Strategic Analysis of Banking Industry
Essay Preview: Strategic Analysis of Banking Industry
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Section TwoSLIDE ONEIntroductionAustralian banking is sophisticated and profitable; however, it currently stands at a crossroads. The “big four” banks (including NAB) and many of their smaller mutual banking and building society counterparts continue to enjoy healthy margins, but the status quo is under attack on three fronts. Firstly, there is present threat of substantial regulatory reform within the next 12-18 months. Poor business practices and customer service have eroded the major banks’ social licence to operate, sparking a Royal Commission and a range of Government and regulatory enquiries, including a recent Productivity Commission report. These are likely to culminate in significant regulatory change which will dilute the power of established players by increasing competition and lowering barriers to entry. In the interim, it creates uncertainty that affects the ability of businesses to plan and potentially affects the availability of capital. Secondly, having explored offshore initiatives with mixed success, the big four are now refocusing on their dominant share of the domestic market to seek opportunities for innovation driven efficiencies. Finally, existing businesses are under threat from disruptive, non-traditional competitors entering the sector offering discrete services such as cryptocurrency, alternative payment systems and peer-to-peer lending. These business models are very different to established players who have consolidated their market share by offering a total range of financial goods and services.SLIDE TWO: 5 FORCES SNAPSHOTThis is a snapshot. It’s important to note that this is taking a consolidated view of the sector, and outcomes may be different when we look at different sub sectors. SLIDE THREE2. Barriers to EntryCurrent threat: Low; Future threat: Increasing Barriers to entry in the banking sector are high due to stringent prudential and licensing regulations, high initial investment and the need for a social licence to operate including high levels of customer trust and bank’s hold customers’ money and data. This last factor is a significant barrier for new entrants because of its intrinsic nature. Some customers will pay a small premium for the size and established reputation of a major bank; while others will forgo the breadth of products and services offered by a big bank for a smaller mutual bank that positions itself as operating in the interest of its members.It is very challenging for a new bank to enter the industry offering both full range of services and the trust worthiness of an established major bank. Many new entrants wind up partnering with established constitutions to tap into their reputation and networks, or are ultimately acquired by a bigger player. The banking industry has undergone a consolidation in which major banks seek to serve all of their customers’ financial needs under their roof. This consolidation increases consumer trust as a barrier to entry for new banks looking to compete with major banks, as consumers are more likely to allow one bank to hold all their accounts and service their financial needs.SLIDE FOURAs can be seen on the graph below, banks have enjoyed considerable growth from 2004 to 2016, however, this is mainly due to M&A rather than organic growth.
Relative size of Australian banking groups (by total resident assets)[pic 1]Source: