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External Factors Affecting UK Banking Industry
- 1. BUS9SM Strategic Management External Environment
- 2. Intro Founded 1765 in Birmingham One of the Big four banks(Lloyds, RBS, HSBC Barclays) Wide range of financial products offered Operate nationally and internationally Customer base includes businesses and individuals Written by all
- 3. Political Factors on Industry New government policies on tighter controls Large government stake in banks e.g 47% (reduced to 12%) stake in Lloyds. UK parliamentary elections UK banking levy Upcoming competition review could hit hard Written by Alex Jones
- 4. Economic Factors on Industry 2008 Financial Crisis – (started in the USA) very risky mortgage loans, housing bubble Knock on effect of the US ‘housing bubble bursting’ Similar situation in the UK Banks being bailed out by the government Current inflation rate at 0% (www.ons.gov.uk) July 2014- June 2015 (CPI) Rate of interest 0.5% (set by BoE) July 2015 Written by Alexander Gomez Foord
- 5. Social Factors on Industry Migrant and illegal Immigrants will be challenged to join the banks. Low customer trust in the banking sector due to the financial crisis Online banking is a huge factor in why high street banking may be declining. Written by Tim Hughes
- 6. Technological Factors on Industry Banking apps are forcing the high street banks in to decline. Social media plays a big part in advertising the banks and helps target specific audiences. Mobile technologies may result in us scrapping debit and credit cards. Written by Tim Hughes
- 7. Legal Factors on Industry BoE introducing new rulings on the level of mortgage loans customers can take (FPC) Banks having to set aside money for Payment Protection Insurance (PPI) e.g. Lloyds £2.2 billion March 2015 (www.bbc.co.uk, Date accessed: Tuesday 29th September 2015) Financial Services Act 2012 - April 1 2013 FPC established (www.bankofengland.co.uk, Date accessed: Tuesday 29th September 2015) FPC charged with closely monitoring the UK financial system Written by Alexander Gomez Foord
- 8. Porters 5Fs Power of Suppliers Low individual strength If suppliers band together their strength can be very high Power can vary depending on how “savvy” buyers are Power of Buyers Variable but mostly high Strength depends on buyer willingness to “shop around” Consumer switching costs are very low Brand loyalty is low Written by Alex Jones
- 9. Porters 5Fs Threat of entrants Low threat of entrants Very high entry costs due to regulation High exit costs can also dissuade potential entrants Low consumer trust makes entry almost impossible Threat of substitutes High threat of substitutes Rise of the short term lender Retailers offer far more credit options The others in the “Big Four” are fighting over market share Written by Alex Jones
- 10. Rivalry/5F Summary Highly competitive marketplace This state is mainly down to the large power of suppliers and buyers Governmental regulation is also a key factor Written by Alex Jones
- 11. Key Success Factors Adopting changes in technology Over the years banking has improved massively with the help of technology. Mobile and online banking has revolutionised banking. PayM is seen to be the way forward for banks to make it easier for their customers. Hugely competitive sector where majority of banks share the same inventive qualities. Brand image, marketing and reputation Provide a necessary service Compared to others Written by Michael Timmins
- 12. Key Challenges for industry Rebuilding customer trust and confidence after the 2008 financial crisis. Meeting new industry regulations and legislations. Changes to other economies, if negative, it could negatively affect the banking industry and create another recession. With online banking being a massive system worldwide, it gives hackers another opportunity to steal money from banks. Re-paying Payment Protection Insurance to customers. This has now cost the industry over £24 billion. Written by Michael Timmins
- 13. Strategic Implications for Lloyds Regain consumer trust Put assets in place to allow the mitigation of sudden financial shocks Develop better predictive and forecasting tools Maintain high level of security for online services Written by all
- 14. Ref Referenced by all Bankofengland.co.uk, (2015). Financial Policy Committee | Bank of England. [online] Available at: http://www.bankofengland.co.uk/financialstability/pages/fpc/default.aspx [Accessed 28 Sep. 2015]. Bankofengland.co.uk, (2015). News Release - Crisis and crash: lessons for regulation - speech by Michael Cohrs | Bank of England. [online] Available at: http://www.bankofengland.co.uk/publications/Pages/news/2012/036.aspx [Accessed 28 Sep. 2015]. Barclaysmoneyskills.com, (2015). Top reasons you need a bank account | Everyday banking | Barclays Money Skills. [online] Available at: http://www.barclaysmoneyskills.com/Everyday-banking/Top- reasons-you-need-a-bank-account.aspx [Accessed 28 Sep. 2015]. BBC News, (2015). Mobile phone banking transactions double in a year, BBA says - BBC News. [online] Available at: http://www.bbc.co.uk/news/business-26816148 [Accessed 28 Sep. 2015]. BBC News, (2015). Regaining trust in banks 'years away', says Andrew Tyrie - BBC News. [online] Available at: http://www.bbc.co.uk/news/business-29046605 [Accessed 28 Sep. 2015]. BBC News, (2015). UK interest rates kept at record low - BBC News. [online] Available at: http://www.bbc.co.uk/news/business-33003037 [Accessed 28 Sep. 2015]. Boyce, L. (2015). Thousands of Lloyds investors with ECNs win court action against bank. [online] This is Money. Available at: http://www.thisismoney.co.uk/money/news/article-3109400/Victory-thousands- investors-high-Lloyds-bonds-bought-height-financial-crisis.html [Accessed 28 Sep. 2015]. Chan, S. (2014). Bank of England calls for legal power to cap loan-to-value ratio on mortgages. [online] Telegraph.co.uk. Available at: http://www.telegraph.co.uk/finance/bank-of-england/11135234/Bank-of- England-calls-for-legal-power-to-cap-loan-to-value-ratio-on-mortgages.html [Accessed 28 Sep. 2015]. Collinson, P. (2014). Mobile payments system Paym goes into operation. [online] the Guardian. Available at: http://www.theguardian.com/money/2014/apr/29/mobile-payments-system-paym-goes-into- operation [Accessed 28 Sep. 2015].
- 15. Ref Collinson, P. (2014). Mobile payments system Paym goes into operation. [online] the Guardian. Available at: http://www.theguardian.com/money/2014/apr/29/mobile-payments-system-paym-goes-into-operation [Accessed 28 Sep. 2015]. Collinson, P. (2014). Mobile payments system Paym goes into operation. [online] the Guardian. Available at: http://www.theguardian.com/money/2014/apr/29/mobile-payments-system-paym-goes-into-operation [Accessed 28 Sep. 2015]. Dakers, M. (2015). Mobile banking has eclipsed branches and even the rest of the internet. [online] Telegraph.co.uk. Available at: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11672021/Mobile-banking-has-eclipsed-branches-and-even-the-rest-of- the-internet.html [Accessed 28 Sep. 2015]. euronews, (2015). Lloyds back in profit, ready for sale of government-owned shares. [online] Available at: http://www.euronews.com/2014/02/13/lloyds-back-in-profit-ready-to-sale-of-government-owned-shares/ [Accessed 28 Sep. 2015]. Flinders, K. (2015). Lloyds Bank accepts ID documents uploaded on social media. [online] ComputerWeekly. Available at: http://www.computerweekly.com/news/2240240187/Lloyds-Bank-accepts-ID-documents-uploaded-on-social-media [Accessed 28 Sep. 2015]. Harris, E. (2015). Brave New World? Banking Regulation Since the Financial Crisis - The Student Journal of Law. [online] Sjol.co.uk. Available at: http://www.sjol.co.uk/issue-3/banking-regulation [Accessed 28 Sep. 2015]. Kelly, S. (2015). Hackers outwit online banking identity security systems - BBC News. [online] BBC News. Available at: http://www.bbc.co.uk/news/technology-16812064 [Accessed 28 Sep. 2015]. Keough, B. (2015). 9 Social Media Marketing Strategies for Financial Marketers. [online] The Financial Brand. Available at: http://thefinancialbrand.com/50594/social-media-marketing-strategies-in-banking/ [Accessed 28 Sep. 2015]. Ons.gov.uk, (2015). Consumer Price Inflation, July 2015 - ONS. [online] Available at: http://www.ons.gov.uk/ons/rel/cpi/consumer-price- indices/july-2015/stb-cpi-july-2015.html#tab-Consumer-Prices-Index--CPI- [Accessed 28 Sep. 2015]. Peachey, K. (2015). Banks' PPI bill now totals £24.4bn - BBC News. [online] BBC News. Available at: http://www.bbc.co.uk/news/business- 31707494 [Accessed 28 Sep. 2015]. Walker, A. (2015). China's economy is stumbling, but by how much? - BBC News. [online] BBC News. Available at: http://www.bbc.co.uk/news/business-34340936 [Accessed 28 Sep. 2015]. Walker, A. (2015). China's economy is stumbling, but by how much? - BBC News. [online] BBC News. Available at: http://www.bbc.co.uk/news/business-34340936 [Accessed 28 Sep. 2015]. Wallace, T. (2015). Lloyds Bank moves closer to abolishing passwords. [online] Telegraph.co.uk. Available at: http://www.telegraph.co.uk/finance/newsbysector/epic/lloy/11716844/Lloyds-Bank-moves-closer-to-abolishing-passwords.html [Accessed 28 Sep. 2015]. Webcache.googleusercontent.com, (2015). The Way We Bank Now embraces a digital banking revolution, says Lloyds Banking Group. [online] Available at: http://webcache.googleusercontent.com/search?q=cache:5btBUWu0ugAJ:www.lloydsbankinggroup.com/globalassets/140708-the- way-we-bank-now-embraces-a-digital-banking-revolution-says-lloyds-banking-group.pdf+&cd=4&hl=en&ct=clnk&gl=uk [Accessed 28 Sep. 2015].
Editor's Notes
- Lloyds Bank is a commercial bank which was founded in 1765 Birmingham by Sampson Lloyd II, John Taylor and their two sons. They are considered to be one of the ‘big four’ banks in the UK along with Royal Bank of Scotland, HSBC and Barclays. Lloyds offer a wide range of financial products from current accounts, mortgages and credit cards to ISAs and investment banking. They operate on both an international level and national level and deal with private and business customers.
- Political Factors Since the 2008 financial crisis the UK government has had a much larger and ever present role in the way banks operate and act in the market. This can be seen in the raft of changes to old legislation and the introduction of new controls that affect the banking sector on the whole. These controls have effects ranging from the maximum size of loans and mortgages that can be offered to the amount of capitol that needs to be put aside to help absorb shocks to the banking sector in the future. This new governmental role in the way banks such as Lloyds are run and can operate can be seen most clearly in the fact that at the height of the financial crisis the governmental stake in Lloyds was around 47%. Nowadays this figure is closer to 12% but that still represents a large percentage of the company that is controlled by the government. There are arguments around as to the downsides of governmental control of such a large organisation such as accusations of preferential treatment and secret support to help the government make a profit from the bailout but many of these are said to be baseless. Another big political factor for banks to consider is governmental change. The recent UK elections caused share prices in banks and interest rates to fluctuate wildly as investors tried to second guess what would happen to the banking sector when or if a new government was elected. This period of uncertainty can be bad news for any financial institution but for a bank that has a large part of it owned by the government the effects of this period are felt even deeper. This is to say nothing of the risk posed to a bank when a regulation light and business friendly government were to be switched for a particularly harsh and regulation heavy government. New governments also create a new budget once elected which is often an important time for investors. In this year’s budget there are two items that may hit Lloyds particularly hard. These are a new UK banking levy and a competition review in April next year. The governmental levy is expected to hit Lloyds fairly hard due to them switching the criteria from global balance sheet to UK size. This would cause Lloyds to have to foot the lions share of the bill. This could combine badly with the competition review as Lloyds currently provide around 25% of UK personal accounts and the review is aiming to redistribute market share to smaller financial institutions putting Lloyds in the firing line.
- Economic – 2008 Financial crisis caused massive strain on the banking industry, both private and investment sectors. The origins of the financial crisis began in the US where banks settled mortgage packages with customers whom they shouldn’t have. The banks gave out loans which were incredibly risky as the customers who were given them had poor credit history, couldn’t afford them etc. Because of this house prices increased over the entirety of the US and caused the customers to not be able to keep up mortgage payments and thus leaving the bank with no income stream from loans. This then led to banks going bust and having to being bailed out by the government and other banks. This had a knock on affect which affected the rest of the world and caused housing bubbles which ‘popped’ and banks were caught out and went bankrupt. Latest Interest rates show that inflation using CPI is at 0% which means that people and businesses will be spending their disposable income and profits instead of saving due to bank interest rates being low 0.5% ONS, this then means that banks will be getting more business as people will be borrowing more as it is relatively cheaper, causing the economy to inflate and grow due to the spending increasing C and investment increasing I.
- For the first time banks are preventing illegal immigrants from opening current accounts which will make it more difficult for them to subsequently gain access to credit cards, mortgages and loans. This establishment works in the national interest. (12th Decmber 2014, James Brokenshire, www.gov.uk) Because of the financial crisis there is low customer trust and confidence in banks to serve the public and to look after the public’s money. This is mainly due to the banking crisis whereby firms had misled customers and engaged in illegal activities resulting in massive fines. In Lloyds perspective many of their services and products ended up failing resulting in the taxpayer to fix things. A British Bankers Association spokesman, Rovert Watts, stated that ‘We’ve got new regulators who are tougher and stronger, but it takes time for customers to recognise that there has been change’. Even though this may be the case chairman of the Treasury Committee Andrew Tyrie told the BBC that regaining public trust and confidence in banks is still years away’ implying that if no one has confidence in banks doing well then everyone will more likely follow each other. (3rd September 2014 BBC News . http://www.bbc.co.uk/news/business-29046605 We also discovered that online banking may be used a lot more frequently than one going to the high street. A group of friends may transfer money into each other’s accounts proving it to be easier and much less time consuming. This then brings us to the technological factors within the PESTEL framework.
- Members of the public now check their bank balance on their mobile phones more than anywhere else resulting in to a trip to the high street failing. The BBA have found that banking apps were used 10.5 million times a day across the country in March as well as 9.6 million daily log ins to internet banking services meaning that in a typical week Brits are transferring £2.9bn through apps. (Marion Dakers 14th June 2015 The Telegraph http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11672021/Mobile-banking-has-eclipsed-branches-and-even-the-rest-of-the-internet.html ) Due to new mobile technologies also ‘the banks reckon that by 2018 we will have made one billion payments using Paym with the start of the revolution that will see us scrap debit and credit cards and start using our mobile phones to help us with our finances. This could ultimately mean the end of many high street bank branches. (Patrick Collinson, 26th April 2014 The Guaridan http://www.theguardian.com/money/2014/apr/29/mobile-payments-system-paym-goes-into-operation ) Social media also plays a vital part in not just targeting specific customer groups but also to facilitate two way communications between the bank and the consumers to creat extended brand loyalty and stronger relationships. Financial Social Media reports that 44% of mass affluent consumers that use social media interact with financial institutions. (The financial brand, March 4th 2015 http://thefinancialbrand.com/50594/social-media-marketing-strategies-in-banking/ ) To be competitive in the banking industry and for Lloyds to stay competitive within and outside the ‘Big 4’ they have to be up to date and pro-active. One factor to help them to stay competitive is the use of technology. Mobile banking is hugely important and for Lloyds they can insure that it takes less than two minutes on average 1 minute 50 to open a savings account online. Also the Lloyds banking app use has risen from 2.1 million in 2012, to 4.7 million in 2013 and now 6.6 million so far this year. http://webcache.googleusercontent.com/search?q=cache:5btBUWu0ugAJ:www.lloydsbankinggroup.com/globalassets/140708-the-way-we-bank-now-embraces-a-digital-banking-revolution-says-lloyds-banking-group.pdf+&cd=4&hl=en&ct=clnk&gl=uk Lloyds bank are close to improving the current verification system where by customers tap their contactless payment cards on their smart phones to prove their identity cutting down the number of passwords the customers need to use, reiterating the fact that the banking industry are trying to make banking as easy as possible for the public while also targeting a wider range of demographic. http://www.telegraph.co.uk/finance/newsbysector/epic/lloy/11716844/Lloyds-Bank-moves-closer-to-abolishing-passwords.html One other way banks are using technology to their advantage is with the use of social media. Lloyds Bank group are enabling customers to upload copies of documents for identification through laptops, smart phones and tablets used for social media again making life easy for customers as it reduces the need to visit a branch. http://www.computerweekly.com/news/2240240187/Lloyds-Bank-accepts-ID-documents-uploaded-on-social-media
- Legal – The Financial crisis of 2008 was partly down to regulators fault and that of the governments. Lack of realisation that banks were agreeing to very risky mortgage packages and lack of monitoring led to the crisis. The bank of England introduced new rulings on the level of loans customers can take based on their income in order to prevent another housing price bubble and a repeat of the financial crisis in 2008 (Financial Policy Committee, FPC). Banks in June 2014 introduced the requirements of people wanting to borrow and this means that the loans become less risky, as there is a smaller chance of the customers defaulting on their payments e.g. restricting loans to no more than 15% of new lending where the loans were 4.5times the income of the customer. PPI scandal – insurance purchased to make sure that credit card/loan payments are made even if the person is un-employed or sick Financial Services Act 2012 was established with the primary objective of focusing on achieving financial stability through regulatory means. For example, on April 1st 2013 the independent body called the Financial Policy Committee (FPC) was established with the primary objective of closely monitoring the UK financial system and supporting the economic policy of the government.
- We used a five forces analysis to assess the competitiveness of the market that Lloyds operates in. As mentioned earlier Lloyds operates in multiple markets around the world in areas such as personal and corporate banking so to keep this analysis simple we are focusing on personal banking in the UK. So first we look at the power of suppliers. So first we had to identify who exactly is or are Lloyd’s suppliers. The answer to this slightly more complex for the banking sector than a traditional industry as buyers and suppliers are the same thing, the general public. How this works is Lloyds “sells” loans to customers but it can only offer that loan if several other people “supply” Lloyds with capital by opening bank accounts. Big banks such as Lloyds also have internal methods of generating cash through investment and interest so they are also technically their own supplier but for the purposes of this analysis we will only count the general public. Supplier power in general is quite low with individuals pulling their money out of banks virtually unnoticeable, even several hundred people moving their money out in a day is no real cause for concern to a large bank. In these scenarios the bank in question still has huge pools of capital to generate income from. However as Northern Rock found out 2008 when thousands or hundreds of thousands of people per day pull their money out at once then you have serious issues. In this situation the supplier has huge amounts of power over the bank. Now let’s look at the power of buyers. As identified earlier these buyers are the same as the suppliers so they are the general public. Buyer power in the banking sector can vary depending on how willing the public is to “shop around” for the best deal. Because the buyer and supplier are the same entity if for example if a competing bank offered a far better product and all of the customers went to the competitor then this would cut the supply of capital to Lloyds reducing or removing its ability to generate income via interest or in extreme circumstances its ability to even offer products such as loans over a certain amount. The power of buyers is also effected by the generally low levels of brand loyalty within the industry as “savy” customers will abandon ship at the first sight of a better deal else were with few considerations for who the bank is. This lack of loyalty is brought about by customers having very low switching costs as many banks allow accounts to be opened with as little as a pound and a switch can normally be made in just a couple of days
- Now let’s look at the threat of entry to the banking sector. The banking sector is one of the most highly regulated and nowadays scrutinised sectors around with huge amounts of targets to hit and conditions to be met before the first branch is even open for business. This combined with huge exit costs make the barriers to entry colossal, effectively preventing anyone who is not a huge existing player in a separate market from even getting in the door. And then comes the issue of trust. The entire banking sector hinges on consumer trust in the banks. Consumers trust that their life saving will not disappear overnight due to the bank collapsing or by reckless behaviour on the part of the bank and after the recent financial crisis trust in banks is at an all time low. These factors combines makes the threat of entrants tiny. Now lets look at the threat of substitutes. This threat is quite high due to the rise in short term lenders, insurers and better finance options from retailers such as paying for a sofa over 12 months rather than all at once. These options have risen to prominence from the financial crash when people had less disposable income and several banks were in trouble and all provide services that would traditionally come from banks. All of this extra competition is leaving out the other banks who are competing on customer service interest rates and other extras that have been added to existing products such as railcards for some student accounts.
- All of these factors combine to make the banking sector a highly competitive market. Despite the low threat of entrants competition remains high through the high buyer and supplier power banks are forced to compete and struggle for market share in a wide array of products and services. This ferocious competition is further fuelled by the high number of substitutes that have entered the market in recent years and government regulations designed to prevent any one bank from getting too big.
- Adopting changes in technology Technology is a huge factor in not just promoting new products but to help increase the amount of consumers using a product. The banking industry has improved hugely by providing innovative apps and online banking to help their consumers find banking easier and more enjoyable. Online banking is seen to a major revolution in banking where customers now make 5.7 million transactions a day using smart phones and other mobile devices. (BBC News 2014) To stay competitive within the banking industry all banks must share these innovative features whether they are in the ‘Big 4’ or not. One specific app which is giving customers an even easier way to pay is PayM, where by individuals are able to pay friends and family using just their mobile number. This app was originally backed by majority of the big banks unclosing Llloyds, Barclays and HSBC with RBS and NatWest later following on showing how competitive and important it is to keep exploiting innovative ideas to gain competitive advantage. Patrick Collinson, 26th April 2014 The Guaridan http://www.theguardian.com/money/2014/apr/29/mobile-payments-system-paym-goes-into-operation ) Brand image, marketing and reputation Within the banking industry the products on offer are quite homogenous and so they need to focus on other forms of competing and gaining an advantage over their competitors. Brand image is a key success factor because it is a way of banks differentiating themselves from their competitors, in a market where their products are very similar. An extension of this key success factor would be to make sure the public and potential customers are aware of the brand image, and so an appropriate marketing campaign would be advisable. Lastly, banks would be able to compete with each other in the form of reputation, and this is a key success factor given the loss of confidence in banks due to economic unrest in the past few years. Provide a necessary service – Banking has been a service that has survived for centuries and it is a service that will always be around due to the need it fulfils. If people want to take out a direct debit for a phone or car, they need a bank, the majority of companies will pay their employees directly into their bank account and other factors such as online banking and shopping online would not be possible without a bank account (http://www.barclaysmoneyskills.com/Everyday-banking/Top-reasons-you-need-a-bank-account.aspx). How Lloyds compares to the KSF’s. Due to being one of the big 4 banks, this proves that Lloyds successfully competes in the industry and is a major factor in how the industry will work. Banking is a very old fashioned industry in which there is very little to differentiate between other banks and very little ways to gain a competitive advantage over competitors. They offer competitive rates on loans, mortgages and every other service that they offer and this allows them to maintain successful relationships with new and current customers as they always stay competitive. How Lloyds compare to the active marketing campaign Lloyds have a very active marketing campaign and this can be seen through their unique TV advertisements depicting people, and families being involved with the bank. Additionally, Lloyds are focusing on trying to re-build their reputation back to being trustworthy, reliable and positive and this can be seen through their target of creating good relationships in banking. Additionally, Lloyds are making sure that they remain in the public eye through multiple methods of advertising, for example TV advertisements, letters, e-mails etc.
- Rebuilding trust and customer confidence – After the financial crisis of 2008, many people and businesses did not want to trust banks with their money and finances therefore it was hard for banks to get customers. Banking is about building a relationship and when there is not trust between both parties then the relationship will not work and this was what happened after the financial crisis with both banks and customer and even banks and employees. Banks are still struggling to re build these relationships. Meeting new industry regulations – Due to the financial crisis, the banks have had to introduce new regulations to ensure people that if events repeat themselves such as Lehman then the entire economy will not go into chaos like it has last time. Because things became so extreme last time then it means that regulations will be very strict, and hard for companies to comply with but it is something all banks must face. “The new rules are to be phased in over the next ten years. Banks must set aside a greater amount of capital as a percentage of risk-weighted assets (RWA), i.e., total assets adjusted for certain kinds of risk, “with the goal of promoting a more resilient banking sector.” (http://www.sjol.co.uk/issue-3/banking-regulation). Adapting to changing economic conditions e.g. China growth – If the Chinese economy begins to slow down then it could act as a domino effect and create another worldwide recession. This could potentially affect the banking industry in a similar way as the last financial crisis. (http://www.bbc.co.uk/news/business-34340936). Online hackers – Wherever there is money there will be someone wanting to steal it. With the online banking industry this could potentially leave the banks at a state of risk if someone smart enough is able to hack into the banks systems or even if the online systems fail it could leave people without any security of their bank account. “Online banking fraud losses totalled £16.9 million in the first six months of 2011, according to Financial Fraud Action UK.” (http://www.bbc.co.uk/news/technology-16812064). PPI Paybacks – All Banks must pay back PPI after it had been miss sold to customers in the past. (http://www.bbc.co.uk/news/business-31707494)