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Banking industry is one of the crucial industries that influences the global economy. It is the industry that encourages the growth in investments by its funding. They are so many factors that drive change in the industry. Drivers of globalisation in banking industry are discussed below.
Drivers of globalisation
The drivers of globalisation are explained according to the yip’s model.
Source: Based on G. Yip, Total Global Strategy II, FT/Prentice Hall, 2003, chapter 2.
Applying this to the banking industry. Most particularly retail banking. The important factors that drive globalisation in the industry are issues regarding legal, customer relations and wishes, technological advancement and the crucial thing is profit.
Legal regulations as a driver
Operating globally may bring in a number of issues regarding legal that is with the laws of the particular country in which a bank is operating. There may be organisational problems within the bank or legal concerns. Global operations need good leadership with which they are able to respond to the government policies. The bank organising globally has to respond individually to the local governments regarding regulations or deregulations. This is essential component in the business because they have to change the interest rates and taxes on the services they provide to the customers. This effects their business with the customers. It doesn’t mean only the taxes and interest rates counts when dealing with regulations and deregulations. Payments directive and financial services action plan in UK is one among them.
Source: FUTURE OF BANKING IN A GLOBALISED WORLD, Chris Skinner, 2007.
Mergers and acquisitions are highly effected by the regulations. Mergers may happen between two national banks or between two international banks. The terms and conditions followed at the time of merging depend on the regulations that are applied in a particular country. For instance consider the case of laws that guide mergers and acquisitions in European Union are related to the economical conditions of the joining partners. They state that the turnover of the individual participant should be more than 250 million Euros and their turnover together should be more than 5 billion Euros. The individual turnover of the bank operating abroad should be more than one third of the turnover of the bank. These regulations are concerned about the financial stability of the banks after the merger. If the banks are willing to merge, their strong financial conditions resist any adverse effects that come under their way. But in the case of small banks, those do not satisfy the conditions of merger, these regulations suffer them a lot. There were cases where small banks merged to form a big bank. But these regulations resist them from doing so. This is the case where legal activities control the banking industry.
Customer requirements as a driver
Planning according to the customers preferences and delivering services up to the customers satisfaction has become the main formula for the success of the banks. It is important in every business to find out an influential customer, that is a customer who brings in more profits to the bank and also who inspires others to join the business with the bank. If that customer is met with all his requirements in banking, he will become the true ambassador for the bank. Of course the needs of the customers in dealing with the bank all over the world are same. They need quality of service and security for their savings. However the requirements of an influential customer vary according to his willingness and trust to invest in a bank. There may be social and cultural factors that influence the customers’ interests and requirements.
Source: Exploring corporate strategy 7th edition, Gerry Johnson, kevan Scholes, Richard Whittington, 2004
Technology as a driver
Internet has become a great boom to the banking industry. It gave the industry the opportunity to serve better to the customers and to develop cross-border communication with the employees and customers as well. It helps in providing privilege customers the advanced banking services, promoting services for new customers, making customer retention by continuously maintaining customer relations etc.
Source: Internet marketing, David Chaffey, 2006
On the other hand, internet banking has raised security concerns about transfer of money online and third-party deposit services. To the customers using internet fraudsters send mails asking for account details and passwords pretending to be like bankers. The customers those respond to the mails will be targeted to get money. These types of actions alerted the banks to develop technology to counter the actions.
Profitability as a driver
Obviously the ultimate aim of any bank is to make as much profit as they can. Generally to gain profits they concentrate on savings of the customers. They plan converting the short term savings of the customers into profits that yield more profits. In retail banking the long term profit yielding products for the banks are fixed deposits, house loans etc.
Source: The business environment 5th ed, Ian Worthington and Chris Britton, 2006
In this present economic downturn of the world, the banks are facing the worst situation in the decade. To face these adverse effects the central banks of almost all the countries started repair work to fuel the economy by decreasing the interest rates there by encouraging the investors to do business with the banks.
Localisation in case of banking industry means designing itself according to the rules and regulations of a particular country. Generally countries demand for localisation irrespective of the foreign bank, as they do not want to be dominated. Retail banking is one of the industries that undergo localisation primarily. However localisation is benefiting the banks in having a wide range of products globally there by analysing the customers’ tastes and concerns. It helps them to gain information regarding customers’ needs to be met locally. In recent days local governments are deregulating the rules to boost globalisation.
Source: Global strategic management, Philippe Lasserre, 2002
Any industry operating globally has so many factors that influence it in the external environment.
Governments’ decision has an influential change in the prospects of the banking industry in a country. Governmental decisions have been a more important factor for the globalisation of the banking industry. Political stand over allowing the foreign countries to do business in their countries decides the extent of entry barriers into the country.
Source: Corporate Strategy 4th ed, Richard Lynch, 2005
Downing of the inflation is the main factor that reflects the fall in the economical condition . The one of the factors for decline in the economy are lower inflation occurring gradually. The one of the reasons for the decline in the retail price index excluding mortgage interest rates from 5.5 % in September to 4.7 % in October clearly states that the drastic situation faced by the banks.
CPI down to 4.5%, RPI down to 4.2%
Annual inflation rates – 12 month % change
The central bank decreases interest rates which in turn reduces the interest rates of all the banks funding mortgages. Bank of England is planning to cut its interest rates drastically to 2 % as when it was in the initial days.
Social trends in the banking, which means the sections of population those who utilise the banking products are essential in planning a strategy for the customers. For instance more than half of the people of Britain are aware of the banking products through dailies, televisions etc. Awareness and individual requirements of the customers are essential to plan a strategy for a bank.
With the increased technology the banks are effectively communicating with customers, media and investors. In this way banks are always observed by the society in all means.
Technology is proven to be the best tool for the globalisation in banking industry.
It plays a vital role in providing financial services to the customers. With use of sophisticated technology, the concerned bank can be able to find out the preferences of the customers. Basing on the preferences of the customer, the services are advertised for him through the mails etc. Also investing in ATM technology took the pain and pressure away from the banks. Now it is easy to access money from pay points etc. The customer is no need to go to bank stand there in queue for hours together to do transactions.
Source: FUTURE OF BANKING IN A GLOBALISED WORLD, Chris Skinner, 2007
Regulations of the banking system is mainly undertaken to control the financial conditions of the banks there by decreasing the domination of the foreign economy on the country. There are different ways in regulating the banks. UK and US banks follow risk based system to regulate the banks.
Source: Banking regulations of UK and US financial markets, Dalvinder Singh, 2007
Opportunities and threats
There are many opportunities of the banking industry. For instance the euro currency offers less cost borrowing or the chance to provide new debts to a large number of investors. According to the international monetary systems governments of different nations undertake rules that will influence firms. The financial position and the opportunities abroad attract the organisations to do business in their countries. The foreign exchange market that are used by many organisations provides the opportunity to gain profits.
Source: International business 4th ed., Alan M.Ruman, Simon Collinson, Richard M.Hodgetts , 2005
Threats to banking industry are mainly related to technology. The technology used by the fraudsters by dominating the banking technology troubles the customers which in turn causes damages to the reputation of a bank. If a bank loses reputation in terms of security, it’s trustworthiness among the customers decreases. This damages the brand value which results in decrease in customer retention.
Hongkong and Shanghai Banking Corporation Limited founded in the year 1865 is one of the top banks in the world. It holds operations in nearly 85 countries all over the world. Its headquarters is located in the London.
It has the shareholders number of nearly 2, 00,000 in 100 countries. They need different services and diversified requirements. Having dealt with all the diversified customers world wide, it is capable of estimating consumer tastes and concerns. Instead it confidently advertises itself as ‘The World’s Local bank’, which reflects it’s adaptability to the local needs and cultures. It whole heartedly responds to the individual customer from which it gains required knowledge to serve the other customer with same needs. The awards and rewards it achieved are the measurements for it’s sincere contribution to the customers. HSBC won awards in all most all categories that are responsible for the bank’s success. The list of awards is given below
HSBC generated revenue of 87,601 million dollars in the financial year that completed in December 2007. It was 25% high than previous year and the operating profit was 22,709 million dollars which was 6.9% high when compared to previous year. Net profit was 19,133 million dollars with an increase of 21.2% on 2006. The most of the profits it gained were from the developing economies.
With the global experience it has, it can deliver a perfect solution for the complex supply chain network of the customer utilising HSBC’s talented resources. Having well versed in utilising sophisticated technology, it follows online dealing with customers rather than going on papers. High level of information exchange can be done with speed and accuracy at the same time cost-effective measures are indulged in their business.
Even though it is a well established brand globally, it realised lately the advantages of performing under one brand name. The action was taken place in the year 1998. Until then it used to perform under various names in various countries. This might had created confusion among it’s customers who thought that their strong local brand was being taken over by some foreign bank. This misunderstanding caused some considerable loss to the bank.
It suffered slight stagnation of revenue in 2006 when compared to the previous year due to increase in bad debts.
Here the financial analysis of HSBC is done by comparing three months and nine months profits with that of the previous year that ended in September 2006 respectively. Finance and other interest income lost by 727 million dollars and 1483 million dollars respectively.
On as a whole it got 271 million dollars loss where it was 1,102 million dollars for the same period of three months that ended in September 2006. On the other hand it recorded 1,461 million dollars loss when compared to that of nine months that ended in Sep 2006.
The main competitors of HSBC are
Royal bank of Scotland
Barclay has 1,700 branches in UK alone and around 2,000 branches in Europe, Africa, Asia and the America. The bank also contributes financial products, corporate finance etc. It is one of the largest investing companies operating under the name Barclays Global Investors. In this year it owned North American investment banking and Lehman brothers for approx. one billion pounds.
It is one of the large financial companies in the world with 3,000 branches in America and Canada and more than 2,000 in several parts of the world. It is the first American bank to own 1 trillion dollars valued assets. Due to the financial downturn it faced in 2007 its CEO Chuck Prince left the job.
Royal bank of Scotland
It operates under the names of Royal bank of Scotland and NatWest. It has nearly 2,300 UK branches offering financial services. In the America it has Citizens Financial which is one of the US’s largest foreign-managed bank. Following the shareholders demand UK government took 60 percent of stakes in the recent days of 2008.
Here in this work the environmental influences on the banking industry are discussed. The main constituents in the banking industry are customer satisfaction, technological advancements, regulations and deregulations and most importantly profits. These four factors act as drivers of change in the banking industry. Out of all without losing the identity the banking industry should be able to adapt changes that occur locally.
To discuss more extensively HSBC is considered as an example and the environmental changes on the bank are discussed. Out of all observations the bank is performing very well.
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