Cicero Policy Briefer

Issue 14, July 2007

Post Monopoly: Financial services growth in unexpected places

By Jacob Coy

A couple of weeks ago, I found myself enjoying a late dinner with a European banking equities analyst from a major investment bank at Palais du Jardin. This presented me with a fairly complicated dilemma—I was keen to talk about the industry and market developments as an interested observer, and from the EU and single market perspective. But I was also at a disadvantage in the shadow of her towering and frankly completely superior knowledge of the market landscape.

At one point in the conversation she asked, “Where do you think that we might see consolidation, and where do you think is most fertile for organic growth?” I wagered an answer about Eastern Europe and Turkey which seemed to curry favour...or at least demonstrate a bare minimum of broader perspective. We agreed that the market is both fragmented and immature in comparison to Western Europe (to varying degrees depending upon the market).

Since that time, I have been thinking about this, particularly with respect to retail, and it would seem that there is a tremendous opportunity for both existing European firms and potential new entrants, such as American, Indian, or Asian banks. That opportunity lies in Member States' incumbent postal services. To understand the potential, we need only to look at Japan. Japan Post, scheduled for privatisation soon, holds 25 per cent of the nation's household assets—$2.1 trillion in savings accounts, and an additional $1.2 trillion in its kampo life insurance services contracts. While some postal services (such as the UK, France and Hungary) have offerings, most are relatively immature in comparison to those of banks. However, I believe that several conflating factors make this an excellent time to review the value of these organisations for financial services firms.

Firstly, postal services are being squeezed by a variety of factors related to modernity, including reduced and changed demand. The much-heralded demise of post that some predicted with the advent of the fax machine, and more recently the internet, has not come to pass. While there can be little doubt that the internet has dramatically reduced the amount of personal communications must be sent through the postal service, it has also created much more demand for parcels and small packages from e-commerce. However, there are lingering concerns about the long-term efficacy of the postal operators’ business plans.

This is particularly the case because postal services which formerly or currently operate as monopolies will now have to face competition as a consequence of the implementation of the 1997 Postal Services Directive—a second consideration. Thus far, most countries are dragging their feet in transposing and enforcing this, but by 2009, liberalisation should have occurred in all Member States. (The UK is one of the few countries where liberalisation has been realised.) Thus, not only will we have a choice of whether to use new technologies to communicate, but also which service provider handles physical goods as well. This means that there are serious challenges on the incumbent providers of the national posts.

Finally, and most powerfully, posts have some of the key elements to successful retail financial services. They have existing (and usually long-standing) relationships with customers, which is paramount. Not long ago I saw a talk by Terri Dial, a real visionary in both the US and UK markets, in which she reminded the audience that a fundamental characteristic of retail financial services is repetitious, small transactions over many years as part of a larger relationship. Very similar to, yes, the post.

Operationally, there are immense synergies to be realised beyond the notional opportunities of relationship. Postal services, by and large, have a very significant footprint of 'bricks and mortar' storefronts and an almost universal reach. This means pretty easy access to nearly the entire market of every demographic—something that speaks to Government agendas for broader financial inclusion and practical, commercial considerations of developing the market. On top of that, financial services accounted for 14 per cent of the global post volumes in 2003 (most recent figures available from Universal Postal Union). Opportunities to leverage existing infrastructure and cross-subsidy of functionality must be very luring traits for a host of firms, especially retail banks.

The temptation for postal services to either develop their own organic services or collaborate on a joint venture (e.g., Royal Mail's link up with Bank of Ireland) will prove immense. There is significant potential for immediate cash and long-term growth from complementing one universally needed consumable (post) with another that ranks almost as highly (mainstream financial services). Likewise, the potential is scalable, flexible and permits consolidation across Member State borders in the EU as these entities develop and mature.

What does this mean for the future? Could you get your Post Office Financial Services mortgage on your French house? Or will you see the financial services division of Magyar Posta (Hungary), Pasts (Latvia), and Eesti (Estonia) all owned by the same Indian bank? It seems possible and likely, and the potential doesn't even stop at retail. In 2003 France's La Poste established XAnge, a venture capital firm with the backing of several major financial services companies that invests in postal-related activities. Others could follow.

However, most of the action will be limited to the retail sector. In May, Post Office Financial Services released a statement claiming to be the fastest growing financial services provider in the UK, having attracted its one millionth customer. Compare that with Lloyds TSB's 13.5 million and we see that there is still a lot of room for growth and incursion into others' market share over time.

I'll keep you posted.

Jacob Coy can be contacted on +44 (0)20 7665 9535 or click here to email.

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