An alliance between credit unions and the post office network could provide the most innovative and far- reaching initiative in Irish retail financial services for more than a generation.
The contraction of the Irish banking network is irreversible and gaining in momentum. The footprint of the bank networks has already shrunk massively and in Britain it is also estimated that five branches will close every week, for as far ahead as it is reasonable to estimate.
There are two forces driving this process. In Ireland the immediate one is brute economics. In the case of Ulster Bank, even after the injection of over £10bn (€12bn) by its British parent RBS, the bank still recorded an operating loss of over £700m last year. Low interest rates hit interest income and a stressed domestic economy provided little scope for optimism on the lending front. Pruning the branch system is an inevitable response to the need for cost reduction.
But there is an even more fundamental force at work; online banking and the proliferation of internet-based platforms for carrying out banking transactions are now mainstream. In Britain, the Lloyds group recorded one billion ‘click-on’ transactions in 2011.
Irish banks have invested heavily in internet platforms. The cost of a transaction has plummeted, while the flexibility and functionality of the new systems is enormous and growing.
We are witnessing the birth of a new banking model, where smartphones can serve multiple transaction and payment functions, though not without some glitches.
The transition will not eliminate the branch. The management and staff and support systems will remain a major competitive resource, but in a more limited manner than five or 10 years ago.
What we are witnessing is the ‘push’ of cost reduction and the ‘pull’ of increased flexibility and functionality, which is ‘crowding out’ the traditional role of the bank branch.
There is another side to all this. The contraction of the branch network represents a major erosion of the commercial infrastructure of smaller towns and of ‘social capital’ in low population density communities.
In these areas the branch was a ‘go-to’ resource, part of the cement holding the community and local economy together. That is now under pressure, and at the worst possible time.
This is not nostalgia; these are not marginal issues. The local bank branch is a very big deal especially in rural areas. A round trip of 30 miles to the next town, or an additional ATM, are no substitutes for a welcoming and well-staffed branch.
Many customers want a personal service, with or without high-tech services.
The banks know this. They just can’t sustain what was once their bread and butter; the interface with their customers. It’s simply the pressure of a business model driven by shareholders and profitability.
There is an alternative. The two potential pillars are the post office network and the credit unions. Each is undergoing its own quiet revolution. But there are enormous synergies to be gained from an alliance (not a merger), including a whole new way of building a distinctively Irish banking model — one that should have been an outcome of the re-imagining of banking, after ‘The Fall’.
Consultants Grant Thornton point out: ‘The post office network plays an important role in the community and offers vital services to many that would be difficult to replace. The decline of the network could have many unintended social and economic consequences, notably in rural areas.”
Bank closures will exacerbate these problems in some parts of the country. But a key difference, compared with banks, is that the post office network is not under the guillotine of shareholder value. There is a specifically ‘social’ purpose. The same is true of credit unions.
Moreover, the Grant Thornton report highlights the scale of the post office network. It is larger than the bank or any of the big retailers. Like the credit unions, it commands trust. It has a highly competitive, if somewhat old-fashioned, range of saving products that actually complement the lending products and credit risk systems of the credit unions.
It also has the capacity to provide profitable new payments services, ranging from motor tax to hospital charges. Its service provision has been greatly enhanced by the acquisition last year by its subsidiary One Direct of the personal motor insurance business of Aviva.
All of this constitutes a strong platform for service provision that is profitable, highly cost effective but that has primarily a social purpose. It has enormous relevance to contemporary Ireland at a time when the domestic and international service capabilities of commercial banks have been cut back and when their commercial mandate has put them under real pressure in terms of their social purpose.
In the aftermath of the AIB branch closures last year, the bank engaged with An Post to distribute its products. It was a sensible move to mitigate the impact of the closures and, probably, to relieve some of the political heat. But it was, essentially, a tactical rather than a strategic arrangement. The bank continues to have a highly circumscribed commercial agenda. The post office needs to be commercial, but it serves a social purpose.
So too do credit unions. The movement has well over 400 branches and the Credit Union Bill 2012 provides a new framework for strengthening regulation, enhancing governance and management, as well as extending the systems and services of the credit unions.
Its product portfolio is deep, extensive and capable of being expanded to embrace new technology platforms. It is investing heavily in training and education and last year UCC developed a whole suite of accredited programmes in collaboration with the ILCU.
An alliance — a sharing of ideas and capabilities and visions — could hardly be more timely.
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