Background
How Will it Work?
Concerns
Conclusion
The deputy prime minister has recently been promoting the establishment of a New Zealand owned bank to provide branch services nationwide. It is being coined the 'People's Bank' or 'Kiwi Bank'.
In New Zealand, five banks control 90% of the country's bank assets. All five are entirely owned in either Australia or Britain and have recently enjoyed an increase in their profits.
The media is always quick to report examples of public discontentwith the banks. They are perceived to be continually increasing their fees and closing branches, especially in rural and other regional centres. Many customers believe they are not receiving an acceptable level of service. The deputy prime minister has said that people could expect full banking services and lower fees from the Kiwi Bank. He also hopes its existence will encourage lower fees and the improvement of services of the other banks, as they will have to compete with the Kiwi Bank.
The minister of finance has been meeting with the deputy prime minister to discuss how the bank could be set up and how it would be financed.
New Zealand Post (NZ Post), a state owned enterprise, has put forward a business plan to run the Kiwi Bank through its branch network. NZ Post has already been using its network of post shops and agencies to provide counter services for other billing utilities. It is believed cash banking services are therefore a logical extension and NZ Post had been contemplating the idea for some time. It is estimated that the Kiwi Bank's set-up costs will be about NZ$80 million.
Until recently, the minister of finance has been concerned about the level of capital NZ Post might need and where that would come from. The minister had indicated that he would be reluctant for any capital injection to come directly from the government. However, a crucial barrier to the bank was cleared when the minister dropped his objection to extra government investment. This has opened the way for NZ Post to raise debt and pay the government a lower dividend to finance the set-up costs. The exact nature of the government's financial help has not yet been settled.
Opposition members of Parliament claim that using NZ Post as a bank will worsen its financial situation. With the increase in electronic mail, and growing competition in the mail delivery business in New Zealand, NZ Post faces an uncertain future. It is therefore not surprising it is looking at potential new activities.
The opposition finance spokesman has said that a business plan prepared for Kiwi Bank showed it would add to NZ Post's losses. Responding to this claim, a NZ Post spokesman said one of the conditions attached to the business proposal was that it must meet "rigorous commercial investment criteria". The deputy prime minister believes that the bank will eventually be worth more than NZ Post, although it is expected to make a loss in the early stages.
The level of government assistance is also a concern, especially in the initial stages. Significant investment will be required in terms of human resources, and in developing adequate security and technology requirements to upgrade the existing NZ Post network, allowing it to provide core retail banking services. A parliamentary select committee met recently to consider evidence from the NZ Post chairman and chief executive on this point. The committee was told that NZ Post already handles a large number of financial transactions and believes that its efficient postal operation and cost structure, coupled with improved back-office technology, provide substantial cost advantages over the existing banking market. The committee was also told that NZ Post intends to provide simple mortgage facilities and savings accounts, and will service private individual customers. NZ Post has said it will not enter the corporate banking market.
Previous government owned banks have not been entirely successful in New Zealand. In the last decade, a government owned bank had to be substantially recapitalized before being sold to the private sector. Also, a venture capital provider was allowed to collapse, causing significant economic and political fall-out, both domestically and overseas.
It seems there is a need for (i) greater scrutiny of the NZ Post business plan, and (ii) transparency of the motives behind the establishment of the Kiwi Bank. Is it really filling a need in the community for more competition among existing banks, or is it merely a form of political points-scoring by way of 'bank bashing'? Either way, it seems likely that existing banks will have a new competitor to consider within the next 12 months.
The author wishes to acknowledge the assistance of Andrea Newland in the preparation of this article.
For further information on this topic please contact Michael Dineen at Buddle Findlay by telephone (+64 9 358 2555) or by fax (+64 9 363 0709) or by email ([email protected]).
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