External environment for banking industry
External environment for banking industry
Standard Chartered is the world’s leading emerging markets bank headquartered in London. Standard Chartered employs 30,000 people in over 500 locations in more than 50 countries in the Asia Pacific Region, South Asia, the Middle East, Africa, the United Kingdom and the Americas. It is one of the world’s most international banks, with a management team comprising 70 nationalities. Standard Chartered has been committed to Hong Kong and China for nearly 150 years. Standard Chartered Bank opened its first branch in China in 1858 and is the oldest foreign bank in the country. The Bank has operated in Hong Kong since 1859 and has been issuing Hong Kong banknotes since 1862. Standard Chartered PLC listed on the Stock Exchange of Hong Kong in 2002.
The bank is listed on both the London Stock Exchange and the Stock Exchange of Hong Kong and is in the top 25 FTSE-100 companies, by market capitalization. It serves both Consumer and Wholesale Banking customers. Consumer Banking provides credit cards, personal loans, mortgages, deposit taking and wealth management services to individuals and small to medium sized enterprises. Wholesale Banking provides corporate and institutional clients with services in trade finance, cash management, lending, custody, foreign exchange, debt capital markets and corporate finance.
Standard Chartered is well-established in growth markets and aims to be the right partner for its customers. The Bank combines deep local knowledge with global capability. The Bank is trusted across its network for its standard of governance and its commitment to making a difference in the communities in which it operates.
The new millennium has brought with it two of the largest acquisitions in the history of the bank with the purchase of Grindlays Bank from the ANZ Group and the acquisition of the Chase Consumer Banking operations in Hong Kong in 2000. These acquisitions demonstrate Standard Chartered firm committed to the emerging markets, where it has a strong and established presence and where it foresees future growth. With the acquisition of ANZ Banking Group, StanChart became the largest foreign bank in terms of branch network and profitability in India. The merged entity has a combined network of 61 branches and 74 ATMs across 15 cities of the country.
Understanding the global, political, technological and socio-cultural segments of its environment is obviously critical to Stanchart’s success. It has acquired companies in order to consolidate its global operations; operates in 50 countries; seeks to display environmental and social responsibility; and deals with communications technology. It strives to take advantage of opportunities in the dynamic environment, the need to deal innovatively with new acquisitions, the problem of reframing the public’s view of banking and ongoing cut throat competition from other commercial banks and non banking entities. The bank therefore has to make clear the communication challenge and make clear the global nature of its operations to the wider community, governments and the population at large.
Research evidence suggests that external environment affects a firm’s growth and profitability over time. Changes in political, regulatory features, the strength of different nations’ economies at different times, and the emergence of new technologies are a few examples of conditions in the external environment that are affecting banks like StanChart and several other firms throughout the world whether in manufacturing or services sector. The companies in attractive environments perform better than the companies that are in less attractive environments. Therefore strategy development is about ‘fit’ i.e. identifying opportunities in the environment and building strategy matching resource capabilities to those opportunities.
The resources and competences of organizations also play an important role as they explain the differences between organizations, potential uniqueness and therefore superior performance. The ‘stretch’ view argues that strategies should be built on the unique competences and resources of an organization by seeking out markets in which competences have special value or by trying to create new markets on the basis of such competences
Another consideration is the stakeholders of company. Organizations have different stakeholders (shareholders, customers, employees, government) who have expectations of the organizations and may exercise considerable influence and power over the strategy to be followed
As said earlier, the external environment plays an important role for banks. Most of the external factors are beyond the control of a bank. The factors such as competition; political, economical, legal, government rules and regulations influence the firm’s choice of direction and action and also affect the internal environment of a bank. The external environment influences a company’s strategic options as well as the decisions made in light of them. The firm’s understanding of the external environment is matched with knowledge about its internal environment. Matching the conditions of the two environments is the foundation the firm needs to form its strategic intent, to develop its strategic mission, and to take strategic actions in the pursuit of strategic competitiveness and above-average returns.
The external environment encapsulates many different influences which makes the tasks of CEOs more difficult. Identifying the different environmental influences though makes sense, is not very much useful as the overall picture of these influences does not emerge. The second difficulty is that of the speed of change. The impact of technological changes on businesses is much faster than ever before. Technology has transformed the way in which the banking business is carried out. In addition the competitive pressures are also driving more banks to diversify their product range in response to market demands.
We can broadly categorize this environment into two types: remote environment and operating environment.
Remote environment: This environment consists of a set of forces that originate beyond a firm’s operating environment. This comprises of political, economic, social, technological and industrial forces which create opportunities, threats and constraints to the firm. For example macroeconomic instability in an economy characterized by chronic inflation, fiscal imbalances and periodic balance-of-payments crises also affect all the banks.
Operating environment: The operating environment involves the factors that provide many of the challenges a bank is facing when attempting to attract or acquire essential resources or when striving to profitably market its goods and services in the immediate competitive position, customer profile, reputation among suppliers and creditors and accessible labor market. The operating environment is also called the competitive or task environment. Hence by considering conditions in the operating environment business can be much more proactively planned. An organization’s external environment is shown in the figure below. The figure depicts the firm’s business area, remote environment and the operating environment cutting into an area of total external environmental impact on the firm. In the banking industry if the Reserve Bank increases the reserve requirements for the commercial banks it would affect all the banking companies in the economy. This is an operational risk.
Over the past two decades, commercial banks across the globe have aggressively repositioned themselves to compete under new economic, technological, and regulatory conditions. These institutions are no longer protected by regulatory entry barriers, and are confronted with a marked transformation in telecommunications and computer technology. Banks can no longer rely on traditional banking models and therefore have invested huge amounts of resources in the search for new competitive strategies. While many of these attempts had fruitless results, the most successful strategic innovations have set a new paradigm in banking and have changed the way banks compete. The manner in which commercial banks currently underwrite their loans, finance their activities, grow their franchises, distribute their services and market their images can hardly be compared to ones that bankers adopted in 1970s.
Coming to the regulatory environment, banks still do not compete in a completely unregulated environment. Regulations continue to shape banking strategies for example, in US, the federally insured deposits are the basis of community bank business strategy. The Community Reinvestment Act (CRA) loans are a mandatory for all banks (in India, priority sector credit is mandatory for all commercial banks, this would be dealt in detail in subsequent pages). Investment decisions of every bank are influenced by capital regulations. The system of multiple regulators can affect the choice of organizational form of banking companies. While most banks are regulated by the RBI (Reserve Bank of India), some are under dual control of government and RBI. In India, all banks are subject to RBI’s regulation but the framework is not uniform in the sense that public sector banks, cooperative banks, and private banks are governed by significant differences and not all of them have access to the payments system.
The Department of Company Affairs (DCA) regulates the deposit taking activities of non-banking non- financial companies and also some activities of Non Banking Financial Companies (NBFCs). SEBI regulates the capital markets and supervises stock exchanges, mutual funds, securities dealers and brokers, merchant bankers, credit rating agencies and venture capital funds. Companies in the insurance sector are regulated by IRDA. Banks are permitted to be involved in insurance activity through joint ventures/equity participation/selling agency type arrangements. Thus, the object of regulation itself is susceptible to some overlap.
Several scandals in banks have led regulators to make increased informational demands on banks. As banking markets grow more concentrated, anti-trust laws may increasingly limit the scale and scope of bank mergers. At a minimum, regulation is simply a fixed cost that must be borne by banks, which does not influence a bank’s behavior. At the other extreme, and perhaps in a more realistic situation, regulation can significantly affect banks’ strategic choices and influence competition in financial markets. Innovations introduced in the markets are often driven by, and in some cases succeed exclusively because of the prevailing regulatory environment.
Similarly, commercial banks’ competitive strategies are shaped by both new technologies, and the limitations of technology. Retail banking had traditionally been built around the paper-based payments, but IT has created new strategic possibilities for it. Electronic delivery of banking services can reduce a bank’s overhead costs to a great extent. However abandoning bank branches can also give rise to disastrous strategic costs. New technologies have a led to a great transformation in the risk management practices of commercial banks, but application of such techniques may also create some unforeseen new risks. After generations of technological stasis in the banking industry, the ongoing rapid pace of technological change has made “strategic innovation” a viable competitive strategy for banks.