finance Minister Michael Cullen and State-Owned Enterprises Minister Paul Swain hold the Government purse strings.

As leader of the Alliance, Anderton pledged a New Zealand-owned bank providing services for low- and middle-income earners in the 1999 election campaign.

With the country's major banks - ANZ, the National Bank, Westpac, ASB and BNZ - all foreign owned, a "People's Bank" would keep profits onshore.

It would also bring to an end rising bank fees, and return banking services to smaller towns that had suffered from a dramatic cull in branch numbers from 1500 in 1993 to 900 in 1999.

At the time, Anderton said ordinary people were being "taken to the cleaners". Labour reluctantly agreed to the creation of its coalition partner's dream in 2001. Kiwibank was set up as a subsidiary of New Zealand Post with $83 million of taxpayers' cash.

The move was against the advice of the Treasury and the Government's Crown Company Monitoring Unit, the opposition and the financial community.

Even after it was established, the OECD chipped in saying it was not an efficient use of public funds.

But, with an additional $40 million injection of taxpayer funds, it has begun to deliver on its promises.

Kiwibank offers home loans, term deposits, credit cards plus savings and cheque accounts. Fee comparison tables on Kiwibank's website claim its services are between 35 and 59 per cent cheaper than the big banks.

It now has 306 branches in post shops, chemists, petrol stations and hardware stores, including 30 in towns and suburbs that suffered from the cull, such as Darfield, Featherston, Kawakawa and Miramar.

Through this network - the largest in New Zealand - it provides services to 300,000 customers.

At September 30, 2004, Kiwibank's loan book stood at $1.15 billion and it held $1.06 billion of deposits. After narrowing losses to $490,000 in the year to June 30, 2004, from $8.03 million the previous year, chief executive Sam Knowles says Kiwibank will post its maiden annual profit this year.

NZ Post chief financial officer Peter Schuyt, who said Kiwibank was an opportunity to diversify in the face of the declining mail business, claims it is on target to make a return on the taxpayers' original $83 million investment in three years' time.

Meanwhile, Consumers' Institute chief executive David Russell says surveys show Kiwibank has achieved high levels of customer satisfaction.

"It has developed into a genuine alternative to the other banks and, as such, I think the consumer has benefited just by simply having it there."

Anderton (naturally) is unequivocal, claiming the "People's Bank" has exceeded his expectations and is now one of the most successful enterprises "there has been".

"Kiwibank has solved the problem that we didn't have a national banking network that was owned by New Zealand," he says.

Kiwibank is now a national strategic asset, like Air New Zealand.

But the bank still faces vociferous critics. And with plans to build a network of 300 ATMs and expand into small and medium-sized business banking, it is set to gobble up millions of dollars more and will have to fight hard to retain support.

David Tripe, senior lecturer in banking at Massey University, says it can be argued Kiwibank has succeeded simply because customers are getting financial services.

But he points out there is more to success than that. "It hasn't stopped the foreign-owned banks making big profits and there's no obvious indication it has had a major impact on the pricing of financial services to consumers," says Tripe.

The relevance of Kiwibank's vast branch network is questioned. KPMG's 2004 Financial Institutions Performance Survey points out 88 per cent of payments made in 2003 were done electronically.

Now that it is "far less common" for people to enter their local branch, Eftpos, ATMs, telephone banking and internet banking are key ways customers pay.

Kiwibank remains a tiny player. Following ANZ taking over the National Bank, New Zealand's big four banks are all Australian-owned and hold 87.5 per cent of banking assets. Kiwibank has 0.6 per cent.

While reaching 300,000 customers in three years is impressive, Tripe questions their value.

ASB has 800,000 customers and $35 billion of assets. This compares with Kiwibank's $1.4 billion. Tripe says Kiwibank will need six million customers to catch up to ASB.

Tripe also questions Kiwibank's financial statements. There is "considerable" uncertainty as to what the bank's income and expenses are actually measuring.

Kiwibank's revenue and expenses include bill payment services and international money exchange services operated at NZ Post branches. This business comprised 47 per cent of Kiwibank's income last year.

"The figures for 'other income' and 'operating expenses' are so far out of line with what other banks incur and achieve that it's difficult to say what those really mean in practice," Tripe says.

Act leader Rodney Hide says subsidising Kiwibank with NZ Post's bill payments services is a classic NZ Post trick "where they shift profitable items around to disguise what is actually going on".

Hide said Kiwibank had not cut prices and had negligible market share.

"I can't see what has been achieved. The Government should not be in the banking business," adds Hide.

National finance spokesman John Key said it was unlikely a National-led government would sell Kiwibank on day one. But it would be reluctant to contribute more taxpayers' money.

"I certainly wouldn't want to underwrite a huge future injection which the bank will need if it's going to expand," Key says.

But the view has to be tempered with those of Kiwibank's rivals, who are attuned to a threat.

Kiwibank's nationalistic appeal and its targeting of low-middle income earners makes locally owned financial institutions such as TSB, PSIS and credit unions, the biggest potential losers. PSIS chief executive Girol Karacaoglu insists he has not lost customers to Kiwibank, but is now attracting fewer customers from those who defect from the major banks. He says Kiwibank is a serious competitive threat.

Kevin Rimmington, TSB chief executive, suggests the playing field is not level because of the way Kiwibank is funded.

James Munro, chief executive of Superbank, says Kiwibank is turning into a player of significant scale. Munro is not sure it is doing "brilliantly" as a bank but suggests it is doing well as an organisation embarking upon social engineering.

Westpac has lost customers to Kiwibank, but they have not tended to have had significant relationships with Westpac.

ANZ National Bank says neither ANZ nor its recent acquisition the National Bank has experienced significant losses.

At Kiwibank's shabby open-plan office on the twelfth floor of Radio New Zealand House on The Terrace in Wellington, Knowles acknowledges it is taking longer than hoped for customers to bring all their banking to Kiwibank due to competition.

Customers may open a savings account with Kiwibank but keep their mortgage with a rival. But he says takeovers have left a gap in the market for Kiwibank.

Post Bank, which had been operated by NZ Post, was sold to ANZ in 1989. Trust Bank was bought by Westpac in 1996 and Countrywide was taken over by the National Bank in 1998.

Knowles is convinced about the Government's investment.

"Big banks had doubled their profits as a proportion of GDP by taking smaller competitors out of the market," says Knowles. "The underlying assumption was if Kiwibank came along, more people would switch banks than were switching before."

Kiwibank pledged to increase competition, offer cheaper services than rivals, be open longer hours and have the most branches. Three years on, Knowles ticks off all four promises.

Kiwibank pledges the cheapest mortgages over six years and other banks have followed its lead to open on Saturdays. He concedes Kiwibank will need "tens of millions of dollars" in extra funding over the next two to three years and reckons it will be at least four to five years before Kiwibank starts paying dividends.

But he asks for time: "Building a big bank is about growing at the rate we are for the next 20 years. It's not a short-term growth path."

It remains to be seen if his wish will be granted.