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Jan 29, 2010

Australian banking goes postal

The re-entry of the Commonwealth Government into personal and business banking should be seriously considered, with an Australia Post-run “AussieBank” now on the cards.


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.


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20 thoughts on “Australian banking goes postal

  1. Perry Gretton

    If Australia Post needs more revenue, it could start by dropping its parcel post prices, thus stimulating volume. The cost of postage often exceeds the value of the item being shipped.

  2. Dr Strangelove

    Why doesn’t the government just set up a bank straight up, and instead of paying dividends to shareholders use it to invest in infrastructure and service delivery in regional and remote Indigenous communities who are no doubt crying out for it?

  3. ggm

    Anyone who has used ‘GIRO’ banking services in Europe will identify with what a bank can do, combined with an international clearing house.

    I asked AusPost to join, the reaction was clear: not core business, to expensive. But if you read the list of national post entities which are in it, and consider how many Australians are of European descent, and could use international funds transfer at less than Telegraphic Transfer swingeing fees.. Its a no-brainer.

    Girobank is also in the space that BPAY is in. I guess it treads on many bank toes at once, which is also very tempting.

    Credit Unions, my choice of bank, are regrettably now falling for a profit motive. They ain’t what they used to be. Shame on you all! collectivism should not look like this.


  4. Terry O'Loughlin

    Will Australia Post employ new counter staff if such a proposal gets underway? I have seen as many as 40 people in line at various AP outlets, and the time taken to reach a counter can eat up a lunchtime. With banking added, and no new staff, might we see lines snaking around footpaths at branches?

  5. nicolino

    The big four desperately need some competition. But there again Australia has many business monopolies and I am surprised Woolworths and Coles aren’t in on the act. They’re in everything else after all.

  6. Scott

    Not a good idea…deregulation of the financial system was one of the great economic reforms of the 80s. By all means make it easier for banks to set up, encourage competition, but don’t go back to the future by creating “The Commonwealth Mark 2”
    You can’t regulate and participate.

  7. Colin Prasad

    Oz Post is increasingly a commercially profitable Package and courier company, for which there are also plenty of private operators. I think we are approaching the stage when Oz Post should be privatised, not made into an even bigger behemoth. This sounds a little like Telstra back in the 90s. It should have been broken into chunks and then privatised, (with perhaps the backbone in public or industry ownership). But the govt chose to maximise its value by retiaining its near monopoly status. Perhaps with Oz Post, the addition of a banking biz will increase its value – but make it harder to break up later. Or maybe they should really make it a Peoples Bank – and privatise Oz PostaBank by gifting the shares to each tax payer based on the amount of tax they pay…..

  8. DNewlan

    I still cannot see the need for a people’s bank when you have over 100 credit unions and building societies offering the full range of banking services, and who are linked to the biggest ATM network in the country and who actively ‘reinvest’ their fortunes back into communities.

    Everything’s there, ready to go. Perhaps the government should be thinking more about how best to ensure the business environment allows mutuals to compete on an even playing field.

    In response to GGM, if any credit union is falling for a profit motive, it certainly isn’t to please investors (they have none) and therefore can only be an effort to increase capital in tough conditions – they cannot access capital in the same way banks can.

  9. nugget

    Australia Post has become worse and worse at providing its original function ie mail delivery.
    The lines go out the door for people paying bills, today I stood behind someone paying 15 bills.
    If they cannot improve their basic function they don’t deserve any more!
    The act says by the use of resources not required. I say they require all their resources to collect and distribute mail UNTIL PROVEN OTHERWISE !

  10. AR

    The british Post Office was a bank until the dreaded Mrs T wrought havoc on society. I used it happily for decades, esp when it joined the Giro system. Were it not for that superbly functioning facility, the 4M+ unemployed of the 80s would not have been so quiet.
    Bring on the Bank of Common Weal, say I.

  11. the duke

    I am very dubious about government owned banks, especially aussie owned banks. More bureaucracy, more bureaucracy. Anyone who has dealt with the CBA knows what I mean.

    Whilst we really are just a tiny player, the australian banking sector is getting alot of positive coverage in the global media and we even may turn into the gateway to the asian markets at some stage.

    Pre GFC and excluding the Big 4, we had a very fluid, regulated and diverse banking sector with a competitive residential mortage market. Whilst these banks/credit unions/building societies have been hit by the GFC, I’m they’ll be back because there is a clear opportunity in the residential market to undercut the Big 4.

    Lending in the SME sector is slowly improving (liquidity is still short, don’t forget) as the economy gains momentum again. I’m not sure if an Aussie Bank moved into residential mortgages that the Big 4 would automatically look at SME. They would be doing it now, they aren’t that stupid.

    Credit assessment is credit assessment, no matter where you go in the world. All banks are going to scrutinise all SME lending proposals in an economic climate like we have – higher approval fees, lower gearing ratios, stricter covenants, higher lending margins – as they are all a product of the environment.

    Forcing the Big 4 to do otherwise in the SME gets us back to the fundamentals of why the GFC happened in the first place. We don’t need an Aussie Bank.

  12. Eric Brodrick

    Aint it funny how the wheels go round. Anyone over 50 will remember when all post offices were sub-branches for the then government owned Commonwealth Bank. You could front up at the counter with your Pass Book to deposit and withdraw money. ALSO-
    Can someone please PROVE to me that privatisation of any government enterprise will improve my life !!!! My experience over the last 50 years is that when a Government enterprise is sold off, Prices rise sharpley, quality of service goes down, jobs are lost and most of the profit goes overseas. You people are the same economic purists/theologians that brought us the GFC and a zillion dollars of world wide debt that can never be repaid. You forget, the ultimate expression of an uncontrolled Free Market is “Rule 303”

  13. JamesK

    How about Federal government special banks for leftist drivel internet news sites or for leftist drivel newspapers such as owned by Fairfax or for any concern that rearranges wealth rather than creates it or any concern unable to face up to healthy rather than perverse moral hazards?

    Aussie banks face a minimal moral hazard lending overseas. I wonder why?

    The non-bank mortgage lending sector is fubarred. I wonder why?

  14. Chris Gulland

    What is it with Australia Post? They now duplicate many of the business products of what was the local newsagent domain, now banking…watch out video stores!

  15. ggm

    @DNEWLAN in the past, when my credit union *had* to increase fees, it said so, and laid the blame squarely on the banks closed clearing house network and card related costs. This time, they sent mail about user-pays visa card costs, claiming it was ‘cheaper for all members’ and then very rapidly send new mail recognizing costs had risen for very many, but denying any dialogue could take place over things (this, despite the credit union definitionally being a member body: remember you can’t be using one without co-owning it).

    The credit union in question is a mega combine, which includes SIROcredit (to which I once belonged) and UNIcredit (to which I once also belonged) and very many of the csiro and academic staff will relate to a sense that their once loved body has gone very far removed from its roots. on campus branches closed, product reduction/rationalization, excess fees for multiple accounts (which are computer costs, not labour costs)

    Credit unions should be lending to home owners. They increasingly seem to want to be lending to negative-gearing entrepreneurs. Is this what we joined a credit union to do?

  16. Richard Wilson

    Sounds like your credit union has been taken over by the same crowd who are conning the rest of us on a daily basis. “Mega” is invariably bad for customers but invariably good for insiders (major shareholders) and employees. In this instance it may be the employees with delusions of grandeur but I would be wary of anything that remotely stank of spin. The credit unions could become a “union” in a monetary muscle sense (their local deposit base is bigger than two of the big four) while still preserving their autonomy in a customer relationship and local promotional sense. And here’s me tghinking this was the big chance for credit unions to offer Australians a third way!

  17. Elan

    Terry O’ – A manager of one AP told me (after my complaint about long delays) that though business was now so varied that traffic had increased considerably, they had been told to lay off one member of staff.
    This move will be useless unless it is commensurate with adequate staffing levels.

    GGM – I moved back to a bank for precisely these reasons. You can stuff yer’ economic forces. Under a specific-(and interestingly made up),- Board, ‘fees and charges’ skyrocketed. (AGM’s became quite volatile, with threats by the Board to call the Polis!!). My bank is a bank. WAY less hypocrisy and secrecy.

    AR – I remember, I remember! (Do you recall the dear ol’ TSB?) Then the odious Mrs T came in and put a blow torch to the working classes, and anything that might assist them.

    Eric B – Absolutely agree. Both your para’s!

  18. AR

    Elan – I still have (!?) a Trustee Savings Bank (TSB) “open” – it closed/ceased/became an ex-entity so I often used to wonder what happened to my few quidlets therein.
    Similarly to GGM above, I also watching my building society become a bank (in UK) then fail and here become…not sure what the new nomenclature … but also cease to fulfill its original function.
    The Commonwealth account I had from primary school, early 1950s, when the representative would come and frank out bank books for our 5/- deposits I held for almost half a century until a it to went to the dark side.
    I retain only a (once) employee created credit union, which last year was absorbed but a larger one and … guess what happened to the fee structure?

  19. AR

    Lotta typos but I’m ANGRY!

  20. Elan

    AR – I have a Midland Bank account. The rosy specks say that with accumulated interest I should have a four figure sum!!

    Sod it!! Someone just knocked me’ spec’s off! It was swallowed years ago in …..’fees and charges’.

    In fact the Mid has been swallowed up I think.

    (……….it is a complete mystery to me what could possibly have happened to fee structure after the takeover…………).

    I wonder if we will ever get back to a structure based on integrity.

    Cat in hells……….


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