“It is clear the public has embraced the concept of a nationwide bank owned by New Zealanders,” says Sam Knowles, chief executive. “We will be twice as big as we expected after 10 years.”
The Wellington-based bank had a difficult start. Critics came from within the Treasury, both ends of the political spectrum and even the Organisation for Economic Development and Co-operation.
Small but successful
However, although it is small, the bank – created on the insistence of Labour’s junior coalition party – has been a success. It has 315,000 customers, which is a good base in a country of four million, and it is adding 400 to 500 new customers a day. In the half-year just ended, meanwhile, it lifted home-loan lending by 22% and retail deposits by 23%.
“It has given the other lending banks a big wake-up call,” says Jim Anderton, minister for economic development and the politician behind its creation.
Formed after a period of intense branch rationalisation and rising fees in the 1990s that increased the unpopularity of the big five banks, Kiwibank had four key aims: to increase competition, have the most branches, be open longer hours and offer cheaper services. It has achieved all four.
Mr Knowles, a former senior marketing executive at National Australia Bank, says fees are 30%-50% lower than its rivals’ and it pioneered weekend opening and an 8.30am start, forcing the competition to follow suit.
The bank’s 300-odd branches (about 100 more than its nearest rival) came from sharing the national network of its parent organisation, New Zealand Post. “They are helping to keep banking fees low and seem to be adding to the efficiency of the market,” says Adrian Orr, deputy governor of the Reserve Bank of New Zealand.
Although Kiwibank has a strong internet platform, Mr Knowles says its model is more traditional than that of many other new banks in the developed world because it is based on a customer relationship strategy, offering face-to-face service. In terms of marketing, its concept is to be like a “value-based retailer” and its target customers are families – a category of consumer that is value conscious but young and flexible enough to change banks.
“We want their mortgages,” says Mr Knowles. “In New Zealand, there’s not much in the way of building societies. We’re right in that area of the market.”
Sophisticated operation
The simplicity of Kiwibank’s offerings – it offers vanilla retail services and is only just rolling out its business banking platform – masks a sophisticated operation. It runs snappy television commercials and conducts extensive direct marketing, dropping its green and white ‘hot offers’ leaflets through hundreds of thousands of mail boxes. “As a result [of the leaflets], we set our rates six months ahead and therefore need a quite sophisticated treasury operation,” says Mr Knowles.
The bank has benefited from high-calibre staff and the falling cost and greater availability of off-the-shelf technology. “There are really skilled people in the market here in Wellington because the big [foreign-owned] banks have moved a lot of operations to Australia or to Auckland,” says Mr Knowles. “We snapped them up.”
Equally, he says the bank has been able to leapfrog competitors in terms of technology by starting from scratch with the latest systems, including strong credit and risk analysis tools. The cost of automatic teller machines, meanwhile, is already substantially lower than it was five years ago, he says.
Despite its large customer base, however, the bank still has tiny market shares in the key areas. “Kiwibank has attracted a lot of attention as a new entrant and because of its distribution network but it is still very, very small,” says Tony Alexander, chief economist at the Bank of New Zealand.
Tiny market share
Kiwibank accounts for just 0.6% of New Zealand’s banking assets, according to KPMG’s latest survey of the local financial sector, and Mr Knowles estimates it has about 1% of the mortgage market and just over 2% of deposits. It has also taken NZ$123m ($91.3m) in government funding for it to get this far – NZ$83m in start-up costs and a NZ$40m top-up to fund its greater-than-expected growth – and does not expect to start paying dividends for years to come.
One difficulty is that its customers are generally in the third quartile of the population in wealth terms and many do not bring over all their banking business straight away.
But Mr Knowles says it takes years to build scale in banking and points to progress. Term-deposit balances now average nearly NZ$42,000, a NZ$10,000 increase on the previous year, and the average mortgage has risen to nearly NZ$136,000 from NZ$127,500. “Our biggest achievement is in changing underlying trends in the market,” he says, noting the increased numbers of New Zealanders changing banks each year and the lack of recent fee increases in the sector.
