For years, post offices have been the ‘comfortable shoes’ of the financial services world. Their old-fashioned savings books and unpretentious surroundings have represented a brand that customers could trust. But the winds of change have been blowing worldwide. Advances in technology, deregulation, increased competition and growing government pressure are driving change on every front. The brand is being unshackled and a more aggressive, corporate stance is being adopted – a far cry from the ideals of the 19th and early 20th centuries when post office savings banks were proposed as vehicles for social reform.
Transforming a non-commercial service into a sleeker, customer-focused machine that still adheres to its social obligations is a tall order. But it is a challenge being taken up on every continent. In some countries post offices are being privatised lock, stock and barrel in the face of enormous political and trade union opposition. In others, joint ventures with the private sector have been forged to provide new products or technology.
According to the Universal Postal Union (UPU) – a forum for cooperation between postal services – around two-thirds of the world’s post offices provide postal financial services and some 60 offer savings bank services, which make a substantial contribution to their overall revenue. The figures speak for themselves: 40% of Poste Italiane’s revenue comes from its Bancoposta activities, 90% of post office revenue in Algeria is said to come from financial services, while in Switzerland, financial services provided more revenue for Swiss Post than its letters business did in 2004.
Since the first post office savings banks were formed, three trends have emerged. Some post offices never had banking services – in North America, for example, for historical reasons, the postal service was excluded from the business sector. Other post offices had banking systems but lost them when they were turned into companies by governments and post was separated from telecoms and banking. However, in these markets it seems that some form of financial services, if not fully-fledged banking, is likely to be reinstated. Finally there are the post offices that have always had financial services systems and have developed them into valuable competitive businesses.
Whether post office banking systems are completely privately held businesses – such as Germany’s Postbank – or remain government-owned, all are using more commercial marketing models to develop and broaden their product portfolios.
But it is a risky business, as Michael J Murphy, president and CEO of post office technology group Escher Group, comments: “Post offices aren’t better than banks. They aren’t set up to be banks and employees are not trained to offer financial products.”
One of the biggest problems for post office banking is that although it can take advantage of a post office’s broad demographic base, physical presence and brand reputation, it is not always geared up for the unique requirements of banking products. “A classic error is not understanding the different nature of some banking services,” says Elmar Toime, an independent adviser in the postal sector.
“Post offices typically specialise in short-cycle transitions. If you want to look like a bank branch and offer more sophisticated lending products, for example, you must invest in bricks and mortar and interior design to ensure queues keep moving and higher levels of privacy can be maintained. However, by taking this route, what started as a marginal cost to introduce a new service could become a substantially larger fixed expense.”
And it does not stop there. Post offices need to identify a gap in the market so they can successfully build on their reputation in order to develop a banking service. With the developed world being pretty well banked already, that is not always as easy as it would seem. But, as Mr Toime points out: “Kiwibank [a wholly owned subsidiary of New Zealand Post] emerged with competitive offerings during a period when mainstream banks in New Zealand were raising transaction fees significantly while they were closing branches.”
Broader portfolio
In addition to the traditional savings plans that people often associate with post offices, many are now offering a more holistic approach to financial services, with products ranging from money transfer and currency conversion, to savings, pensions, mortgages and insurance policies. Some also act as front-end agencies for banks, taking deposits for ones that want to enter the market.
Money order services have been a cornerstone of post office financial offerings since 1878 when international agreements were first signed to use paper-based money transfers. The UPU is now working to move this area of business from paper to electronic. “This is becoming increasingly important because of globalisation and the growing migration of people, particularly workers wanting to send money home,” explains Edouard Dayan, director general of the UPU. “Today, the average money transfer is $200, but many low paid migrant workers cannot always find a bank to process the order. Furthermore, for this low level of transaction, commissions can be as high as 30%. One consequence of this is that because the service is expensive – and not available everywhere – people may use informal channels to transfer money.”
The UPU is applying its internationally developed electronic network for monitoring mail and parcels to money transfers. “130 countries are committed to paper-based money transfer,” says Mr Dayan. “Of these, 33 have now joined the UPU network for electronic transfers. An agreement has been signed with post offices and banks in Europe [known as Eurogiro] and the system will interface with the European network at the beginning of 2006.” The UPU forecasts that 70-90 countries should be able to provide electronic transfers within the next two years.
Money transfer is a big market in countries where there is a large expatriate community. “In South Africa, the government has funded money transfer terminals to enable workers to send remittances back to their families in six southern African countries,” says Mr Murphy. The scheme’s main advantages are that it reduces money laundering and enables expatriates to avoid having to use a middle man – who may rip them off – to send money home.
Credit services
Product portfolios are being expanded to include sought-after services such as credit. Some organisations, like Italy’s Bancoposta, act as agents on behalf of other companies. Germany’s Postbank is in the process of acquiring BHW bank, which specialises in home savings [a savings plan that enables home owners to save for some years and then get a low interest home loan].
Many organisations, such as Kenya’s Postbank, now offer credit cards. Some of the more innovative credit card products include the recently launched “two in one” MasterCard credit card offered by the UK’s Post Office, providing consumers with a credit card along with a fixed rate, loan-like facility, and the German Postbank Visa photo card, that can be personalised with any photograph of the cardholder’s choice.
Post office insurance services are also growing worldwide. For example, Germany’s Postbank began selling such services in 1999, and to date has sold more than 269,000 life insurance and 89,000 accident insurance policies.
In a radical move away from being providers of so-called “safer” financial offerings, some post offices are beginning to offer more creative products. For example, Japan Post began selling investment trusts in November 2005. This is a departure from its traditional approach of offering only no-risk financial products.
Germany’s Postbank has also looked further afield and now has more than 40,000 corporate customers and underpins this business with its core competencies – Payment Solutions and Selective Commercial Finance – supplemented by special financing and platforms in New York and London.
Market position
If the commercial world is all about improving market position, some post office banks are on to a winner. Italy’s Bancoposta has grown out of the financial services offerings of Poste Italiane. “In May 2000, it became a separate division of Poste Italiane when it positioned itself as a major player in the retail bank arena offering cheque accounts and a financial services platform,” says Marco Siracusano, marketing director, Bancoposta.
“Today it is the number one bank in Italy for cheque accounts (with 4.3 million retail cheque account holders) and is also the top issuer of debit cards with five million cards.”
The private sector is having a much bigger say in the activities of many post office banks. In Japan, where the country’s upper house has voted to privatise the post office, fears have been expressed that people living in the countryside could lose access to its services and postal workers could lose their jobs. But prime minister Junichiro Koisumi has reassured those who are worried about the consequences of privatisation by arguing: “Even if the private sector handles the services offered by the post office, the network will still be maintained in regional Japan as well as sparsely populated areas.”
Under the government’s plans, Japan Post will be split into four units that will operate under a holding company from October 2007. It is a major move, with approval of the bill potentially creating a financial powerhouse with trillions of dollars in savings.
“The next step will be to launch new services as soon as possible to increase profitability and strengthen the management of the bank,” says Saio Chikanori, director general of Postal Savings business department with Japan Post.
While politicians and post office leaders in Japan have been answering stakeholders’ concerns about privatisation, Germany’s Postbank has been getting on with the business of building its customer base. Founded in 1990 when Deutsche Post was split into three separate companies (Deutsche Telekom, Deutsche Post and Postbank), and having swallowed the banking activities of the East German post office following reunification, it is completely privately owned, with Deutsche Post being the main shareholder. Its aim is to provide good, simple and cost-effective products to its clients, which currently include 4.5 million cheque accounts and 17.2 million savings accounts as well as insurance and brokerage accounts. In 2004, Postbank saw its customer numbers grow by half a million.
However, building the private brand has not been without its challenges. According to Hartmut Schlegel, Postbank press officer: “The biggest challenge was trying to get a banking licence when it was formed. Between 1990 and 1995 – and without a banking licence, cheque accounts could not have an overdraft, so customers were not allowed to be overdrawn. Since it got its full banking licence in 1995, it has been able to expand its portfolio to include a lending business.”
Social inclusion
In Brazil, where post office banking is firmly positioned as a vehicle for social change and economic development, several attempts have been made since the 1890s to create a post office banking system. However, it was in 1997 that there was real change, when the country’s Ministry of Communications started a complete overhaul of the system including the introduction of postal banking operations. The project allowed banks to be hired so they could deliver banking services outside of their own branch network.
José Osvaldo Carvalho, CFO, Brazilian Postal Company, explains the motivation for this move: “In 1999, there were 201 banks with approximately 16,000 branches, mostly concentrated in major towns, leaving 1728 cities without any branch. Added to this, even in places where a bank branch could be found, a lot of people would not visit it because they didn’t have enough income to be a client, they didn’t feel comfortable with the sophistication of the bank or they didn’t trust the system.” In fact before 2002, many consumers had to travel more than 100km just to use the bank. “This meant that many people spent their money in the same town as where they had withdrawn it,” explains Andre Rodrigues Cano, a department director at Bradesco, in charge of Banco Postal.
A pilot project began in March 2000, in conjunction with the state-owned Banco do Brasil. Based on the findings of this pilot a complete business model was established, which ended in a bid selection intended to establish a partnership with one or more banks. Bradesco, a major private bank in Brazil, won the auction and became the sole partner of the Postal Company in the Banco Postal venture.
In March 2002, the first branch was inaugurated and by August 2004 all post office counters owned by the Postal Company had come on line. Postal banking services are currently operational in 4826 out of the 5506 municipalities in Brazil, and Banco Postal is now estimated to have a 5% share of the country’s banking customers. “The second phase of this project will comprise the franchise network [around 1400 branches] and other third-party branches [around 5150 units],” says Mr Carvalho.
Banco Postal has a fairly broad customer base, although it is targeted at the poorer and unbanked in the cities where there are no alternatives to mainstream banks. Mr Cano says: “One branch in São Paulo has been a particular success. Located on Paulista Ave [the main financing centre in Brazil], this branch is local for a lot of poor people. Although these people were working, they thought they couldn’t afford to have an account in an ordinary bank. Banco Postal has changed this perception as it has no marble and no people with ties trying to sell them something. It also charges a low tariff [around 50% of the tariff for regular bank accounts].”
Like Brazil, a lot of the work in countries such as South Africa and Namibia is targeted at the marginal communities as a way of establishing a more developed economy. South Africa’s Mzansi account was introduced in October 2004. By August 2005, more than 1.5 million accounts had been opened, with the vast majority being used by South Africans who had previously never had a bank account. Furthermore, it has enabled service banking to be available within 15km of all South Africans, and there is at least one ATM within a maximum distance of 10km of anyone’s home.
New technology
Technology is having a massive impact on how post offices deliver their financial services offerings. However, given the significant proportion of citizens (particularly senior citizens and the socially disadvantaged) in many countries who may not have access to such technologies, post offices are offering such channels in conjunction with traditional bricks and mortar locations. At Germany’s Postbank for example, of the 4.5 million private cheque accounts held, more than two million are operated online and over three million are accessed by telephone.
GPRS technology is also radically changing the way citizens in remote areas interact with post office financial services. “In Norway, for example, an online transaction processing terminal can be carried by post operatives to enable a subset of customer transactions to take place,” says Mr Murphy.
And in an environment where keeping costs down is vital, sleek processes can be adopted economically. As Mr Toime explains: “When New Zealand’s Kiwibank was formed, it had no banking system to build on, but it cost less to buy and install a modern, internet-compatible system than many New Zealand banks spent on Y2K.” And in Germany, Postbank’s large customer base enabled it to achieve greater economies of scale by using technology.
“Postbank was the first to provide banking services in an industrialised way in Germany,” says Mr Schlegel. “As a result, it was the first to centralise its back-office functions, enabling branches to keep costs down by only selling products and providing services to customers.” Out of this centralisation process, Postbank developed outsource services and now provides them to Deutsche Bank and Dresdner Bank.
Counteracting exclusion
Commercially driven product mixes may be miles away from the models for social inclusion envisaged by the first proponents of post office banks, but does that matter? The UPU estimates there are still three billion people in the world with no access to financial services. “Against this backdrop, postal operators are active in 660,000 postal establishments in the world. They are in a position to bring financial services closer to the people, and in some of the most isolated areas of the world,” says Mr Dayan.
And from the financial perspective, there’s a solid business case for deploying financial services as a revenue-generating source for postal services. However, as Mr Dayan points out: “The postal service must continue to provide, and finance, a universal postal service, which is an obligation under UPU treaties. Postal financial services are an important business area that could contribute to sustaining the viability of the postal network.”