Post pins hopes on fickle customers

By RICHARD BRADDELL

New Zealand Post reckons customers are more likely to switch banks once it enters the market, enabling it to overcome a downbeat view of its prospects by independent adviser Cameron & Co.

The new bank's interim chief executive, Sam Knowles, said NZ Post and Cameron agreed the new bank was "a reasonably sensible investment." But Cameron saw its worst case scenario, in which the bank misses its required rate of return by a small margin, as the most likely outcome.

Cameron's view that the bank would fall slightly short of its hurdle rate of return of 11.7 per cent, is based on an assumption that customer switching would not change markedly when NZ Post enters the market early next year.

But Mr Knowles said NZ Post's own research indicated that a new group of dissatisfied customers would look to NZ Post once the bank began operations.

It could definitely achieve profitability. The issue was whether it would be a star investment.

At present, 174,000 of New Zealand's three million bank customers switch annually. But NZ Post expects that number to rise markedly after its entry, as retail customers re-evaluate their options and decide to go for a locally owned enterprise with its heart in the community.

As things stand, over half those switching banks do so out of dissatisfaction, which stands at 25 to 30 per cent for some banks.

Banks with the highest fees have the highest levels of dissatisfaction, and NZ Post hopes to take advantage of that with slightly lower fees.

But customers who arrived at their banks through takeovers or mergers are also less likely to be content, although disillusionment tends to take longer to set in when customers have selected their banks themselves, partly because they are reluctant to admit they were wrong.

It seems likely that Mr Knowles, previously the chief executive of the Government's now-disbanded workplace accident insurance, @Work, will be confirmed as the bank's chief executive once its board is appointed.

He has extensive banking experience, having previously held senior strategic planning and executive positions at the Bank of New Zealand and National Australia Bank. He has been working on the banking project since the middle of last year.

To achieve its 11.7 per cent return, NZ Post is targeting a minimum customer base of 100,000 customers within three years.

But its business case is built on getting 165,000 customers who would enable the bank to generate enough profit to pay a dividend in year four. Mr Knowles said the new bank would be relatively cheap to set up given the existing 320-strong Post Shop network and low costs of off-the-shelf banking systems.

At perhaps $10 million, banking systems cost a tenth of 10 years ago and allow rapid product innovation and introduction, something that established banks find difficult on their complicated legacy systems.

NZ Post will target 1.6 million bank customers who pay fees and 300,000 with mortgages.

Its research shows that the bank will have wide appeal, even among National voters, many of whom have a sentimental attachment to the notion of local ownership.

And while independent research by the University of Auckland suggests that it will be least popular in the 30- to 45-year age group, Mr Knowles said that was expected since they were "mortgage belt" customers, who can change banks only with great difficulty.

However, research suggests that the bank will be well received by older people who, as it happens, tend to have higher levels of deposits, thus being a cheap source of funding.

Unfortunately, sympathy may not translate too easily into action, since this group is notoriously sticky - possibly because most banks give this profitable segment a holiday on fees.