Banking Review

Checks in the mail

Australia Post’s new MD has banking in his veins.
Will he parcel up a new financial services offering for the business?

BY CHARIS PALMER

Speculation is mounting within the banking sector that Australia Post may ramp up its financial services offering, following the appointment of former NAB chief Ahmed Fahour as its new managing director.

Australia Post already offers a Bank@Post service that provides card  access to banks through 3,300 post office stores. In September last year, the group entered the insurance sector with a car insurance offering. At the time, Australia Post group manager of financial services Andrew Wiseman said: “For us, insurance was a logical next step. We are a well-known brand and we have the expertise in the financial services area”.

Australia Post chairman David Mortimer has tasked new Post boss Fahour with writing the next chapter in the corporation’s history. He says, “This will involve proposing ambitious new strategies that further strengthen our balance sheet and improve our profitability”.

And some in the industry say after just a few weeks in the job, Fahour is already taking advice on which direction to drive the group’s financial services business.

The political imperative
Christopher Joye, who chaired former Prime Minister John Howard’s 2003 Home Ownership Task Force, and now runs funds management and advisory business Rismark International, says the establishment of a Postbank in Australia is “A pretty obvious election strategy”.

Joye argues as a result of implicit and explicit guarantees made of the sector by the government, the major banks now have a “protected species status”, and that the imperative of an Australian Postbank would be to give smaller lenders a competitive advantage.

Joye was one of six economists that petitioned the government last year to set up a “basic bank” similar to New Zealand’s Kiwibank, which relies on state-based funding.

Joye says, “There’s no doubt we should use those three to four thousand national outlets that Australian taxpayers currently own and make them available to smaller lenders…they would be a cheap distribution conduit for smaller lenders”.

In the shadow of the global financial crisis, Joye and his colleagues are not alone in making calls for their government to set up a bank using the postal network. In the UK, a coalition of representatives from trade unions, a small business association, an economics think tank, and a research group specialising in the environment and climate, are lobbying the UK government to transform the UK Post Office’s current financial services offering into a full-fledged, state-funded bank offering deposits and loans at a lower cost than commercial banks.

In its paper arguing the case for a new UK Post Bank, the coalition argues: “The current banking crisis provides an opportunity for a radical redesign of banking. Combating financial exclusion and creating rights to a fair, accessible and trusted banking system can best be done through a Post Bank”.

Do we need a Postbank?
But back in Australia, the local Finance Sector Union is not convinced a state-funded bank is the answer to increasing banking competition, or changing the behaviour of our major banks.

“An Australia Post bank may provide hundreds or thousands more distribution points, but it’s not going to provide competition to the oligopoly that is the big four (banks),” says Leon Carter, national secretary of the Finance Sector Union.

“History shows us it would never be able to compete on the scale of the big four in retail, wholesale, business lending or international banking. We know the big four would make sure they never got a foothold.”

And, says Carter, even if a Postbank was able to gain enough market share to represent a competitive threat to the major banks, it’s likely one of the banks would move to take it out of play. “We had a fifth biggest bank that was providing genuine competition to the big four and modifying the behaviour of the big four. It was called St. George and it got swallowed on this government’s watch.”

Regulation before risk-taking
Carter says instead of spending vast sums of tax payers’ money starting a new bank, the government should focus on regulation in the areas of interest rates, switching, responsible lending and service levels. “If they want to provide competition and modify the behaviour of the big four, the only way for it to happen is for the government to use its legislative capacity to apply a raft of regulation and changes.”

Carter says a greater focus on switching regulation would help turn some of the government’s rhetoric into reality. “It’s all well and good for the Prime Minister or Treasurer to say, ‘If you’re unhappy with Westpac, take your business elsewhere’. If only it was so easy. It’s not like taking a SIM card out of a mobile phone.”

Carter says the second tier of financial institutions is still “on its knees” and that the big four have come out of the global financial crisis more profitable than they went in, but yet curiously have not been asked to provide anything in return for the range of guarantees provided by the government that have helped them gain even more market share.

Across the Tasman, Finsec campaigns director Andrew Campbell says Kiwibank has given the New Zealand government the ability to influence the banking market in a way that it probably couldn’t have done through regulation alone.

And, he says, “The argument was that the government could have used Kiwibank as a mechanism for stimulus and growth, so it could have offered lower interest rates in order to get people back in the market, or it could have acted as a lender if the other banks had held back”.

What would Postbank look like?
Joye agrees regulation is one way the government could help boost competition in the sector, but points out a Postbank wouldn’t have to operate as an entirely new stand-alone institution. “Across the spectrum of alternatives you have pure broking to white label offerings.”

Under one of Joye’s proposed models, Australia Post would work with the second tier banks and credit unions to offer mortgages. Alternatively, he says, Australia Post could white label the products of an existing non-bank lender, using the Australia Post brand.

“One of the biggest issues is distribution and if you can do it on a cheap basis, you have an advantage. The truth is, offering home loans is not that complicated, so it wouldn’t be hard to train one staff member in each branch to be equipped to offer a home loan.”

On the deposit side, Joye says Australia Post could offer a deposit-taking capability for non-bank or second tier lenders. “If a bank like Members Equity could raise deposits through 4,000 branches, you are using Australia Post to benefit existing institutions, rather than compete against them. You would be using it to supplement the competitive dynamics that already exist.”

Campbell says aside from its ability to harness nationalism to compete against foreign-owned banks, Kiwibank has succeeded because it has remained focused on simple banking products. “Their greatest innovation has been to keep it simple, and for lots of customers that’s all they want.”