I have enormous respect for those proposing the establishment of a community bank in Kingscote. But I hope it will not go ahead. If it does, there is no realistically foreseeable outcome which will be beneficial for Kangaroo Island or its residents.

With a population of just over 4,000, we are fortunate to have two established banks with a long- standing commitment to the community. Both existing banks support the community through employment and sponsorships. Some smaller SA towns do have more banks than us, but without exception these are towns which provide services for a wider area of smaller population centres. That is not true here. People are not going to come from Delamere and Yankalilla to do their banking in Kingscote.

Unless large numbers of island residents who currently bank on the mainland suddenly decide to bank here if a branch of the Bendigo Bank opens, most of the new bank’s business will come from the existing two banks, both of which are only marginally profitable.

The argument for a community bank is that profits are shared with the local community. But profits have to be made before they can be shared.

Bendigo Community Banks are franchises. A fee of $16 – $20 thousand is paid to the Bendigo Bank every year, regardless of whether the local bank makes a profit. Then the bank takes fifty per cent of profits, if there are any. The rest is distributed between local shareholders and the community.

Franchise consultant Rod Young says a successful franchise is one in which 90% of new businesses have repaid their start-up costs and are making a profit within five years. But sixty-three out of one hundred and ninety three Bendigo Community banks – one third – made a loss in 2010. By normal business standards, this is not a successful franchise model. Young says that Bendigo is expanding its network at the expense of local investors.

Retired auditor John Williams agrees. As well as the sixty-six branches which made a loss, Williams says there are another forty which are borderline – not making a loss, but not returning anything to investors or community. Twenty community banks have lost all their investor capital and are being propped up by commercial rate loans from Bendigo.

To give just a few examples from the 2010 financial year, the Edenhope branch, which opened in 2003, had accumulated losses of $193,000 and a negative cash flow of $66,000 per annum. Augusta in Western Australia opened in 2005 and had accumulated losses of $245,000 and a negative cash flow of $57,000. Ettagong in NSW opened in 2005 and had lost nearly $900,000 – $200,000 more than its total investor capital. The Robe branch opened in 2003. In 2010 it had accumulated losses of $330,000, and a negative cash flow of $58,000 per year.

Andrew McGauchie, a former board member of the Alice Springs branch, said the bank had lost almost the entire $840,000 of start-up funds invested by locals. “I used to think this was a great idea,” he said “but not now.” He has transferred his accounts back to his former bank and says he doubts he will ever get back the money he was persuaded to invest.

There are success stories. Cummins is one. But to suggest the results from Cummins are typical or could be expected here is misleading. The successes are mostly wealthy rural communities which have no other banking facilities. Kangaroo Island is not a wealthy community and already has two banks.

If the establishment of a Community/Bendigo Bank goes ahead, there are three possible outcomes.

First, all three banks remain open. All three make a loss. Over time the locally invested community bank capital is lost. The bank is never able to repay its start-up costs. No money is returned to the community.

Second, after a few years, one of the other banks closes. A few years after that, the community bank edges its way to marginal profitability. But it is many more years before it is able to repay its start-up and capital costs, if ever. The franchise fee still has to be paid to the Bendigo Bank. Returns to the community are minimal or non-existent.

Third, the community bank attracts so much business from the other banks that both ANZ and Bank SA branches on the island close. This is the only scenario in which it is likely that the new bank will be consistently profitable. A few years after the other banks close it will start to make some returns to the community. But this scenario also means considerable inconvenience for those who bank with the ANZ or Bank SA, loss of employment for those who work there, and no choice in banking for any island resident or business.

None of these outcomes is positive for Kangaroo Island.

Peter Wales, Kangaroo Island

A shorter version of this letter was published in The Islander