Porter’s 5 Forces Analysis of the Retail Banking Industry in Australia Retail banking can be defined as an industry where financial institutions offer mass market banking in which individual customers use local branches of larger commercial banks. Services offered include savings and checking accounts, mortgages, personal loans, debit/credit cards. Retail banking aims to be the one-stop shop for as many financial services as possible on behalf of retail clients. Some retail banks have even made a push into investment services such as wealth management, brokerage accounts, private banking and retirement planning.
While some of these ancillary services are outsourced to third parties, they often intertwine with core retail banking accounts like checking and savings to allow for easier transfers and maintenance. When applying the Porter Five Forces in analysing industry competitiveness and how it relates to the retail banking industry, the following outcomes have been found.
Threat of new entrants Current Rating – (Low) – Future Rating – (Med) It would be very difficult without the access to large capital for the average person/company/organisation to start up a bank. However with the popularity of Credit Unions, Building societies and the evolution of the internet, there are many traditional banking services such as providing mortgages, car loans, paying bills, on which online entrepreneurs can enter this market segment (www.billbuddy.com.au OR Aus POST). Banks would be fearful of losing part of their traditional revenue raising, because it is a good source of fee-based revenue. Another threat to traditional banking is companies offering other financial services. What would it take for an insurance company to start offering mortgage and loan services? Not much. Also, when applying the threat of entry formula to a regional bank, there is a huge possibility that one of the big 4 entering the market will annihilate it.
Competitive Rivalry Current rating – (Low) – Future Rating – (Low) When analysing the competitive rivalry of the big 4 banks, (ANZ, Westpac, Commonwealth and NAB), we quickly realise that the Aus retail banking industry is dominated by these banks and it is not very competitive. The products they offer are very similar, interest rates are very close and all of them have ATM’s everywhere. The financial services industry has been around for hundreds of years and just about everyone who needs banking services already has them. Because of this, banks must attempt to lure clients away from competitor banks. They do this by offering lower financing, preferred rates, investment services and access to cash almost 24/7.
The banking sector is in a race to see who can offer both the best and fastest services. In the long run, we’re likely to see more consolidation in the banking industry. Larger banks would prefer to take over or buy a large stake in other financial service providers (Commonwealth & Aussie), (Commonwealth & Bank West) and (Westpac & BOM). The Main threat to the big 4 would be small & foreign banks trying to gain market share. However, the big 4 have 83% of the mortgage market share compared to 11.5% of the small banks and 5.3% of the foreign owned banks*. So there is a lot of ground to make up. *Source – Aus Banking Industry Report, Page 14 (May 2011).
Threat of Substitutes Current rating – (Med) – Future Rating – (High) There are some substitutes in the banking industry. Banks offer a suite of services over and above taking deposits and lending money, but whether it is insurance, mutual funds or fixed income securities, chances are there is a non-retail banking financial services company that can offer similar services. On the lending side of the business, banks are seeing competition rise from unconventional companies. An example of this would be car manufacturers financing customers by offering 0% financing, why would anyone want to get a car loan from the bank and pay up to 10% interest?
Suppliers – Relative Bargaining Power Current rating – (Low) – Future Rating – (Low) The suppliers of capital might not pose a big threat especially when the banks viability was/is guaranteed by the federal government during the height of the GFC. On the labour side, the threat of union interruptions is very low to non-existent. The banks have been quite clever in moving a lot of the front line staff offshore though call centres to ensure that the labour supply is cheap and sustained. This is further supported by the huge uptake of online banking by customers.
Buyer – Relative Bargaining Power Current rating – (Low) – Future Rating – (Low) The individual doesn’t pose much of a threat to the banking industry, but one major factor affecting the power of buyers is relatively high switching costs. If a person has a mortgage, car loan, credit card, checking account and mutual funds with one particular bank, it can be extremely tough for that person to switch to another bank. In an attempt to lure in customers, banks try to lower the price of switching, but many people would still rather stick with their current bank. On the other hand, large corporate clients have banks wrapped around their little fingers. Financial institutions by offering better exchange rates, more services, and exposure to foreign capital markets – work extremely hard to get high margin corporate clients.
Industry Attractiveness One can conclude based on the outcomes of this analysis, that the retail banking industry would be a very difficult and an unattractive market to be considered by a potential competitor. More particularly for the following reasons; * The large market share of the big 4 banks (who pretty much have the market sawn up), * New loan application numbers have retracted significantly and have not rebounded since the GFC, * the need to have access to large amounts of capital, * low margins by lower interest rates, * high borrowing cost, * Non-traditional lenders such as car manufactures offering extremely low finance rates, * With all these factors in mind, the barriers to entry are quite high.