The Shoeshine Column: All coming apart nicely at WestpacTrust

Friday 3rd November 2000

Shoeshine wonders whether WestpacTrust chief executive Tom Gallagher and deputy prime minister Jim Anderton managed to have a chinwag last week when they met in Buddle Findlay's Auckland offices.

The two are on opposite sides of the supply-demand relationship. Anderton's proposed "People's Bank" will be needing some customers and many of Gallagher's customers, according to the University of Auckland's latest banking satisfaction survey, are looking for a new bank.

In any other industry the discovery you're only slightly more popular among your customers than halitosis would have the panic bells ringing all over the building.

But this is the wonderful world of banking where CEOs shrug off such news, close a few branches and announce another record profit.

So Gallagher probably isn't sweating it. In August, after a similar caning in Consumer magazine, he explained customers simply didn't understand why the bank had to change.

Retail bankers' apparent indifference to such things is accounted for by the demographics of the industry. The rule popularly applied is the 80-20 rule - that is, 80% of your profit comes from 20% of your customers, the best-paid and most asset-rich group.

KPMG's banking industry group reckons that's a massive understatement. It says a bank's best customers account for more like 140% to 170% of profit. The bottom 20% - the high transaction volume, low balance brigade - generates 80% of losses, while the middle 60% is on average at break-even point.

So were the People's Bank to come along and take out WestpacTrust's worst customers Gallagher would think forever kindly of Anderton. Even if a big chunk of the middle ranks defected the bank's profitability probably wouldn't suffer much.

The message is clear: look after your best clients and don't worry too much about the riff-raff.

WestpacTrust's annual profit is due out today and it's bound to be a whopper. According to Massey University research, the June quarter was the most profitable for banks since new disclosure rules came in four years ago.

Their aggregate return on assets was 1.32%, up from 1.2% in the previous quarter and 1.15% a year earlier. That is, they made $1.32 for every $100 of assets held.

ANZ, the country's second least popular bank, last month posted a 21% higher $305 million gain. National Bank's profit was ahead 11% at the half-year and the picture is likely to have improved since then.

This rosy picture is in no way inconsistent with a high level of bleating from grumpy pensioners and poverty-struck students. What should strike fear into Gallagher's heart is the customer breakdown in Auckland's University's survey.

This shows dissatisfaction is higher among Westpac's highly paid customers than it is among more modest earners. Some 25% of customers with a household income of over $100,000 said they were thinking about switching banks, compared with 13% on $40,000 or less.

To paraphrase Lady Bracknell, to lose a Joe Blow client may be regarded as a misfortune; to lose a high net worth one looks like carelessness.

And there's no shortage of competitors waiting to pick up those wealthy clients.

First, there's those banks - ASB and National - whose customers actually seem to like them.

More ominously there's internet banking. This appeals most to the very people - the educated, the well-heeled, and businesses - that banks consider their best clients.

Here in Godzone the internet has so far been treated by High Street banks as just another cheap distribution channel. Running costs are low but the savings aren't really passed on to customers - fees, charges and lending rates are lower than offline equivalents but only by a fig leaf's breadth.

And of course even cyberclients need to be backed by a branch network and ATMs so they can get cash and deposit those pesky cheques.

Even so, Shoeshine's online mates tell him internet banking is darned convenient. And WestpacTrust, surprise, was last off the blocks. It launched its service in April this year. ASB launched BankDirect in October 1997.

Third, there's a growing array of non-banks piling into the mortgage market.

Home-grown operators like Cairns Lockie source a bottomless well of funding from the securitised loans market and lend to homebuyers using little more than an office, a fast internet connection and a fax machine.

Wizard, which claims it is capturing 5% of the $A5.5 billion monthly growth in the Australian home mortgage market, set up here a few months ago. With a bricks-and-mortar as well as an internet-based approach, it specifically looks for areas where the mainstream banks have closed branches.

It has already opened three in Auckland and others are planned for Wellington and Christchurch.

And then there's the credit unions. A recent law change allowing them to do larger transactions could put them into competition with banks, although in Australia they've met the same problems with unprofitable small customers that banks have here.

The trick, for all banks, is to get their grumpy low-margin customers to use the lower-cost delivery platforms for banking services - ATMs, eftpos, telephone banking and internet banking.

Jacking up fees for manual transactions in the branches is a blunt but effective way of doing that.

It's also very unpopular, for all banks, not just WestpacTrust. Saying customers don't understand why change is necessary doesn't explain the bank's appalling satisfaction rating. Something else is wrong and WestpacTrust needs to find out what that is - fast.

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