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'It is the value chain through which a company can create and offer value to its customers by efficiently utilizing costs and effectively offering the product or services through a lower cost or a higher differentiation.' (Porter, 1985) Value chain not only seeks to do away with the activities that do not add value, but establishes the importance of other support activities, including infrastructure, technology, and so on, that play a vital role in providing the foundation for competitive advantage. (P Rajnandan, 2007) The value chain also is useful in outsourcing decisions. Understanding the linkages between activities can lead to more optimal make-or-buy decisions that can result in either a cost advantage or a differentiation advantage. (Graeme J. Buckley, 2006) Once the discrete activities are defined, linkages between activities should be identified. A linkage exists if the performance or cost of one activity affects that of another. Competitive advantage may be obtained by optimizing and coordinating linked activities. (Porter, 1985)
The invented competitor's projected strategy, that is, where it competes in the marketplace (marketplace scope), how it competes (competitive posture), and what it tries to achieve (goals), should be distinct from any strategy pursued by any current player. Those executives charged with imagining the invented competitor's strategy should also be encouraged to go beyond the likely strategies of announced or prospective market entrants. (Emerald, 2005) It is necessary to communicate the competitive variables to the target market as that will force the buyers to prefer the products. 'Marketing communications conveys the meaning of the company's total product offering, helping consumers attain their goals and moving the company closer to its own goals.' (Lancaster, 2002)
Marketing effectiveness depends significantly on communications effectiveness. The market is activated through information flows. The way a potential buyer perceives the seller's market offering is heavily influenced by the amount and kind of information he or she has about the product offering, and the reaction to that information. Marketing, therefore, relies heavily upon information flows between the seller and the prospective buyer. (Thomas A. Staudt, Donald Arthur Taylor, 1976)
The firm's value chain links to the value chains of upstream suppliers and downstream buyers. The result is a larger stream of activities known as the value system. The development of a competitive advantage depends not only on the firm-specific value chain, but also on the value system of which the firm is a part. (Kiichiro Fukasaku, 2007) Dramatic changes due to globalization, deregulation, and technology have redefined the nature of business by increasing competition. Significant increases in the speed of competitive response and the number of competitive actions and price cuts have also resulted. Those indicators highlight the intensity of competition. (Gr, Cu, Le, Hu, Ken G, 2005)
Unlike the classical concepts, the marketing concept states that the nature of the marketing orientated organisation, whether product or service based, profit or non profit based, is the identification and genuine satisfaction of customers needs and wants, more effectively and efficiently than the competition. The marketing concept has been defined as 'the key to achieving organisational goals' and the marketing concept rests on 'market focus, customer orientation, co-ordinated marketing and profitability'. (Le, Ru, Lancaster, 2002). 'Marketing Research is a systematic problem analysis, model-building and fact-finding for the purpose of improved decision-making and control in the marketing of goods and services' (Kotler, 1999)
Strategic capabilities that companies can use to support the strategy they have chosen to pursue. A strategic capability offers a company a sustained competitive advantage when substantial time and effort is required for competitors to develop the same capability. (Susman, 1992)
Design Tools And Practices
Information Processing Functions for NPD
Pattern of NPD Outcomes
Likelihood of achieving the competitive Strategy
Fig: The link between design tools and practices and competitive strategy
(Source: Integrating Design and Manufacturing for Competitive Advantage
by Susman, Gerald I. Chapter 2, P 16 )
Game theory more specifically, non-cooperative game theory can be a useful tool for investigating a comprehensive model of competitive advantage in that it demonstrates the linkages between resources, competitive moves and responses, and advantage. (Gr, Cu, Le, Hu, Ken G, 2005)
The ability and speed with which a company can learn from experience is another strategic capability. The ability to learn is dependent, in part, on how the company captures and accesses information. Companies can simplify this process by minimizing the amount and complexity of information they have to process. (Susman, 1992)
Only by gaining a deep and comprehensive understanding of buyer behaviour can marketing's goals be realised. Such an understanding of buyer behaviour works to the mutual advantage of the consumer and marketer, allowing the marketer to become better equipped to satisfy the consumer's needs efficiently and establish a loyal group of customers with positive attitudes towards the company's products. (Lancaster, 2002)
Fig: The Innovation/Adoption model
Competitive advantage is a way of firm's gained advantage over its rivals. Competitive Advantage introduces a whole new way of understanding what a firm does. Competitive Advantage takes strategy from broad vision to an internally consistent configuration of activities. Its powerful framework provides the tools to understand the drivers of cost and a company's relative cost position. Competitive Advantage also provides for the first time the tools to strategically segment an industry and rigorously assess the competitive logic of diversification. (Porter, 1998)
The design stage determines the way in which a firm intends to differentiate its good or service from rivals. In this stage a firm makes choices to gain a competitive advantage over rivals. (William, 2004) For a single product or narrow group of products, a firm's competitive strategy refers to the weighted mix of price, product qualities and features, and service that differentiates its product from those of rivals. (William, 2004)
The Competitive Advantage model of Porter learns that competitive strategy is about taking offensive or defensive action to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment. According to Michael Porter, the basis of above-average performance within an industry is sustainable competitive advantage. There are 2 basics types of CA: Cost Leadership (low cost) and Differentiation.
The Delta Model contains the following elements: Strategic Triangle: used for defining strategic positions that reflect fundamentally new sources of profitability (three strategic options: best product, customer solutions, and system lock-in), Aligning these strategic options with a firm's activities and provides congruency between strategic direction and execution (three fundamental processes are always present and are the repository of key strategic tasks: operational effectiveness, customer targeting, and innovation), and Adaptive processes: core processes of the company must be aligned to the chosen strategy in order to make progress against the strategic agenda and avoid a commodity-like outcome.
2.1 The Trends (Customer Focused)
E-trading and online customer services are becoming the key differentiators in every industry. The banking industry in the midst of a shift assisted and backed by the rapid technological advancement, internet and globalization. The transition is not an incremental one through which organizations, processes, and technologies evolve in linear fashion into more advanced, but still familiar models which is distinct from the earlier industry change. Industry observers anticipate that this transition will be much more radical and constitute a complete metamorphosis of banking's entire business model, realigning everything from its strategic business orientation to its technology architecture to its value proposition to its customers. (Balthasar, 2010)
While some of HNWIs prefer to deal with their advisors face to face and seldom use email, it is easy to see why the "new money" group, often in their mid-thirties and forties, are increasingly turning to online self-service. Many mid-tier Swiss based private banking firms, especially boutiques, are not up to speed in this area. Their e-trading capabilities and the online statement functionalities cannot be compared to more established private banks. It is logical to predict that private banks that provide comprehensive and user friendly online services will continue to stand out, while those that are ill-equipped will find themselves having difficulty to attract and retain clients. (Wall Street Arrow: Market Insights, 2009)
2009 is a significant year forcing many private banking experts to remember. Privet funds failed to generate revenue as clients withdrew assets from private banks. The global financial crisis has fundamentally changed the investment pattern of the High Net Worth Investors and their wealth management business itself.
Over the past decade there has been an increasing convergence between the activities of investment and commercial banks, because of the deregulation of the financial sector. Today, some investment and commercial banking institutions compete directly in money market operations, private placements, project finance, bonds underwriting and financial advisory work. Although, the banking industry does not operate in the same manner all over the world, most bankers think about corporate clients in terms of the following:
Commercial banking - banking that covers services such as cash management (money transfers, payroll services, bank reconcilement), credit services (asset-based financing, lines of credits, commercial loans or commercial real estate loans), deposit services (checking or savings account services) and foreign exchange;
Investment banking - banking that covers an array of services from asset securitization, coverage of mergers, acquisitions and corporate restructuring to securities underwriting, equity private placements and placements of debt securities with institutional investors.
'Many "new money" acquire their wealth through IPO. Brazil and China accounted for two-thirds of global capital raised in Q2 2009' (Ernst & Young, 2009) showing that there is a growing demand for private banking and wealth management service in the region as the economy is rapidly growing.
China's growth will outstrip US which is a good news for private banks who have a strong APAC presence, wealth management professionals should understand that the Chinese market is not easy to penetrate.
First of all, client advisors need to be fluent in Mandarin and have local connections.
Secondly, guanxi (relationships) still plays an extremely important role in the modern Chinese business community, private bankers without access to key relationship brokers as references will find it very difficult to convince Chinese HNWIs to open accounts. Private banks that hire locals will have a definite advantage over expats trying to cover Chinese clients. (Warren Buffet, 2009)
The lending industry is comprised of a wide variety of sectors, such as banking, credit cards, mortgages, leasing and consumer finance. Many of these sectors have interconnections and synergies. In addition, a large number of related services and technologies have a major influence on the lending and credit business. These services include e-commerce, credit risk analysis, call centers and information technologies. Rapid changes have taken place in lending in recent years. For example, large amounts of business and consumer debt are now syndicated or securitized. Meanwhile, non-bank firms, such as GE, have become immense competitors in the lending arena, and international acquisitions are shaping up the globalized banking industry of the near future.
Affordability assessment approaches vary across the industry. Responsible lending decisions require checks to be made concerning income and outgoings (typically using a combination of income multiples and affordability models) when assessing ability to repay now and into the future. Also the type of lending undertaken and the type of borrower (for example, applicants with impaired or low credit ratings) may require more detailed assessments to be carried out.
Other (unregulated) lending Mortgage lending is only part of the affordability picture. Under the auspices of Treating Customers Fairly (TCF), affordability assessments are equally relevant to other borrowing, including personal loans and credit cards, and a number of lenders are looking at how their affordability assessment processes may need to be strengthened for these types of credit.
In an effort to strengthen existing rules, new Banking Code guidance concerning assessing affordability in relation to unsecured loans (overdrafts and other borrowing) was issued by the Banking Code Standards Board in April 2006. Any assessment should now include at least two of the following:
Income and financial commitments
Credit reference agency information and past repayment history
It is also worth noting that the Office of Fair Trading's recent guidance ('the OFT Guidance') reinforces the need for firms to have regard to its earlier guidance on non-status lending and confirms its intention to consider further specific guidance with regard to irresponsible lending and what this may mean in different market sectors and circumstances.
Responding to the concerns
The FSA has indicated that as part of its retail agenda it will continue to focus on quality of advice processes in the mortgage market. In responding to these concerns, firms will wish to consider how the results of the FSA's findings impact each of their lending businesses:
How extensive is the affordability process; does the advice process include an assessment of income and identifiable expenditure; anticipated changes in personal circumstances (income/expenditure composition); impact of interest rate changes and possible future increases in interest rates?
How can the consumer deal with mortgages extending into retirement?
What steps are taken to ensure that underwriting processes (including income multiples and affordability models) reflect the different characteristics and risk profiles of customers in different market sectors (for example, sub-prime; non-conforming)?
Is the recent assessment carried out to identify the affordability (including affordability decisioning models) to meet the regulatory as well as commercial drivers impacting the business?
What steps are taken concerning the assessment of the customer's ability to repay where 'enhanced' income multiples are used (and where the firm may have insufficient, or outdated, data to measure the potential impact/risks of default)?
What MI does the consumer have to facilitate the identification of affordability issues on a timely basis (for example, the performance of loans where 'enhanced' multiples have been applied; at the end of any discount period; the level of arrears and repossessions; lending introduced by intermediaries)?
Even for long-established product offerings, it is clear that nothing stays still. Aside from regulation by the FSA, the market still needs to respond to the challenges of competition investigation into the PPI market.
In the years leading up to the crisis, a combination of factors, including low interest rates, lax lending standards, a proliferation of exotic mortgage products, and the growth of a global market for securitized loans fueled a rapid increase in household borrowing. (Shedlock, 2010)
'The recent financial crisis contributed to the longest and most severe economic contraction since the Great Depression. The rapid expansion in the use of borrowed money, or leverage, by households in recent years, is one factor that may help account for the virulence of the downturn.' (Shedlock, 2010)
'Household leverage in many industrial countries increased dramatically in the years prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rise in house prices over the same period. Moreover, these same countries tended to experience the most severe declines in consumption once house prices started falling. The common patterns observed across countries suggest that, the unwinding of excess household leverage via increased saving or increased default rates could be a significant drag on consumption and bank lending going forward, possibly muting the vigor of the economic recovery.' (Shedlock, 2010)
Fig: House Hold Leverage Ration
2.2 Changing Nature of Consumer Behaviour (Higher Expectation)
'Customers take control. Customers will be smart, informed and savvy users of financial services. They will only be interested in service providers that can meet their very specific individual needs.' (CMA Management, 2006)
The needs, wants, and preconceived ideas of a customer about a product or service. Customer expectation is getting higher with time influenced by their perceived values of the product or service offered by the industry competitors. Furthermore previous experience, advertising, hearsay, awareness of competitors, and brand image are adding extra features expected by the customers. The level of customer service is also a factor, and a customer might expect to encounter efficiency, helpfulness, reliability, confidence in the staff, and a personal interest in his or her patronage. (Minu Pauline, [nd])
Global banking leader for the Institute for Business Value, each bank must decide on a strategy that fits its customers' needs. Banks will need special strategies to cater to a far more discerning--and controlling--customer. Innovative approaches to business design, customer service, workforce management and IT will be critical to banks' future success. (Sunny Banerjea, 2009)
Banking customers will demand more advocacy, personal security and control in their banking relationships Banks will source products and services from many specialized and best-in-class service providers, including independents and other banks providing white-label products and services. Innovation in products, processes, relationships and business models will be the primary path to sustainable growth.
Furthermore, the modern banking industry has brought greater business diversification. Some banks in the industrialized world are entering into investments, underwriting of securities, portfolio management and the insurance businesses. Taken together, these changes have made banks an even more important entity in the global business community.
The competitive threat, two forces that have altered the market dynamics: the economic downturn and the market change to a customer-centric approach. The euphoric expectation of a never ending pipeline of new customers with unlimited dollars has given way to harsh realities brought on by tightening of budgets and reduction in consumer spending. Customers are now demanding a portfolio of products from a single source that will meet all their needs - from traditional insurance to brokerage, securities management and banking. (BNET, 2005)
As the society progresses and becomes more diversified, so is the wealth management market. Customers today are more fragmented than ever before, and banks which are quick to respond benefit from the changing demographic. Islamic private banking, for example, is gaining momentum. HSBC Amanah is promoting Shariah compliant portfolios. In June 09, Morgan Stanley Wealth Management hosted a wealth planning seminar for same sex couples in Beverly Hills. It is likely that other private banks will become more aggressive in targeting demographic segments that have previously been ignored.
2.3 Globalization (Intense Competition)
'By 2015, we will live in an intensely customer-centric market that is dominated by global mega banks and densely populated by specialist financial services providers. Fierce competition, global regulation and technology will reshape bank and non-bank structures.' (Rusty Wiley, 2009)
Specialized niche competitors. Market consolidation will continue, making the mega banks even bigger. But they will face swarms of nimble competitors including community banks, industry specialists and non-bank banks that specialize in providing specific services. Partner-competitor relationships will arise. (CMA Management, 2006) The need for productivity and efficiency will create new labour and work practices. But there will also be intense competition to attract and retain talent.
More than a quarter of HNWI clients withdrew assets from their firms due to a loss of trust and confidence (Capgemini 2009). 'The need to comply with globally enforced standards of transparency and accountability will force the adoption by banks of integrated, enterprise-wide systems and processes.' (CMA Management, 2006)
At the early of 21st century, the biggest banks in the industrial world have become complex financial organizations that offer a wide variety of services to international markets and control billions of dollars in cash and assets. Supported by the latest technology, banks are working to identify new business niches, to develop customized services, to implement innovative strategies and to capture new market opportunities. With further globalization, consolidation, deregulation and diversification of the financial industry, the banking sector will become even more complex. (Wall Street Arrow: Market Insights, 2009)
Banking is moving incrementally but unmistakably away from a model based on products, transactions, touch points, and internal departments toward one based on customers, processes, integrated experiences, and the enterprise-wide value of information. The new strategic center is not an institution's asset size, market share, revenue growth, or operating efficiency, but the "customer experience" the institution provides to consumers. Whether a seismic departure in focus or simply a more pronounced emphasis on an existing strategy, many banks have decided this is their destination.
Many countries are now more alert after so many scams including The Bernard Madoff $65 billion Ponzi scheme exposed in 2009. To minimise and control the false trading activities and tax evasions, governments worldwide demand more oversight of banking operations influencing not only the investment banking business but also the private banking side. The account opening process, KYC and offshore banking activities are under tighter scrutiny than ever before. As a direct result, banks have to spend more money on compliance and risk management. With advocates such as Alan Greenspan proposing higher capital ratio for banks, the cost of doing business is bound to increase. With a stagnant market in most countries it is almost impossible to increase fees and banks are likely to have to absorb the rising cost. This means lower margin for private banks and flat compensation for bankers. (Investment Research, 2010)
Banks no longer think in terms of selling products and making transactions, but rather in terms of acquiring, satisfying, and retaining customers. They are realigning their system architectures to recognize, integrate, and monitor business processes that span departmental boundaries and consider customers from a company-wide perspective. The resulting systems provide customers with tools to conduct their own banking business on their own terms, in their own time, and through whatever channel they happen to access. (Balthasar, 2010)
This shift in strategic focus has already had a profound impact on the way that banking's role and value to its customers have evolved, leading to the second feature of the industry's transformation, which is that banking is no longer seen as purely a financial transaction, but rather in a broader and more significant way as a financial information business.
This distinction may sound like splitting hairs, but the eventual effect on the banking industry will be nothing short of transformative. To better adapt and accommodate this shift successfully, banks will have to reconfigure and upgrade their entire IT infrastructures.
The excellent international reputation and the $300 billion private banking assets the region currently manages, the Singaporean government is aggressive in making the country more attractive to private banks and HNWIs worldwide. Singapore officials are planning to amend the Income Tax Act, which is likely to help the country to make Organisation for Economic Cooperation and Development's "white list", further establishing itself as Asia's private banking stronghold. (Wall Street Arrow: Market Insights, 2009)
The competitive pressures that have squeezed the banking industry for the past decade show no sign of letting up, principally due to the banking industry's continuing consolidation. (Balthasar, 2009)
Many industry analysts are expecting another round of large bank merger announcements, with the additional element of international banks involved in cross-border mergers. We have seen the beginnings of that trend already in Europe, with the acquisition of Abbey National (U.K.) by Santander (Spain) and the protracted dispute between Dutch bank ABN AMRO and another Spanish bank over two Italian banks. One important ramification of the continued growth of leading banks will be their ability, based on their sheer size and higher efficiencies, to invest in world-class data storage, management, and analytical capabilities, thereby extending their dominance by the development of innovative revenue-generating products and services. The transition to banks as primarily an information source has helped lower the barriers to entry in the financial services industry, opening the banking arena to a host of new, non-bank players. The current alarm among banks and their regulators about Wal-Mart's efforts to obtain an industrial loan company (ILC) license in Utah is the most visible manifestation of that trend.
2.4 Technology (Customised Service)
Deregulation and the emergence of new forms of technology have created highly competitive market conditions which have had a critical impact upon consumer behaviour. Bank providers must, therefore, attempt to better understand their customers in an attempt not only to anticipate but also to influence and determine consumer buying behaviour. The paper accordingly presents and develops a model which attempts to articulate and classify consumer behaviour in the purchasing of financial products and services. The theoretical insights generated by this model are then used to examine qualitative research data gained from focus group discussions on consumers' attitudes to their financial providers and their financial products. Finally, these findings are examined for the potential insights they provide to bank providers attempting to identify appropriate strategies which are conducive to increased customer retention and profitability. (Be, Pa, Howcroft , 2000)
Sharply focused technology. The enabler of all this change will be technology that supports rapid, accurate decision making and greater operational flexibility and efficiency. The successful specialists will be those who can track and analyze specific customer needs and speedily meet them with profitable, reliable products. (CMA Management, 2006)
The global trend of deregulation has opened up many new businesses to the banking industry. Coupling that with technological developments like internet banking and ATMs, the banking industry is obviously trying its hardest to shed its lackluster image. (Investopedia, 2010)
The major force driving banking transformation stems from the increasing commoditization of financial transactions. Banks can no longer distinguish themselves on the basis of product set functionality or operational excellence. Commercially available systems have perfected virtually all the important functions in basic transactions, including payments, deposits, funds transfers, and account reporting. The maturity of technology in these areas has made both functionality and pricing nearly uniform among leading vendors.
The sheer volume and scope of regulatory requirements has imposed on banks an unprecedented need to develop transparent systems and processes, along with more effective and reliable means for collecting, storing, and manipulating information. Going forward, banks will need to develop an approach to their IT infrastructure that places a premium on flexibility, adaptability to rapidly changing market circumstances, and the ability to integrate information from multiple sources currently isolated from each other.
The competitive landscape has also shrunk considerably. In June 2008, there were 46 lenders offering unsecured personal loans, down from 58 in June 2007, however, by June 2009 this number had dropped further to just 37.
The real value proposition that banks offer now is in the information they can provide about financial services and transactions, from a perspective of accessibility, speed, convenience, granularity, analysis, and so forth. In other words, the important question to ask banks now is "how quickly, accurately, deeply, efficiently, transparently, and finitely can they capture, parse, store, identify, access, retrieve, sort, match, analyze, aggregate, present, share, distribute, and protect data?" Therefore, leading banks are basing new technology strategies on transforming and enhancing their command of information. Although they already sit atop vast amounts of data about their customers, banks in many respects are unable to identify and/or retrieve it with any degree of precision. With banking's future growth and profitability dependent on the ability to aggregate information across systems and reorient it by customer instead of product, technology spending decisions will henceforth be guided by how well a proposed solution furthers a bank's command of information. (Balthasar, 2009)
The command of information should be incorporated it into technology development by the vendors allowing them to capture (automatically as much as possible) descriptive and associative information about customers, transactions, and workflow circumstances as distinct data fields; to identify, access, associate, aggregate, sort, and display data from disparate sources; to exchange, transfer, compound, and deconstruct data freely across system boundaries; to normalize, integrate, and analyze that data for a specific purpose and for a specifically designated market segment; to drill down and parse data into ever more discrete units that can be segregated and analyzed; and to manage all of the above in near-real time through centralized database management and automated business processes with rules-based workflow and exception management.
Initiatives and architectures not built on a sophisticated data management core will provide only limited benefit, since sooner or later they will be unable to integrate fully into a bank's overall architecture scheme. Wasteful duplication of spending and resources will continue, thereby denying banks the operational efficiency they need to rebuild margins and provide meaningful value to their customers and shareholders.
Priorities in Banking Technology:
All of the strategic imperatives above will require banks to adopt flexibility, speed, and transparency across operations. This will require a technology orientation fundamentally based on horizontal integration and spanning multiple business lines, rather than vertical integration within individual business lines. The priorities for banking technology in the next several years will be data capture and management across geographies and business lines, mining and analysis of customer information to enable more customized service and profitable relationships, more efficient and scalable business processes, and nearly fool-proof regulatory compliance. Meeting these objectives will significantly reduce a bank's IT cost base through the use of competitive, low-cost technology and allow banks to move forward with architecture upgrade initiatives by replacing application modules rather than risking full-scale system replacements. While banks are still several years away from realizing these wholesale changes, there are a number of areas where technology is already beginning to enable a longer-term transformation. These are the hot technology priorities for banking in the short-to-intermediate future.
The maturity of transactional banking services is forcing transaction fees downward in tandem with narrowing interest margins and driving the need to understand customer profitability and risk more accurately, over and above the more direct objective of raising customer satisfaction and loyalty. Strengthening the overall relationship with the customer is one of the highest priorities for virtually all banks. Developing a single view of the customer with consistent and up-to-the-minute information across all business lines is driving the next generation of customer relations management (CRM) technology. Despite earlier negative experiences by some banks, CRM is nevertheless a four-star strategy and will be a top technology spending priority at many wholesale banks. It comprehends multiple aspects, from the straightforward quality of the service provided to customers when they interact with a bank, to the capability to provide tellers and call center agents with real-time information about customer relationships, to analytical software that can provide cross-sell opportunities by modeling and predicting customer financial needs, to sales force automation technology to improve the tracking and follow-through of customer leads and complex accounting applications to measure customer profitability.
2.5 Economic Turmoil
2009 has been a watershed year for consumer credit in the UK, with both lenders and borrowers reassessing their balance sheets. Historically high levels of bad debt, a growing regulatory burden, continuing funding and capital constraints and the toughest macro-economic environment in a generation are placing unprecedented pressure on UK lenders. As a result, consumers will face a reduction in the availability of credit and an increase in its cost.
Market corrections can easily become crashes as confidence is lost. The threat goes deeper than the possible extent of credit losses on complex asset and derivative products. This latest financial crisis could seriously affect business revenues and costs more widely. However, the US Federal Reserve Bank has cut US rates, stock market values have remained buoyant, and Bank of England auctions to provide liquidity, albeit at a price, have gone unused.
All firms will have to factor in the likely impact of a weakening economy and housing market on loan loss provisions and recoveries. Concerns remain that the liquidity crisis in the debt markets could spill over into the equity market and trigger a steep fall in prices (a fear that was unfounded at the time of writing this article as the FTSE 100 stood at over 6500, only 3% off the 12-month peak). For the moment, firms that hold good levels of cash and employ a spread of short-, medium- and long-term funding methods are largely unscathed by the credit crunch.
In the short term there may be casualties across all sectors among businesses that are reliant on short-term funding from the debt markets. But if rising mortgage rates undermine High Street spending, businesses that depend on consumers' discretionary spending will be impacted. Ongoing evidence from the US points to problems in the housing market, and elsewhere consumers appear to be showing greater willingness to manage to lower personal debt levels.
The ripple effect of the credit crisis on business (which, more accurately, is a shortage of liquidity and difficulties in pricing credit risk) that began to unfold in August 2007 could have the potential to be deeply damaging to the conduct of everyday business, to reputations and to attitudes to risk. And the full extent of the impact is still unfolding.
Yet this was a crisis long predicted, although the speed and severity caught almost everyone out. The roots of it go deep - into the dot-com crash of 2000 - when, around the world, the response was to keep interest rates as low as possible to encourage a return to economic confidence. Money became cheap and plentiful, and as a consequence, investors increasingly found themselves competing for assets, the pricing of risk became increasingly difficult as structures became more complex, and frequently investors underestimated the real risk. With low interest rates, benign inflation and rising asset prices, all was going well. As interest rates have risen over the past few years, the chickens have been coming home to roost.
Financial services companies will struggle with portfolio risk and complexity, the difficulty of fair valuing assets and the need to rapidly rethink strategy in the light of radically changed conditions. Banks and fund managers, in particular, face a rocky time working through the repercussions of investors' failure to fully understand the risks they were taking on.
Far fewer are now prepared to buy securities such as the commercial paper and certificates of deposit issued by banks and building societies to raise short-term money. And more institutions are reluctant to undermine their own strength by lending to others. The most popular home for cash is overnight deposits held by banks with the strongest credit ratings and where the funds can be called at any time. The market has already begun to differentiate much more sharply between issuers, to the benefit of those with the strongest balance sheets.
The UK remains one of the most expensive places for expats to live - and the recession has taken its toll. The UK emerged as an expensive destination in many categories. Compared with life in their home country, high proportions of expats in the UK claim they now spend more on their accommodation (79%), transport (68%), holidays (62%), utilities (61%) and entertainment (58%). In fact, expats in the UK spend more of their income on accommodation than expats living anywhere else in the world (85% of UK-based expats rank their home as their greatest expenditure). The second and third related item that they spend their cash on was found to be food and entertainment. (HSBC Bank International Expat Explorer Survey, 2009)
Expats in the UK were the worst savers/investors globally, with more than a quarter (27% the highest recorded in the survey) saying that they had reduced their savings and investments when compared with life in their home country.
The UK personal lending market has suffered considerably over the past year. Lending has declined across all product lines, and many lenders have left the market entirely. While some signs of recovery are on the horizon, the supply of credit is still restricted, and perhaps more importantly, consumers are reducing borrowing and debt obligations.
Datamonitor expects conditions to remain tough throughout 2009 and 2010 before improving in 2011. Datamonitor's expectation is of an overall contraction of around 12% in the market from £192.9 billion to £170 billion between 2008 and 2009.
HNWI clients are likely to remain extremely sceptical of private bankers and advisors in the midst of financial turmoil. How to rebuild trust remains a top priority for private bankers. Proper disclosure of conflicts of interests can address some concerns. True private bankers are professionals who should act like doctors, who can be relied on to give impartial expert advice. Private bankers who can in still confidence are likely to remain top performers.
Corporate UK is still relatively lowly geared and companies are holding a fair amount of cash. This could be the moment to do deals. There is a backlog of deals to be done, as well as a great deal of money available to invest, with Asian growth and Middle Eastern oil dollars adding to the funds needing to find a home. Alongside the threats to business, there are opportunities, and money is still available for good quality propositions.
In the financial services sector, the short-term funding famine could accelerate the rate of consolidation. Certainly, from a long-term perspective, current market prices for bank stocks look low. And one consequence of the impact on the private equity sector of the credit markets turmoil is that backers of M&A deals are likely to be sitting on their hands. This gives strong trade buyers a chance to make strategic acquisitions without seeing prices driven up by private equity backers. Companies that have accumulated a war chest of funds for just such an eventuality will now be well placed.
Organisations can, and will, continue to make money where they manage risk effectively. Those that do well will be increasingly sophisticated, as discussed below. However, of critical importance is ensuring that there is adequate governance over the steps taken.