Citibank Innovation from Historic Period - Case Study Example

CITIBANK INNOVATION By Name Course Instructor Institution City/State Date Citibank Innovation from Historic Period Introduction Comprehending how to successfully manage innovation is critically crucial, especially now when innovation is considered a compulsory strategy for survival (Ortt & Duin, 2008, p.522). Even though since late 19th century management of innovation was performed professionally, Haga (2015, p.120) posits that innovation management after the Second World War became crucial to the technological as well as economic survival of companies and nations alike, which resulted in prevalent utilisation of scientific research into management of innovation. According to Smith (2007, p.530), if business has to be completely professional, it must utilise the past incidents to guide as well as inform the existing actions; that is to say, developing a successful business organisation needs that the past mistakes are not repeated sooner or later due to ignorance of the past. The institutionatists as stated by Jacoby (2010, p.209) depended somewhat on historical evidence so as to relativize the markets as well as to exhibit the agentic, mutable, as well as contingent facets of social economy. The historical innovation patterns are typified by complexity, which reflects the diversity of technology creation processes and the economic activity heterogeneous nature across countries as well as sectors. Such attributes as observed by Bruland and Mowery (2005, p.349) make it difficult to build all-encompassing historical development schemas. The majority of the existing historical evidence guiding the historical innovation study are inclined to highlight exhibit the formal and conceals the informal processes of gaining knowledge, learning, and diffusion fortifying change in technology (Bruland & Mowery, 2005, p.373). Innovation as defined by Fagerberg (2005, p.3) is idea commercialisation. Therefore, when a company has easy access to the diversity of sources then the insights achieved from such sources can be combined in valuable and creative ways (Mol & Birkinshaw, 2009, p.1272). The essay seeks to provide a justification proving that Citibank was innovative during the historic period. Discussion For many years, as mentioned by Knowles et al. (2010, p.97), Citibank had petitioned both Labour as well as non-Labour Governments with the intention of attaining a full bank, and consequently the right of raising retail bank deposits so as to compete directly with the domestic banks in the Australian banking system that was tightly regulated. Citibank effort to access the Australian banking since 1916 had continually been frustrated by the regulatory protections that favoured the domestic banks as well as other restrictions such as exchange transfer and foreign ownership. Still, the interest of Citibank in Australia heightened considerably in 1960s and subsequently acquired significant minority shares in CitiNational, and Industrial Acceptance Corporation (IAC) and 50% share in First National City Bank of New York (FNCB). During the period between 1974 and 1977, Citibank helped in preventing a major Australian corporate crisis by taking full ownership of Industrial Acceptance Corporation, and this development offered a foothold to Citibank’s ultimate achievement in attaining Australian full bank status (Knowles et al., 2010, p.98). Citibank started expanding its product line after 1891, opened new locations as well as widened its customer base. According to Huertas (1985, p.148), it introduced a multidivisional structure that was decentralized, and was eventually successful in separating management as well as ownership. Consequently, Citibank developed into a fully contemporary company and became a key player in the financial services industry. Moses Taylor the owner of Citibank had built a strong base that was inherited by Stillman, who facilitated Citibank into providing new products to accessible customers and attracting new customers. Towards the 20th century, Citibank entered into investment banking, and it characterized the strategy of governing the outside world, which was to be used by the bank for three decades. Considering that in 1870 Citibank was in actual fact a one-man operation. Its innovation ability made it a big business bank by 1913. It offered the biggest corporations as well as correspondent banks across the United States with investment and commercial banking services. By 1926, Strategic initiatives had made Citibank the leading financial institution in the world with all its affiliates occupying a key position in their fields (Frieden, 2015, p.27). As pointed out by Huertas (1985, p.153), Citibank’s investment banking affiliate became the largest securities distributor in the world while its trust affiliate serving individuals and institutions was viewed as a prestige trust company, especially after the 1929 merger with Farmers' Loan & Trust Company. Cleveland and Huertas (1985) try to justify the stunning success of Citibank in the business world, by arguing that the company had experienced an important transformation: from a one-man operation bank that focussed on the owner’s personal business empire to a financial firm that is publicly owned and professionally administered that pursues a specific destiny. This transformation according to Cleveland and Huertas (1985) is attributed to a number of processes as well as forces both internal and external to the company: policy making and regulation by different governmental organisations; its macroeconomic environment that was continually changing; Citibank's strategy institutionalisation as well as articulation; and Citibank top executives’ personal initiatives. Citibank is for this reason considered as an aggressive, innovative company influenced by its positive impact on the welfare of the society (Grant, 2005, p.156). Walter Wriston as Citibank Chairman and President was certain that Citibank could only progress through branch expansion both locally and internationally. He believed that financial innovation was the main propeller to the success of Citibank, and pioneered the utilisation of credit card (Dezalay & Garth, 2010, p.93; Zweig, 1995). The financial institutions in the United States were required to take innovative steps in developing as well as delivering new financial services as well as products in the way that is in line with its out-dated laws. Zumello (1999, p.10) suggests that unless revoked soon, the out-dated statutory hurdles to effectiveness can destabilize the global ascendancy of American financial institutions. Citibank growth to international markets started as early as 1901when it established International Banking Corporation (IBC) its first arrival in Asia (Nishimura et al., 2012, p.25; Davis & Gallman, 2001, p.296). Citibank was the first bank from America to be present everywhere in Asia after IBC in 1902 opened a branch in Shanghai. By July 1902, IBC had branches in Yokohama, Manila, Singapore, and also Hong Kong. The first American expatriate to work in Hong Kong De Menocal who was trained by Citibank in New York prior to being sent to work in Hong Kong in 1904 (Starr, 2002, p.25). While working in Hong Kong branch, De Menocal observed that Chinese managed all the cash and used European-controlled ledgers to reconcile their balance. In the same year, De Menocal after understanding the Hong Kong ropes, relocated to Guangzhou after the IBC opened its second Chinese branch. Simultaneously, IBC began consolidating their positions within Asia; for instance, Japan’s Kobe branch funded cotton imports from India while the Yokohama branch funded exports of tea and silk (Starr, 2002, p.39). Besides that, the Singapore branch involved itself in rubber and tin exports from Malaya. To outshine British banks that were establishing their branches in Asia, IBC opened a new branch in Rangoon and strengthened its Chinese network. The world of finance according to Covington and Jr. (2001, p.85) was revolutionized by the negotiable certificate of deposit (CD), which was introduced by Citibank in 1961 (see Appendix one). OCC (2011) indicates that the flexible CD allowed large banks to efficiently as well as quickly raise money for purposes of lending. The innovation would help banks draw liquidity from consumers, businesses and investors. This product as mentioned by OCC (2011) alleviated a serious shortage of deposit that Citibank and other leading banks were facing in the 1950s. Prior to the innovation, the increasing interest rates at the market made majority of individual and corporate depositors to move their idle cash that they had deposited in the checking bank account to higher-yielding investments like corporate borrowing and Treasury bills (Thomas, 2005, p.132). This resulted in deposit shortfalls, which consequently reduced the commercial banks’ lending ability, limiting economic development. Furthermore, banks response to the increasing interest rate environment was handcuffed by legal constraints such as anti-branching laws. For instance, anti-branching laws restricted banks’ capacity in opening new offices that could have aided them in attracting deposits. This circumstance facilitated Citibank executive vice president, Walter Wriston to come across a rare opportunity. Citibank has lent New York broker 10 million US dollars in government securities, and had settled to take trades in certificates of deposits (CDs) (OCC, 2011). In this way, Citibank was able to develop a feasible secondary market (Khanna, 2005, p.89). In this case, the certificate purchaser who required cash could sell the certificate immediately to a different investor, similar to how they traded the Treasury bill. The investors were attracted by the marketability as well as safety of the negotiable certificate of deposit (CD), and in consequence, purchased a lot of large negotiable CD (Krippner, 2011, p.65; Neave, 2002, p.197). The negotiable certificates of deposit geld by investors by 1966 was a staggering 15 billion US dollars, which was second in position after Treasury bills (64 billion US dollars). According to OCC (2011), by 1970, negotiable certificates of deposit ascended to more than 30 billion US dollars and surpassed 90 billion US dollars in 1975. As pointed out by Battilossi (2000, p.172), negotiable Certificates of Deposits as a financial ‘technology transfer pioneered by Citibank led to a significant cost advantages proportionate to fixed time deposits of equal maturity. Broaddus (1985, p.8) concurs that the negotiable CD was a big achievement in the 1960s since it helped banks to recover the ground they had lost, even though temporarily. Furthermore, the negotiable CD brought about the liability management concept, which according to Roussakis (1997, p.147) changed the entire banking character in the US. As mentioned above, before Citibank introduced the negotiable CD, most banks were primarily relying on demand deposits as their key source of funding; therefore, implicit interest substituted explicit interest. By changing the interest rate, banks were able to actively influence the deposit inflows volume instead of just passively accepting deposits. Moreover, given that no payments services were involved in the negotiable CDs, Broaddus (1985, p.8) posits that their introduction helped financial institutions to move towards pure intermediation. Even though such changes were beneficial to banks in various ways, they left the banks vulnerable to the risk of unexpected short-run swings because of forces in the market that were beyond their ability. According to Krishna (1990, p.21), Citibank by 1960 had a very broad international network of sub-custodians as well as branch offices. This in consequence offered them an advantage over their competitors in terms of handling global securities. Officials at Citibank local branch were inclined to be more familiar with the legal and regulatory environment, the market conditions as well as languages, therefore offering the bank with an efficient network of individuals dealing with the innumerable differences between nations. It is for this reason, why Citibank is was viewed as a technology leader in the financial services industry (Krishna, 1990, p.21). As stated by Broaddus (1985, p.9), the powerful forces of innovation let loose by the growing inflation as well as evolving technology significantly eroded the banks’ restrictive regulatory structure, which had surfaced during the Great Depression. Moreover, the continuous increase in interest rates within the market well beyond the Regulation Q ceilings resulted in increased incentive for banks for devising ways of avoiding the restriction. Therefore, advancements in technology together with the moderately high banking activities profitability generated dominant incentives for non-bank organisations to penetrate the banking markets as well as offer quasi-bank as well as bank services. Such conditions resulted in the explosion of financial innovation as well as the consequent depository markets’ deregulation between 1975 and 1983 (see Appendix two). It was during the Wriston regime when Citibank materialised as a leading innovator, considering that Wriston facilitated the deposit insurance expansion as well as the doctrine that Citibank was too big to fail (Grant, 1996). By confidently operating within the safety net of the federal governments, Citibank was able to innovate not just in consumer debt, but also in the Third World lending. As an innovator, Wriston assisted Citibank to develop the first syndicated Euroloan. By devising novel products, like the negotiable certificates of deposit, introducing innovative ideas within the market, as well as inventing new loopholes, Wriston freed Citibank from the out-dated geographic, product and pricing barriers and helped it compete with other competitive organisations in the financial service industry. And even though Citibank during Wriston was internally competitive as well as chaotic, it offered the environment for creativity as well as risk-taking that facilitated others to develop instruments like the currency swap, which eliminated barriers to allow efficient and free flow of capital (Businessweek, 2000). Citibank developed a new service in 1973, due to the Organisation of the Petroleum Exporting Countries (OPEC) oil crisis and the economic challenges in Japan. For this reason, Citibank started planning to help Japan overcome the crisis by entering a joint venture with Asia Pacific Capital Corporation (APCO), currently known as Fuji Bank (Markham, 2002, p.66). The purpose of the joint venture was to establish a syndicated loan business within the region for nations such as Korea. Although both Citibank as well as Fuji Bank pursed diverse strategies in the business, both companies were specialists in the project finance, cash management and treasury business. Having talent specialists within such areas facilitated Citibank to become the most successful banks in the world. This success facilitated Citibank to enter into another venture with Australian finance company, Industrial Acceptance Corporation (IAC) (Starr, 2002, p.115). Citibank’s joint venture with the IAC enabled the bank to gain a considerable footing in the Australian market (Knowles et al., 2008, p.283). Due to its success, Citibank became the first foreign bank to be granted a full license in Australia. A number of foreign banks operating in Japan by 1986 had accounted for almost 1% of Japan’s entire banking market (Viner, 1988, p.132). Even though Citibank had previously offered different types of services in Japan, more Japanese banks had since 1979 began offering products that were more competitive. For this reason, Citibank and other foreign banks were forced to concentrate on the areas like investment banking as well as foreign securities or exchange trading. So as to gain back the competitive advantage from Japan local banks, Citibank introduced a new strategy in the Japanese market. After a while, Citibank realised that the consumer banking was progressively becoming important; therefore, their main focus became credit card (see Appendix three) (Rapp & Leir, 2002, p.231). Due to their advanced technology and through their ‘success transfer’ strategy, Citibank introduced the touch screen ATMs in Singapore and Hong Kong from New York before diversifying to other countries (Ho & Chau, 1989, p.62). Another crucial historic innovation pioneered by Citibank is the Global Cash Card, which facilitates Japanese to withdraw their local currency while in the foreign country (Starr, 2002, p.136). Due to this innovation, customers managed to access various choices in the banking services. Conclusion In conclusion, the essay has provided a justification proving that Citibank was innovative during the historic period. These days, people are scores of banking products and services such as credit card, government securities and time deposit services, which were invented innovative firms such as Citibank. As evidenced in the essay, Citibank has since early 20th been innovating various banking products such as credit card services and negotiable CD. As highlighted in the essay, negotiable certificate of deposit (CD) is one of the key innovations pioneered by Citibank, which led to the development of the secondary market. Besides that, Citibank successfully introduced deposits for foreign currency in countries such as China, Japan, Singapore and Australia. Citibank historic innovation is defined by its shared vision across the globe considering that an organisation capable of translating global scale into local advantage can transfer local innovations to different countries across the globe. References Battilossi, S., 2000. Financial innovation and the golden ages of international banking: 1890–1931 and 1958–81. Financial History Review, vol. 7, pp.141–75. Broaddus, A., 1985. Financial Innovation in the United States - Background, Current Status and Prospects. ECONOMIC REVIEW, pp.1-21. Bruland, K. & Mowery, D., 2005. Innovation Through Time. In The Oxford Handbook of Innovation. Oxford: Oxford University Press. pp.349-79. 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Smith, G.E., 2007. Management History and Historical Context: Potential Benefits of Its Inclusion in the Management Curriculum. Academy of Management Learning & Education, vol. 6, no. 4, pp.522-33. Starr, P., 2002. Citibank: A Century in Asia. Lanham, MD: National Book Network. Thomas, L., 2005. Money, Banking and Financial Markets. New York: Cengage Learning. Viner, A., 1988. The emerging power of Japanese money. Tokyo: Japan Times. Zumello, C., 1999. Finance and Politics in the USA: From National City Bank to Citigroup : an American bank or a world bank ? Working Paper. Paris: Université Sorbonne Nouvelle. Zweig, P.L., 1995. Wriston: Walter Wriston, Citibank and the Rise and Fall of American Financial Supremacy. New York: Crown Publishers. Appendices Appendix One: The Negotiable CD Appendix Two: Major actions to deregulate interests’ rates on deposits Appendix Three: Demand for and Supply of Credit in US credit Cards Read More