Retail banking can be defined as an industry where banks use mass market banking in which individual clients utilize regional branches of larger industrial banks. Services offered consist of savings and checking accounts, home mortgages, personal loans, debit/credit cards. Retail banking aims to be the one-stop buy as numerous monetary services as possible on behalf of retail customers. Some retail banks have actually even made a push into financial investment services such as wealth management, brokerage accounts, personal banking and retirement preparation.
While some of these supplementary services are outsourced to 3rd parties, they typically intertwine with core retail banking accounts like checking and cost savings to permit easier transfers and maintenance. When using the Porter 5 Forces in evaluating industry competitiveness and how it relates to the retail banking industry, the following results have actually been discovered.
It would be really tough without the access to large capital for the average person/company/organisation to launch a bank.
However with the popularity of Cooperative credit union, Structure societies and the development of the web, there are numerous traditional banking services such as supplying home mortgages, auto loan, paying costs, on which online entrepreneurs can enter this market sector (www.billbuddy.com.au OR Aus POST). Banks would be fearful of losing part of their standard profits raising, since it is an excellent source of fee-based earnings. Another threat to conventional banking is business offering other financial services.
What would it take for an insurance provider to start offering mortgage and loan services? Not much. Likewise, when applying the threat of entry formula to a local bank, there is a huge possibility that one of the big 4 entering the market will obliterate it.
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).
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?
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.
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