The USA Banking Industry - Research Proposal Example

Organizational Analysis for JPMorgan Chase & Co Environmental Analysis Strategic history of the banking industry The banking industry as a whole has undergone many changes during the past years in terms of products and services which they offer in a wide range now compared to the limited range of products which the industry offered earlier. The rate of efficiency has also increased of the banking industry. Though the core banking function remains the same of putting the deposits and investments to work to lend to people for different purposes. Banks play a very important role in the economy of a nation. Banks are the first preference for over 10million Americans for saving, borrowing, and investing. The first central bank was founded in 1791 by Alexander Hamilton the nation’s first secretary of Treasury. On its expiry of congressional charter on 1811 a second bank was started off in the year 1816 and operated till 1832. The bankers tend to be very cautious regarding the duration of the money lent out so that they have enough cash to meet the demand of depositors. The bankers offered short term loans mainly to manufacturers, shopkeepers or farmers to meet their operational costs but they failed to repay the loan on time because of market or weather conditions which resulted in loan losses. The state government took over the supervision of the banking industry when the second bank of the United States failed in 1832. But the supervision was not proper and the banks issued their own notes for loans which could be transferred, on demand, to cash, gold or silver. There was more than 10,000 banking notes by the end of 1860 and it was impossible to detect which note is applicable and which is not. There were hundreds of bank which failed and there was a need for a uniform currency. In 1863 Congress passed the National Currency Act which was modified by President Lincoln in 1864 as the National Bank Act. This act established a new system for national banks and appointed a Comptroller of the currency whose job was to supervise and manage the new banking system through periodic examinations and regulations. The national banks then bought securities from US government deposited it to the comptroller and received national bank notes in return. No national banks failed again and the notes were lending out to the borrowers hence the circulation of the notes increased. The engraving and printing of the national bank notes was done first then it was entered on the books of the office of the comptroller of the currency then again taken to the printer where the treasury department stamp was imposed on each note. The notes with the desired bank names were delivered to the respective it was then signed by two senior managers and the notes were then ready to be circulated. This process continued till 1914 when the Federal Reserve notes appeared. In 1929, there was a disaster in the banking system on account of the worldwide depression. Around 1000 US banks failed, as the assets of the bank declined in value and the borrowers were unable to repay back, the customers used to queue up in front of the bank to take out the cash as fast as possible before the bank had nothing to pay them back. In 1933, federal deposit insurance was passed by congress which covered $2500per depositor account to ensure people that banks were still a safe place and other laws were passed to regulate different bank activities. There has been a revolution in the last quarter century for the banking industry mainly because of technology which has changed the way Americans obtained the financial services. There have been facilities such as debit cards, credit cards, automated teller machines, use of electronic money. Even the office of the comptroller of currency use computers and technology to give the best, efficient and secured services to the customers, it even performs research on economy and banks and merger applications for national banks. Five forces analysis of the USA banking industry Porter’s five forces model is a tool used to analyze the pros and cons of the banking industry. It comprises of the five forces- rivalry amongst the competitors, bargaining power of suppliers, bargaining power of buyers, threat of potential new entrants, and threat of substitute products. Banking industry is the most competitive industry, applying Porters five forces model on the banking industry of USA. Rivalry among existing competitors The intensity of competition is very high amongst the existing players as banks are branching everywhere, then some banks even offer incentives for opening new account. Banks now even have a target of opening a fixed number of new accounts in a month. Thus the competition is very high. The exit barriers are high and since the product are of the same type the competition is high. It faces a competition from the insurance companies, and even some mutual fund companies. The players in the banking industry are generally of the same size and have almost similar kind of strategies which makes the competition fiercer. The market growth is also low in the banking industry. Bargaining power of suppliers The bargaining power of suppliers are high since the whole banking industry is under FED, a change in the interest rate by the FED can have tremendous effect on the entire industry. The other influencing factors are fed fund rate, required reserve ratio etc. The bargaining power of suppliers are greatly affected by the rise in the investment avenues, providers of funds, interest rates etc. The bank needs to utilize the four suppliers such as customer deposits, mortgages and loans, mortgage backed securities and loans from other financial institutions well to keep a balance between the amount borrowed by its customers and maintaining enough cash to meet withdrawal requirements. The power of suppliers may differ from high to medium depending on the market conditions. Bargaining power of buyers The bargaining power of buyers is very high as the product offered s of homogeneous kind the choice for the buyers is more if the buyer is not satisfied with a particular bank he may open an account elsewhere. The bargaining power of the buyer is greatly affected by the long term investments, multiple choices, a huge number of bank competitors and even the option of retail lending available to the buyers. A good customer relationship helps to hold on the existing customers as well as acquire new ones. Personal banking is a demand for all buyers which increases their bargaining power. The high competition in the banking industry is the reason behind the high bargaining power of buyers. However the switching costs involved is high. The customer tends to shift to those where the margins offered on their investments is considerably high. Threat of substitutes The threat of substitutes is medium in the banking industry. The main rivalry is not from competitor banks but from non financial institutions, small co-operative banks. However deposits or withdrawals have no better option than banks other than insurances, mutual funds, fixed income securities which are offered by non-financial companies. Other substitutes are jewelries, electronics, cars etc. Even if the customers has the option of taking out money from banks for the sake of little more interest and investing in mutual funds , stocks etc. but the cheque clearing advantage of the bank cannot be obtained elsewhere which is essential for any buyer. The ease for shifting into substitute products is medium as because many customers are conservative and prefer banks to be the safer mode to keep their hard earned money. Though a bank may offer low return on investments but the security is high in case of banks so buyers with low risk taking attitude will not shift to any substitute products. In the small co-operative banks and other non financial companies a good customer relationship management is followed which lacks in national banks. This may lead to a serious threat for the banking industry. Threat of potential new entrants The threat from potential new entrants is low as opening a new bank requires a huge amount of capital investment. Even the board of directors needs to be checked and verified by the Fed which takes a long time. Thus the entry barriers are high. Skilled manpower is essential for setting up a new bank other than high investment. In spite of regulatory and high capital investment barriers there are new banks opening which are even offering new facilities to customers such as zero balance account, with net banking facilities. So to remain in banking industry it is essential to be up to date with new technology that the competitor might be using to grab more number of customers by giving them value added services (Hill and Jones, 2013). Driving forces in the banking industry Updated technology plays a vital role in the banking sector The technology to be used has to be updated to satisfy the needs of the customers. This technology helps to cut down the overhead expenses and improves the quality of the product. As the banking industry came up with the facility of ATMs thus increasing customer convenience by 24/7 service and cutting down the transaction cost. One more added advantage of this technology is online banking which makes transactions much simpler. The best rates offered by the virtual banks The virtual banks has no existence of branches and ATMs so the overhead costs is low hence they offer a low transaction cost and has an added advantage of offering their products/services at a lower rate than mortar banks. A new facility of Branch banking There are a certain percentage of customers who rely more on some kind of local branch offices in spite of available technology such as ATMs and net banking. These branch offices act as a foyer with an ATM for any cash transaction, laptop computers to provide all the banking services, scanners for processing information and printers for printing the respective documents. This facility lowers the pressure for the handling cash and that time could be used efficiently to visit the elderly customers by the bank staff that had opted for home delivery package which is the new generation retail banking. Development of new service models for the corporate market The changing economy will create new challenges for many businesses. Many mergers and acquisitions will be favored by the stock market valuations. Following the historical approach will be obsolete and the banks need to be segment the approach. The credit approach has been changing due to different market trend, an effective lending system follows with well transmitted business documents electronically. There are banks which have a drop in credit ratings on the other hands many conservative corporations retain the ratings and even self finance in the capital markets. Capital markets can be accessed more easily by large corporations than small or medium sized companies, due to this there has been a huge growth in leasing business which requires less capital. This evolution may result in leasing intellectual property and brands to raise cash. Service quality, recognition and size of the company The quality of the service offered by the banks should encompass all the dimensions which the customer wants. A good customer relationship management needs to be followed to make the customers feel satisfied, banking industry should focus on the post sales service more to get more of the market share. This service quality helps to build a brand image as Bank of America has built a good brand image and more customers want to open an account with the bank. The key success factor for any bank is the size of the bank which involves the total assets, market share, total customers, total number of branches and ATMs etc. The bank must have wider network coverage to make the transactions easy and convenient for the customers. References Hill, C. W. L. and Jones, G. R. (2013). Strategic Management: An Integrated Approach, 10th Edition. South-Western: Cengage Learning. Read More