Updated – see end of article.
Ever since Ahmed Fahour was appointed Graeme John’s replacement at Australia Post — he starts on Monday — there’s been speculation about whether he would pursue an expansion of Oz Post into banking. So far Fahour has declined to give a detailed response to the speculation beyond suggesting he has higher priorities than setting up a bank — like continuing the company’s long effort to raise the price of stamps.
However, Crikey can reveal that the Rudd Government commissioned a scoping study into the establishment of a publicly-owned banking capability by Australia Post, with positive results.
As Crikey detailed in August last year, Oz Post has been trying to address the long-term decline in postal volumes by encouraging mail marketing and exploiting its branch network to offer a wider range of the sort of services that still require interaction.
This already includes financial services under licence from several banks and up to 70 financial institutions in all, including business banking services from NAB and the Commonwealth. Last year, Australia Post itself began offering insurance services. About 3,300 Australia Post outlets offer external banking services now, just under three times the number of branches of the largest bank network, Westpac/St George.
A postal service offering its own banking services is hardly novel. The French La Poste runs La Banque Postale, offering banking and insurance to individuals and business. Swiss Post runs Post Finance. Post Italiane has expanded from being a pension-collection and bill-paying outlet to full banking. Prior to being broken up and sold off, Japan Post ran one of the biggest banks in the world. And in December, Peter Mandelson announced that the British Post Office would start offering full banking services later this year.
And of course there’s the example just across the Tasman of Kiwibank, which was bought by NZ Post and established as a locally-owned competitor to NZ’s Australian-owned banks in 2002, offering personal and business banking services. Kiwibank started with the aim of undercutting the majors in lending rates, and quickly forced them to match it.
Last July the “six economists” – John Quiggin, Christopher Joye, Joshua Gans, Stephen King, Sam Wylie and Nicholas Gruen – suggested the Kiwibank idea was worth considering, as part of a call for a wide-ranging inquiry into finance sector reform. One of the key attractions of an “AussieBank” proposal – which ended up distracting from the substance of the economists’ letter – was that it would offer a no-frills sets of financial services: savings, payments, and even wealth management, an area increasingly dominated by the big banks.
Crikey understands that Rudd Government commissioned former Westpac consumer banking head Mike Pratt to undertake a scoping study to explore whether Australia Post could replicate the KiwiBank model in Australia. Pratt’s findings were apparently very positive. However, Australia Post’s Graeme John wasn’t interested in pursuing the idea.
And so, enter former NAB exec Fahour.
Australia Post’s act is surprisingly open-ended about what the corporation can do – apart from postal services, it can undertake any business or activity that is “capable of being conveniently carried on by the use of resources that are not immediately required in carrying out Australia Post’s principal or subsidiary function.” What the company would need is a banking licence from APRA and a chunk of change from the Government to start up lending services – Mandelson is investing £1.7bn in the UK Post Office’s banking venture; KiwiBank needed NZ$83m start-up funding in 2002. We’re talking at least $1b, probably more.
The question is, if Australia Post could run a bank, whether it should. Should the Government plunge back into an industry it exited barely 14 years ago? Apologists for the Big Four banking cartel obviously think not, and mutter about “undermining competition”. But there is no evidence that the collapse in competition in the Australian finance sector engendered by the GFC – and the subsequent waving-through of substantial reductions in competition via bank mergers by regulators and the Government – is being rectified.
Yesterday, Wayne Swan announced the allocation of $3.4b from the second $8b tranche of Government support for the residential mortgage-backed securities sector, including three non-bank lenders. This still looks a lot like life support for the non-bank sector, rather than a shot in the arm.
The most recent lending figures, for November, still show banks – overwhelmingly dominated by the Big Four – retaining over 90% of mortgage lending, with wholesale lending – which pre-GFC could claim nearly 14% of the mortgage lending market – still struggling on less than 3%.
The surge in Big Bank mortgage funding had to come from somewhere, and it has come from commercial lending, which is currently far below boom-period levels and barely reaching lending figures seen in the early part of the decade, although the RBA puts some of that down to companies hunkering down in the face of the downturn and consolidating their balance sheets
But for all the media obsession with residential mortgage interest rates, it is commercial lending where the shrinkage of bank competition is being felt worst, and where the impact of an Australia Post-run “AussieBank” might be most appreciated, especially in regional towns abandoned by the Big Banks. Some economists, like Christopher Joye, incline to the view that a rural/regional “AussieBank” might be the way to go, although I suspect that might just encourage the Big Banks to further abandon regional centres.
But this gets us to the nub of why the re-entry of the Commonwealth Government into personal and business banking, should be seriously considered, however much it goes against the grain of confining the public sector to activities the private sector can’t do.
As I suggested earlier this week, shamefully stealing from the likes of Joye and John Quiggin, it is the critical role the banking sector plays in the real economy that makes it a special case. As Smart Company’s James Thomsen pointed out this week, if a major company like Flight Centre complains that the banks are making life difficult for it over loans, it’s a fair bet small and medium enterprises are struggling to get on banks’ lending radar. And that has real-world consequences for employment.
Even an “AussieBank” entry into housing lending would help, by forcing some Big Bank finance out of the low-risk residential mortgage and bank into business lending.
It wouldn’t necessarily be easy. Talk to some New Zealanders and they’ll readily complain about poor and poorly-informed service from Kiwibank, sufficient to overcome its “little Kiwi battler” branding and drive customers away (revelations that it was using a Melbourne call centre didn’t help). About two-thirds of Australia Post outlets are licensed post offices which are independent small businesses (many of whom are unhappy with the way Australia Post treats them), meaning they’d have to agree to take on an in-house banking function, presumably supported by a strong online presence, and be trained to operate it.
And while the Commonwealth Bank was, in public ownership, highly-successful, the shadow of the collapses of state-owned banks in the early 1990s will continue to worry Labor types. Nevertheless, the Pratt study will give them comfort that “AussieBank” would work.
The consistent overseas experience is that a postal-based bank can work well. In Australia, the branch infrastructure is there, the branding is there – Australia Post is one of the country’s most trusted brands – and so is the need for greater competition. With Fahour, it now has a flying start with the expertise.
Update: The Treasurer’s office this afternoon released this statement: “A report this afternoon claiming that the Government has commissioned a scoping study into a publicly owned banking capacity for Australia Post is unsubstantiated and incorrect. The Government has commissioned no such work.”
Bernard Keane stands by the article as initially written.