It’s fair to say that in banking circles, Kiwibank is regarded as a something of an upstart. Formed just five years ago as a subsidiary of NZ Post, the bank has confounded its early critics by wooing a sizeable number customers away from its Australian-owned competitors. What’s more, Kiwibank is managing to make money despite competing on price.

Kiwibank’s proposition as a ‘value bank’ is based on low fees and advantageous interest rates and yet the bank has managed to turn in some impressive financial results. In September Kiwibank reported a net profit of $15.8 million, more than double the 2005 figure of $7.2 million, while operating revenue climbed by 35% to just over $150 million. We caught up with Kiwibank’s chief executive Sam Knowles to find out how technology has helped to launch and run a high street bank.

Knowles, who was involved in the planning of Kiwibank before he became its founding CEO, has an unlikely background for a banker. After gaining a BSc in Physics and Psychology from Waikato University he launched into a long ‘overseas experience’, “four or five gap years” that took in several countries in Europe and Asia as well as a stint as a teacher in Africa.

After returning to New Zealand Knowles completed a masters degree in Resource Management, which was his ticket for a job in the Treasury department. Knowles says he joined “right at the end of the Muldoon era” and one of his early tasks was to work on tax reforms as part of the first ‘Rogernomics’ budget. “It was an interesting role in a very interesting period,” he says.

Knowles left the Treasury “because the government didn’t pay enough” and joined the Bank of New Zealand where he worked on strategy and marketing. He says that shortly after he joined, the bank “got into trouble” and so he spent the next five or six years “sorting out BNZ issues.”

This included working as part of BNZ’s involvement in the ill-fated Databank consortium, which was intended to deliver a major new platform that would automate the clearing process between banks.

Although Databank turned out to be a “spectacular failure” Knowles says this period did give him a fundamental understanding of banking. It also led to a posting in Melbourne with BNZ’s new owners National Australia Bank. But Knowles soon returned “for family reasons rather than career,” as he wanted his three children to grow up as New Zealanders rather than Australians.

Back in New Zealand he re-entered the public sector and started his first CEO position as head of the government-owned accident insurer @Work. This organisation turned out to be short lived. After just one year the government closed the company when it re-nationalised ACC. However despite a projected loss of $20 million, @Work turned in an $8 million profit for that year.

Hatching a kiwi
Knowles was winding @Work up when he was approached by New Zealand Post to investigate the viability of that organisation moving into financial services.

“We looked at a range of scenarios including working with existing banks as well as starting a bank from the ground up. What was to become Kiwibank was the recommended option.”

Knowles says making that plan a reality was “pretty challenging” but he was able to draw on his experience at BNZ and @Work.

“From a business strategy point of view you look at how much risk you want to take and how long you’ve got to take it to market and that drives your decisions.”

One of the major constraints on the timing of Kiwibank’s launch was the six months notice period that the other banks required in order to work Kiwibank and its prefix ‘38’ into the inter-bank settlement system.

“We wanted to make sure that when the other banks were ready we had a bank that was ready for them to test, and so we worked back from that date.”

One of the challenges in building a ‘green field’ bank was that many of the employees had come from different banks, and they now had to develop and adapt to an entirely new set of infrastructure and processes.

On the other hand Knowles points out that an advantage of building a company from scratch is that there is very little organisational inertia. “If you want to change something you can just go ahead and change it, you don’t have a lot of people protecting a position and saying but this is the way we have always done things.”

Kiwibank also benefited greatly by sharing some of the established infrastructure of NZ Post.

“NZ Post gave us a branch and teller platform with transactional capability,” says Knowles. “That was the reason we could work so quickly into the market, we didn’t have to build the branches - they were already there. We started with 300 branches on day one and we planned to grow more, and this was at a time when the other banks were still closing theirs.

“Clearly we had to put our IT in through NZ Post’s network so you could open a bank account. The hard piece of building a bank is actually developing the processes around managing money, the easy piece is putting the terminals in place so you can access that core system and load customers in.”

Core systems
After going through the usual RFP procedures Kiwibank bought a core system that had originally been built for an Australian credit union by Ultradata. Kiwibank also makes use of NZ Post’s Peoplesoft ERP package for payroll and HR purposes.

Knowles says technology is central to the success of any bank. “In some ways banking is technology. If you look at the way banking has evolved over the last 30 or 40 years its all about technology, so the future of banking is pretty much underpinned by the evolution of technology. That’s largely because banking is all about processes and what technology does is allows you to do processes more effectively. Sometimes it allows you to do processes you already do with less people but generally it allows you to do things that couldn’t do without technology, whether it’s a sales process or service process like banking on the internet.”

One service which Kiwibank pioneered in New Zealand was electronic statements, which Knowles says were available to customers from day one. “Customers can get statements emailed and they can also look up any past statement and access them in PDF form.”

Internet banking has also been very successful for Kiwibank as it has for the banking industry generally.

“Clearly the uptake of internet banking has strongly correlated with the take up of broadband. At the same time you’ve still got the challenges that some of your customers are on dial up so you can’t make your site too whizzy.”

Knowles says internet banking is growing very fast and Kiwibank is using the internet more and more as a channel to allow customers to manage their accounts.

“Increasingly it’s becoming the way customers manage their relationship with us,” he says.

But Knowles warns that it is important not to launch products and services just because the technology allows you to. “What you can and can’t do is dictated by technology but the big challenge that gets introduced is complexity. You can soon find you’ve got so many processes that they become difficult to manage. It’s all about finding the optimum level of complexity that fits your strategy.”

First mover status
When customer growth began to exceed expectations Kiwibank took the plunge and invested in New Zealand’s first all IP call centre, in partnership with Telecom and Cisco.

“We replaced our call centre a year after starting because a traditional call centre would not be able to meet the growth that Kiwibank was experiencing.”

Kiwibank was able to exploit its “first mover” position to negotiate a good deal.

“If you are a technology driven company you’ll find all sorts of people want to partner with you and we were able to get a good deal as a development site. You’re not at bleeding edge but at first mover status as a small or medium sized business you can negotiate good entry prices. If you understand what the suppliers are trying to do you can generally find a win-win situation.”

Knowles says the VoIP system has substantially increased the call centre’s functionality, and the whole of Kiwibank (as well as NZ Post) has since converted to VoIP phones.

“When you ring up Kiwibank you enter your ID number and all your details will pop up with everything on the screen. We were able to introduce that functionality relatively cheaply whereas a few years ago it would have been very expensive and so we were able to make that leapfrog by investing in the new type of technology.”

Kiwibank is taking a similarly pioneering approach with its recentlylaunched mobile phone-based banking service. This was developed in partnership with Synergy International, and Knowles says it provides most of the features of the internet banking site.

“You can check your balance, look up transactions, pay your bills, transfer money between accounts, or pay a third party and you can see all on the screen.”

Once again Kiwibank was able to strike a good bargain, says Knowles.

“It’s a very good example of a development model for New Zealand companies like ourselves. We go to the supplier and say, ‘Don’t charge us too much for this and we’ll give you all the IP [intellectual property] so that you can sell it at the end.’ In this case Synergy developed a new mobile banking package which they are now selling around the world and we’ve got a leadership of one or two years on the rest of the market.

If you want to be an innovator, particularly in New Zealand, it’s all about finding the right firms to work with.”

Industrial strength
Kiwibank does a lot of its own systems development internally rather than buying packaged solutions.

For this reason it maintains a relatively large IT department of just over 100 people but Knowles points out that this includes banking specialists and business development staff as well as project and operations people.

“What we call IT is actually bringing new products to market. We have some industrial strength core applications and then there’s the glue which we build. We needed to build deep enough core competency in IT so that we can be an innovation leader. You can’t actually be an innovation leader by going out and buying the latest application because by that time all your competitors will be using it.”

Kiwibank has been using a packaged CRM solution but it is rolling out a more ambitious system called Intouch, which is being developed internally.

“Effectively this will give us a single view of the customer, and phase one will include notes about the customer relationship. These might be prompts warning us that we are dealing with a ‘credit challenged’ customer but they are more likely to be a prompt showing us that a customer owns a mobile phone but has not registered for mobile banking. In this case the call centre operator will be able to explain the new service to the customer.”

Knowles says it is very important to foster a culture of innovation, and to encourage top individual performers to work as part of the team. This can be challenging in an IT department because “IT people are not always people people,” and it is hard to find people who can bridge the gap between IT and the business or the customers.

“To use the sports analogy it’s a bit like the All Blacks – they have some real stars but they also have team players and it’s the way the stars perform with the other players which ultimately decides the success of the team.”

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By Michael Foreman