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Bank@Post Office – A Global Trend

Thought Paper

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Evolution of post offices

Extending deposit services by post offices

Post offices and postal services have been in existence since antiquity. According to the British Postal Museum, the oldest functioning post office in the world is in Sanquhar, Scotland. This post office has functioned continuously since 1712 AD. For centuries, post offices, also earlier called “Post Houses”, have carried mail and sold postage stamps and related stationery.

Around the world, post offices have been an integral part of one’s life, providing services to the rich and poor alike - till the early 90s, postal services were the most affordable and reliable means of communication.

However postal services are in danger of becoming extinct due to the advent of

Small savings are essential for any country. They form an important source of budgetary resources for the government, which uses these funds for developmental activities. Most governments are cognizant of the potential of the postal network in supporting these objectives, given its unmatched reach and customer trust.

The first instance of a post office accepting deposits can be traced back to 1861, when

personal computing, the internet becoming popular, and finally and perhaps most importantly Gen Y adopting all these modern conveniences (mod-cons).

Over this long journey, post offices have had to evolve to prevent themselves from being obliterated or made redundant. Service offerings initially were only postal services like accepting and delivering letters, book post and the like. Later post offices ventured into accepting and maintaining deposits (term), where interest was paid to depositors on the monies kept with the post office. This and other such products triggered a revolution with post offices aspiring to become full service banks - this global trend is the focus of this thought paper.

Great Britain proposed a postal savings bank to generate funds for a postal telegraph network. After a decade this was also adopted by the United States. Today, many postal departments around the world offer and maintain deposit accounts to encourage savings with long lock-in periods – the monies collected are typically lent to the Government, often for funding developmental activities.

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Full-fledged banking services in post offices – A global trend – reasons

Various models adopted by postal departments across the globe to offer banking services

Post offices in countries like the U.K., U.S. or Japan have been offering banking services to customers for a long time, and many others have followed their example, or are in the process of doing so. The main reasons are as follows:

1. Survival: The world is shrinking rapidly thanks to progress on the communications front. The common man who was once solely dependent on the postal service now has the choice of several communication channels – which are much faster and cheaper – to connect with the external world. This has forced the postal service to tap alternate sources of income in order to survive. Since most post offices were already accepting deposits, it was logical to extend the offerings to savings accounts, insurance, bill payment and so on.

2. Trust: For generations people have trusted the postal service with important documents and money. In addition, most governments rely on the system to market their bonds.

• As a bank’s agent: In some countries like the U.K. and France, post offices do not offer deposit services of their own. Instead, they enter into a strategic alliance with one or more major banks to offer a free of charge financial service, such as cash deposit or withdrawal, balance inquiry, cheque deposit and so on at their outlets. These post offices also sell the banks’ products or other financial instruments like insurance and earn commission on sales. For example, in September 2012, HSBC announced its strategic alliance with the Post Office Limited in the U.K., to offer HSBC customers access to their accounts from any of its 11,500 post

3. Reach and Financial Inclusion: A post office is part of the basic infrastructure that needs to be provided to citizens. Accordingly, even those without access to a bank branch are likely to have a post office within their reach. For example, there are around 150,000+ post offices in India, whereas the leading bank’s branch network extends to a comparatively small 17,500+ Branches (SBI and Associate Banks) and 25,000+ ATMs. Imagine the advantage a Post Bank would have, were it to convert its outlets into bank branches!

4. Bank of the Poor: Most commercial banks offer services at a cost – in the form of a fee or a non-fee stipulation like a minimum balance. These conditions make banking services unaffordable to the poor. In contrast, most countries offer deposits and other services through post offices at low cost, in order to attract small savings.

offices. The Post Office Limited has similar tie ups with other major banks in the country.

• As a separate entity / subsidiary under the Postal Department: Post offices in countries like Japan and Germany have adopted a different model wherein they have formed a separate business under the Postal Department, to offer banking services. For example, Japan Post Holdings has Japan Post, Japan Post Bank and Japan Post Insurance as subsidiaries. Taking the example of Deutsche Post – initially Deutsche Bundespost was divided into three companies, Deutsche Post, Deutsche Telekom, and Deutche Postbank.

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Postbank went on to become a wholly owned subsidiary of Deutsche Post, who subsequently sold controlling stake in the Postbank to Deutsche Bank in 2010.

• Hybrid Model: This model is a hybrid of the two discussed above - the post office offers its own banking services as well as facilitates transactions related to other banking entities. For example Korea Post, operated by the South Korean Government, offers banking and insurance services. Korea Post also handles deposit into and withdrawal from Citibank Korea, Industrial Bank & Korea and Korea

Exchange Bank accounts. Counters to provide banking and insurance services are available in most post offices.

• Co-partnering with a bank: In some countries, postal departments have entered into a strategic alliance with an existing commercial bank to form a new entity offering banking services. For example, in Brazil, the National Postal Service (ECT) formed a partnership with the largest private bank in the country, Bradesco, to provide financial services at post offices. Later it entered into a partnership with Bank of Brazil to continue the same services.

Challenges for postal banksThe Postal Department would have to face some major challenges, irrespective of the model chosen to offer banking services. The five Cs of these challenges are – Culture, Competence, Compliance, Competition and Core Infrastructure.

• Culture: Success in a new industry requires the ability to adapt quickly to changing environment and culture. Hence if Postal Banks wish to make a mark in the highly competitive financial services industry, the organization and its existing staff have to adapt to the cultural change wherein the orientation has to shift from providing a few services to understanding and servicing a customer.

• Competence: Banking is a specialized industry and competence of the bank’s staff in offering customized and quick service plays an important role in customer satisfaction and retention. Training staff on these specialized services and also on other skills like cross selling, would be one of the largest challenges faced by postal banks.

• Compliance: Banking is a highly regulated industry and non-compliance of rules and regulations is not an inexpensive option for banks. In the recent past, one has heard of banks, which have been in existence for

centuries, falter on compliance and be fined for their non-compliance. To simply carry out banking transactions with newly trained staff while complying with stringent rules and regulations defined by various regulatory authorities would in itself be a major challenge for a Postal Bank!

• Competition: Banking industry is highly competitive and cost of the funds is a major differentiator, providing a competitive edge to players in this industry. Large banks in any country would have the advantage of sourcing funds at low costs and lending at rates which new entrants would only dream of. In some countries, postal banks may feel the wrath of the “Big Brothers” who may use their financial muscle to minimize the impact of competition from Postal Banks.

• Core infrastructure: For a new entrant in the banking industry, huge investments to procure core infrastructure like branches, core banking solution, hardware, recruitment and training of the staff will be needed. Though Postal Banks have the advantage of having an extensive branch network, the task of modernizing them to offer banking services and training the staff on the systems they need to operate would require large investments.

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Murthy M L NPrincipal Consultant – Finacle Presales, Infosys

Vani VangalaIndustry Principal Consultant, Finacle, Infosys

References 1. www.guardian.co.uk

2. www.indiapost.gov.in

3. www.sbi.co.in

4. www.wikipedia.org

The Indian scenario: The postal bank

Conclusion

India Post has long sourced deposits from the public under various savings schemes and currently has an outstanding balance of approximately INR 600,000 crore in them. But it needs to do more if it has to turn around its annual loss of INR 7,000 crore.

As part of its strategy for the future, India Post has taken up distribution of various third party products like gold coins or foreign exchange services offered by different commercial banks. The Department has identified a technology

Extending banking services at Post offices is a Win-Win Situation for all. A few advantages could be:

- Very viable financially, as no additional investment would be required to set up basic infrastructure as the postal network would have a point of presence to double as a bank branch!

- Providing easy access to banking services across the width and breadth of the postal network – in countries like India this is an enormous benefit!

- Encouraging a culture of savings which will benefit the economy as a whole.

company to enable online services in all its 150,000 offices and is also seeking a license from the Reserve Bank of India to start full-fledged banking in its branches.

Should the latter proposal materialize, India Post, and its bank will have a clear advantage over many other banks, in not only sourcing low cost deposits but also in promoting financial inclusion. The Department also plans to use Mobile Banking and a Banking Correspondent model to further strengthen its rural outreach.

- Uniquely placed to further goals of financial inclusion in remote or rural locations, where a commercial bank may not find it financially viable to set up a new branch.

However the benefits from having a bank @post office will see light only with the support from its technology partner. It is a humungous task for any technology company to network all the branches of a post office in a country, and enable them to offer online banking services to their customers.

Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with ‘accelerated innovation’ that is key to building tomorrow’s bank.

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