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4 Economic structures revisited – competitive forces in the banking industry

4 Economic structures revisited – competitive forces in the banking industry

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36 British and German Banking Strategies



that is the transformation of inputs into outputs or through arbitrage, that

is, the transfer of products across time and space (Grant, 2002, p. 67). It

is accepted for this book that corporate strategies are aimed at increasing

or at least maintaining the company’s profitability (Grant, 2002, p. 67).

Profitability is defined as the return for the owner of the company, that

is the Return on Equity (ROE). A firm’s profitability is determined by the

split of value creation between consumer and producer. Conventional

microeconomic theory propounds that the distribution between consumer surplus and producer surplus is a result of the level of competition,

thatis the number and relative bargaining power of buyers and sellers

(Grant, 2002, p. 68).

Consumer surplus is defined as the difference between what the buyer

would be willing to pay for a good/service and what he/she actually has

to pay. Thus, the consumer surplus is a function of the consumer’s utility

derived from the product or service and the price charged for it. Producer

surplus is the difference between the price charged by the seller for a

product/service and the minimum price for which the firm would be willing to sell, usually the average cost (Varian, 1990, pp. 240–255; Katz &

Rosen, 1994, p. 141).

3.4.1 A framework for competition analysis

The amount and distribution of the value created, that is the consumer

and producer surplus, is determined by the underlying economic structure

of the industry (Porter, 1979, 1980, 1998). Porter argues that an analysis of

these underlying structural features is essential to understand the competitive forces in the relevant industry (Porter, 1998, p. 3). Subsequently, he

suggests that the nature and degree of an industry’s competition, thus an

industry’s profitability, is influenced by five competing currents. These five

forces are identified as the threats of new entrants, substitution, bargaining

power of buyers, bargaining power of suppliers and rivalry among existing

competitors (Porter, 1979, 1980, 1998).

Porter’s five forces framework is the most widely used strategic concept

applied to the banking industry (Ballarin, 1986; Gardener, 1990; Canals,

1993; Chan & Wong, 1999; Börner, 2000; Hackethal, 2001; Büschgen &

Börner, 2003; Smith & Walter, 2003). Ballarin applies Porter’s model to an

analysis of the US banking market. A strategy analysis of financial conglomerates by Gardener also uses Porter’s five forces model (Gardener, 1990).

Chan and Wong find evidence for Porter’s theory through an empirical cluster analysis of Hong Kong, which is a highly international banking centre.

Their research also shows that well-resourced banks with a multi-strategic

approach outperform “strategically monotonous” rivals, thus corroborating

the resource-based view (Chan & Wong, 1999). Börner develops an integrated

concept that combines the positioning school with the resource-based view

(Börner, 2000).



Corporate Strategy Analysis



37



Canals uses Porter’s five forces model for his analysis of the changing

structure of European banking at the beginning of the 1990s (Canals, 1993,

pp. 185–196). He concludes that increased competition results from deregulation, globalisation and the sector’s attractiveness (Canals, 1993, p. 195).

Canals holds that deregulation, along with financial disintermediation,

“have considerably diminished the competitive position of banks [...]”

(Canals, 1993, p. 196) and changed the structure of the banking system to

such an extent that banks need to adjust their strategies.

In order to better comprehend Porter’s model, it should be recalled that in

economic theory an industry that generates a return above its risk-adjusted

cost of capital attracts new entrants. These new entrants can be firms which

are active in similar or other industries, or mere financial investors seeking

attractive yields. In a perfectly efficient market economy, excess returns are

unlikely to be upheld for long. Rates of return that exceed the cost of capital

attract funds into this industry, thus increasing competition. As a result,

competition drives down profit margins and the return on capital declines

to the cost of capital. Similarly, competitors exit an industry if the return

on capital falls below the cost of capital. Yet, perfect markets exist only in

imperfect economic textbooks and reality is perfectly complex. Therefore,

barriers to entry are much more diverse and cannot be reduced to a mere

financial cost of capital versus return of capital analysis.

Consequently, this book takes a critical view of models that attempt to

explain the varying profitabilities of British and German banks by the

difference between a shareholder value approach and a stakeholder value

approach (Llewellyn, 2005). The shareholder value concept is an approach

to business planning that places the maximisation of the value of shareholders’ equity above other business objectives (Dictionary of Finance and

Banking, 1997).

Proponents of the shareholder value approach generally regard the stakeholder value concept as the competing paradigm for managing firms. The

stakeholder value concept recognises the multiple interests of a broad range

of groups affected by the actions of a firm, including its owners, that is

the shareholders (Freeman, 1983). It follows that the stakeholder concept is

an extension of the narrower shareholder value concept and thus does not

stand in contradiction to it.

The large number of state-owned savings banks and mutual cooperative

banks in Germany nourished the argument that the German banking system is essentially a stakeholder value oriented system, whereas the United

Kingdom is predominantly a shareholder value oriented system, and that

this difference largely explains the different levels of profitability (Llewellyn,

2005). Llewellyn holds that “[...] British banks have been highly profitable

partly because they have chosen to be profitable in that, compared with

banks in some European countries, they set the ROE as the central and

uncompromising business objective” (Llewellyn, 2005, p. 309).



38



British and German Banking Strategies



There is certainly some truth in the fact that the more capital marketoriented British system has made the management of banks more aware

of shareholders’ expectations than their German counterparts. However,

a model that attempts to explain higher returns on equity from management’s greater adherence to the shareholder value concept does

not sufficiently consider other structural components that determine

competitiveness.

3.4.2 Barriers to entry in banking

Porter offers a rather differentiated picture of barriers to entry. In his definition of barriers to entry, he also includes economies of scale (Porter, 1998,

pp. 7–23). Economies of scale refer to a decline in long-term average costs

as output rises. Thus, the unit costs of a product fall as volume per period

increases (Katz & Rosen, 1994, p. 291; Porter, 1998, p. 7). High economies

of scale “deter entry by forcing the entrant to come in at large scale and risk

strong reaction from existing firms or come in at a small scale and accept a

cost disadvantage [...]” (Porter, 1998, p. 7).

Although it is usually argued that economies of scale apply particularly

to capital-intensive industries, the case of the banking industry appears

somewhat ambiguous. Most studies about efficiency in banking indicate

that economies of scale are hard to find at group level (Benston et al., 1982;

Gilligan et al., 1984; Molyneux et al., 1996; Berger, 2000). These studies

show that a bank’s size does not seem to have a major effect on its performance. A review of empirical studies shows that on average scale economies

and diseconomies account for only 5 per cent of the difference in unit costs

between financial services firms (Smith & Walter, 2003, p. 378). On the

basis of European banking data Walter concludes that “for most banks and

non-bank financial firms in the euro-zone, except the very smallest among

them, scale economies seem likely to have relatively little bearing on competitive performance” (Walter, 1999, p. 152).

However, scalability varies significantly between the different banking

businesses, depending on the standardisation of products and distribution

structures. Walter therefore remarks that it would be wrong to concentrate

solely on corporate (group-level) scale economies when there is obvious

potential for efficiency gains through size at the level of individual financial

services, such as global custody, processing of mass-market credit card transactions and institutional asset management (Walter, 1999, p. 153; Smith &

Walter, 2003, p. 379). In contrast, M&A advisory services and private banking are very service-intensive and require detailed product specification,

leading to high fixed costs and thus limited economies of scale (Walter,

1999, p. 153; Smith & Walter, 2003, p. 379). Other findings suggest that economies of scale are particularly limited in commercial banking (Hackethal,

2001, p. 23). Overall, the limited efficiency gains for banking groups (at

corporate level) and the evident scalability of certain banking businesses



Corporate Strategy Analysis



39



support Canals’ critical view of universal banking and strengthens the case

for specialisation in banking (Canals, 1999).

Despite these reservations about efficiency gains resulting from size at

group level in the banking sector, Walter concludes: “It seems reasonable

that a scale-driven pan-European strategy may make a great deal of sense

in specific areas of financial activity even in the absence of evidence that

there is very much to be gained at the firm-wide level” (Walter, 1999, p. 153).

Schmidt estimates that the growing significance of information technology increases the minimum efficient firm size in the banking industry

(Schmidt, 2001, p. 11). The rapid developments in information technology

should have a bigger impact on retail banking than on any other banking business, providing a rationale for mergers and acquisitions to reduce

superfluous retail capacity. According to Schmidt, consolidation should be

mainly national as this allows for the greatest cost-savings, for example, by

closing down bank branches (Schmidt, 2001, p. 11).

The rationale for mergers or acquisitions in banking is diverse. Among the

principal motifs for M&A cited by senior bank managers are cost synergies

in the form of economies of scale and scope (Dermine, 1999). Focarelli and

his colleagues find that expanding revenues is the major strategic objective for mergers (Focarelli, Panetta & Salleo, 2002). Other explanations for

mergers and acquisitions in the banking industry comprise gaining access

to new markets and to information and proprietary technologies (Goddard,

Molyneux & Wilson, 2001).

Furthermore management’s ambition to increase market power and

improve the group’s risk profile by broadening the loan base are also put

forward as reasons (Goddard, Molyneux & Wilson, 2001). On the contrary,

“cluster risks” are often the result of mergers and acquisitions. Subsequently,

the two merged banks have to gradually adjust their loan portfolios not to

be too exposed to one specific industry or company. Additional arguments

for M&A activities in banking (as in other industries) are hubris and management’s own personal (e.g., financial) interests to work for a larger bank

(Eijffinger & de Haan, 2000, pp. 163–164; Goddard, Molyneux & Wilson,

2001; International Labour Organization, 2001). Molyneux et al., remark

that there “may also be an element of herd behaviour among banks [...]

during periods when merger activity is considered fashionable” (Goddard,

Molyneux & Wilson, 2001, p. 88).

Overcapitalised banks are faced with demands by their shareholders to

grow organically (for example by granting more loans), to grow through

value-enhancing acquisitions or simply to pay out the excess capital to shareholders in the form of dividends (alternatively, the bank could buy back its

own shares). Various analyses show that stronger, that is larger and better

capitalised, banks tend to take over weaker ones (Berger & Humphrey, 1992;

Peristiani, 1993; Vander Vennet, 1999; Wheelock & Wilson, 2000), based on

the assumption that the acquired bank’s efficiency can be improved.



40 British and German Banking Strategies



A study by Buch and DeLong is particularly interesting in the context of

this Anglo-German comparison as it suggests that banks operating in more

regulated environments are less likely to be the targets of international bank

mergers. Thus, the lifting of regulations could stimulate cross-border bank

mergers (Buch & DeLong, 2001).

Dyer et al., argue that there is always an alternative to acquisitions, namely

alliances (Dyer, Kale & Singh, 2004). According to Dyer et al., the decision

on whether a firm should acquire or form an alliance with another firm

depends on five key factors. Management should carefully consider the different kind of synergies between the two firms (modular, sequential, reciprocal), the nature of resources (soft versus hard; i.e., human resources versus

machines), the extent of redundant resources (potential for cost-cutting),

the degree of market uncertainty and the level of competition.

By illustrating their argument with an example from the banking industry,

Dyer et al., advise companies that have to generate synergies by combining

human resources to avoid acquisitions (Dyer, Kale & Singh, 2004, p. 112).

From their line of reasoning it can be inferred that the more industrialised

parts of the banking business (e.g., retail banking and the credit card business) are relatively more suitable for acquisition-driven growth strategies

than banking operations that are more dependent on a set of specialised

individuals (e.g., investment banking).

While size may be useful for realising economies of scale, some companies also enjoy absolute cost advantages which are independent of size.

According to Porter (Porter, 1979, 1980, 1998), this is the case in industries

where the learning and experience curves are pivotal. It also applies to companies with proprietary technology or a location which enables them to

access raw materials.

The emergence of so-called financial centres in the banking industry

results, among other things, from the importance of a pool of people with

particular expertise. The role of London as the dominant banking centre in

Europe can be partly attributed to the availability of skilled labour. In contrast, the more dispersed financial services industry in Germany could be

identified as one reason why Frankfurt seems to remain a second-tier financial city. In addition to an efficient and experienced financial community, a

financial centre has to provide economic and political stability, good communications and infrastructure and a regulatory environment that successfully protects investors’ rights without excessive capital market restrictions

(Dufey & Giddy, 1978; Gardener & Molyneux, 1993; Falzon, 2001; Schmidt &

Grote, 2005).

Access to a pool of well-educated specialists with professional experience

can therefore pose an important entry barrier in a service industry such

as banking (Schmidt & Grote, 2005). Canals remarks that the experience

curve could lead to noticeable cost advantages for some banks (Canals, 1993,

p. 189). Production efficiency in banking is often expressed in the form of



Corporate Strategy Analysis



41



the Cost Income Ratio (CIR). The CIR is derived by dividing the non-interest

expenses (excluding loan loss provisions) by the sum of net interest income

and non-interest income (Golin, 2001, p. 133).

A comparison of CIRs shows disparities of up to 30 per cent between

Europe’s large banks (Flemings Research, 2000). Smith and Walter hold

that the most important factors for differences in CIRs are not related to

economies of scale or scope but are due to operating efficiency. Put simply,

they consider the differences in efficiency to be largely the result of better

management (Smith & Walter, 2003, pp. 380–381). Other research corroborates these findings (Berger & Humphrey, 1997; Wagenvoort & Schure, 1999;

Vander Vennet, 2002).

Another barrier to entry is product differentiation according to Porter

(Porter, 1979, 1980, 1998). An established company may enjoy an immaculate reputation or have a recognised brand, which is associated by customers

with a specific service, quality or image. So, for a new entrant to overcome

existing customer loyalties carries a price. In addition, there can be significant switching costs, that is the financial cost to a customer of changing

supplier. As remarked by Porter “new entrants must offer a major improvement in cost or performance in order for the buyer to switch from an incumbent” (Porter, 1998, p. 10).

For retail clients, changing their bank accounts is a time-consuming

and inconvenient undertaking, which is not done quickly. Besides, a new

entrant to the retail banking market would have to build trust and attract

customers by offering better conditions as most retail clients have a personal relationship with the bank staff in their local branches and are concerned about their savings and the reliability of their financial transactions.

To some extent the same holds true for wholesale banking, particularly the

M&A advisory business, where it is common for new entrants without a

track record to significantly undercut market prices to attract “deals”.

Despite these considerations, it is argued that overall there is little product differentiation within the banking industry (Canals, 1993, p. 191).

Product differentiation in retail banking may take the form of an extensive

and sophisticated distribution network. Operating a large branch network

implies additional fixed costs, but it may also be perceived as an important

barrier to entry for potential competitors. As branches are also points of sale

for banks, this leads to the fourth barrier to entry, namely access to distribution channels (Porter, 1979, 1980, 1998). Prior to entering a new market,

a firm needs to consider ways of distributing its product. Thus, the costs of

accessing an adequate distribution network can pose such a financial burden on the company that it would have a competitive disadvantage. This

argument could partly explain the reluctance of most European banks to

enter the large German retail banking market.

Another important entry barrier in banking may originate from government policies and regulation. Governmental intervention can take many



42



British and German Banking Strategies



forms, of which government subsidies, regulatory requirements and product standards are just a few. The structural differences and the favourable

refinancing conditions enjoyed by some banks (e.g., the German savings

banks) make it clear that government policies can be pivotal for an industry’s competitive environment.

One specific form of government policy which is identified as a distinct

barrier to entry in banking comprises capital requirements (Porter, 1979,

1980, 1998; Canals, 1993). Capital requirements in the banking sector have

a legal and a microeconomic dimension (Canals, 1993, p. 198). The minimum level of legally required banking capital is set out in the Basle Capital

Accords. The microeconomic dimension originates from a bank’s need to

constantly invest, especially in the latest information technology and the

training of its staff, to remain competitive.

Although entry barriers tend to improve an industry’s profitability (Bain,

1956; Mann, 1966), some research suggests that barriers to entry do not

deter new entrants and that there are usually always firms that manage to

enter an industry by overcoming these hurdles (Yip, 1982). Moreover, Yip

claims that there are actually advantages in lateness. He argues that lateness enables new entrants to enjoy greater flexibility about their positioning. Therefore, they may be able to attack the incumbents’ weaknesses and

their lateness enables them to use the latest technological equipment, possibly negotiate better terms and conditions with suppliers, customers and

employees (Yip, 1982).

An example from the banking industry is the entry of ING Direct, the

online banking arm of the Dutch bancassurance firm ING, into various

European retail markets. Supported by large marketing campaigns and

attractive conditions for new clients ING Direct grew its deposits to EUR 197

billion with 15 million customers worldwide within a decade of its establishment in 1997. By avoiding any brick and mortar bank branches ING

Direct has been able to keep its CIR below that of most banks in the nine

countries in which it has a presence (ING Group, 2006).

3.4.3 Analysis of competition among established players in

a banking market

Closely related to an analysis of new entrants is an assessment of the level of

competition among the existing players. Some industries are characterised

by such intense competition that returns do not cover the cost of capital.

The more competitive an industry is, the less attractive it is as its profitability declines (Canals, 1993, p. 195).

Porter distinguishes between eight factors that essentially determine the

level of competition among established players in an industry: concentration, industry growth, cost structure, product differentiation, diversity of

competitors, discrete capacity increases, exit barriers and high strategic

stakes (Porter, 1979, 1980, 1998). Applied to the banking industry Canals



Corporate Strategy Analysis



43



sees the rivalry within the industry to be specifically driven by a low overall level of product differentiation. Furthermore, he considers a weakening

of demand for bank products as detrimental for banks with relatively high

fixed costs (Canals, 1993, pp. 194–195).

Industries with few competitors fulfil the criteria of an oligopolistic

structure as discussed in the introduction to this section. A high degree of

concentration, measured by the market-share of the largest players, also represents a barrier to entry and is usually accompanied by relatively attractive

returns on capital. This is, for example, the case in British retail banking which

is dominated by HSBC, Barclays, Lloyds TSB, HBOS, RBOS. In contrast, the

fragmented German retail banking market suffers from excess capacities

and political exit barriers. Büschgen and Börner regard the weak profitability of German banks as a sign of a more competitive spirit in the country’s

financial services industry, which has abandoned “gentlemanly capitalism”

(Büschgen & Börner, 2003, p. 238).

For the politically sensitive banking sector exit barriers can be as important as entry barriers. Exit barriers entail costs such as severance payments

and possibly losses from the sale of business units. Moreover, management’s

initial decision to enter the business may be perceived as a sign of incompetence or misjudgement and affect its willingness to withdraw from a market.

Exit barriers can also be politically motivated, if, for example, the industry

plays an important infrastructural role or employs a large number of people,

who form part of the electorate.

For example, cutting down the number of savings banks is a politically

sensitive task as it implies high redundancies among the around 370,000

(2003) employees who work for Germany’s savings banks and Landesbanks.

Moreover, German savings banks are an important source of financing for

many Small and Medium-Sized Enterprises (SMEs) which are the backbone

of the German economy. Many of these firms, which are known as the

German Mittelstand, are highly geared. Thus, a sudden credit shortage could

possibly push hundreds of companies to the brink of insolvency (Janssen,

2003).

The level of competition among established players is also conditioned

by the degree of homogeneity in the industry. As noted earlier, the banking

sector is a relatively homogenous industry in terms of management styles

and the products/services offered. The seemingly limited scope for product differentiation therefore poses an additional challenge for incumbents.

According to Canals, the intensive price competition in banking is a result

of this homogeneity (Canals, 1993, p. 195).

Among the eight factors identified by Porter that determine competition within an industry are the prevailing cost structure and the industry’s

growth potential. “Slow industry growth turns competition into a market

share game for firms seeking expansion. Market share competition is a great

deal more volatile than is the situation in which rapid industry growth



44 British and German Banking Strategies



insures that firms can improve results just by keeping up with the industry

[...]” (Porter, 1998, p. 18).

As banks are operationally dependent on the macroeconomic environment in which they operate, their overall performance is a function of economic growth. The aforementioned threat of a sudden weakening of demand

for banking products is likely to be of particular concern for banks with relatively high CIRs. The reverse holds true for an economic upswing, which

should translate into a noticeable earnings boost for banks with a high proportion of fixed costs relative to variable costs. In that respect Porter’s final

point about large capacity jumps, which can have disruptive effects on the

industry’s supply/demand balance, could hold true for the banking industry

(Porter, 1998, p. 19).

3.4.4 The substitution problem for banking products and services

As described in the preceding paragraphs, companies which operate in

industries with attractive returns face the threat of new competitors entering, or at least trying to enter, the same industry. If the new entrants succeed, supply increases relative to demand, so overall profitability should

decline. On the other hand, an industry’s profitability can also come under

pressure if demand declines relative to supply. This is the case when a specific industry’s customers discover an alternative source of supply, that is if

their current needs can be satisfied through a substitute product or service.

Porter suggests that pressure from substitute products constitutes a distinct

threat for an industry (Porter, 1979, 1980, 1998).

The probability of customers seeking alternative solutions increases if the

price/quality relation is perceived as disproportionate. In other words,

“the price customers are willing to pay for a product depends, in part, on

Wholesale (corporate) banking

(wholesale markets)

Products



Asset-Liability Management (treasury), Capital Markets & Corporate Finance Expertise

Asset management (pension funds)

Transaction banking (cash

management, foreign exchange)

Financing (equity, bond, debt)

Insurance (derivatives)

Transaction advisory (M&A)



Sales



Savings products (mutual funds,

insurance products)

Transactions, payments (credit cards,

cheques)

Loans (mortgages, credits)



Marketing (brand), Network (distribution)

Product-line

Industry-line (relationship banking)

Corporations / JVs

IFAs



Figure 3.1



Retail banking

(retail markets)



Banking structure



Branches

Online banking

Telephone banking

Cash-machines (ATMs)

Corportaions / JVs

IFAs



Corporate Strategy Analysis



45



the availability of substitute products” (Grant, 2002, p. 72). Price elasticity

of demand is the relative change in quantity divided by the relative change

in price (Varian, 1990, p. 262). Thus demand for a product for which there

is a close substitute, can be expected to be very responsive to price changes

(Varian, 1990, pp. 262–265).

Demand for the broad range of products and services provided by the

banking sector should be subject to different price elasticities due to the

varying availability of substitutes. As illustrated in Figure 3.1 above, a bank

can add value through “production” or through “sales” (advisory services).

“Production” refers to the transformation services provided by a bank

whereas “sales” comprises essentially non-interest-yielding transaction

services.

Substitutability in banking, that is in the financial services sector, is characterised by at least two structural shifts (Büschgen & Börner, 2003, p. 235).

First, the shift from commercial banking to investment banking, that is

the replacement of transformation services by transaction services (disintermediation). Second, it is maintained that there is a shift from bank saving to

insurance saving, largely driven by demographic changes in Western countries (Büschgen & Börner, 2003, p. 235). In addition to these two shifts, it

is possible to consider a third, which originates from the aforementioned

unbundling of “production” of standardised bank products from the “sales/

distribution” of these products.

According to Bryan, non-branch-based distribution channels should gain

significance for retail banks (Bryan, 1993). While telephone and online

banking are services that can be offered by traditional retail banks, it is

more difficult for them to credibly sell third-party products if substitute

products are also available from the same group. Nevertheless, many banks

operate this type of “open architecture” as they feel obliged to offer their

clients a wider choice of products.

The limited credibility of these open-architecture approaches helps

Independent Financial Advisors (IFAs) to compete with the advisory and

sales service of retail banks. IFAs usually cooperate with various product

partners (banks, asset managers and life insurers) and are paid on commission basis. Cooperation with IFAs reduces a bank’s fixed costs as demand

for branch staff declines, while the profit margin per product sold normally

decreases by the amount of commission paid to the IFA.

On the product side, a retail bank faces a threat of substitution from

investment alternatives which are not managed outside its scope. These may

be, for example, mutual funds managed by non-bank financial institutions

(e.g., Fidelity Investments). If, however, these third-party funds are sold

through the bank, then the bank receives commission from the asset manager. For example, if HSBC sells a retail fund managed by US asset manager

Fidelity via one of its branches, HSBC will receive a fee from Fidelity, which

will be shown in its “commission income”.



46



British and German Banking Strategies



Effectively, any investment (including deposit or savings accounts) that

is not managed by a bank can be regarded as a potential substitute. This

may range from such obvious investments as life insurance products or real

estate to expenses (investments) for education and training. The product

group least at risk of substitution in retail banking is the loan and mortgage

business as this requires the capacity (size for risk diversification) and technology for asset-liability management.

In wholesale banking, companies’ direct access to capital markets is the

most obvious substitute. Disintermediation, that is the substitution of bank

loans and deposits through direct interaction with other market participants, poses a threat to banks which only offer transformation services and

no transaction services. However, Bryan remarks that there are limits to

securitisation, which should ultimately allow banks to concentrate on a

kind of “residual transformation business” (Bryan, 1993). This core business is likely to comprise only transformation services for individual households and SMEs where the costs of securitisation exceed their value (Bryan,

1993).

Customers’ interest in substituting bank financing by capital market

financing have caused many banks to expand their service spectrum to

include capital market services. In some countries, like the United States of

America, this strategic shift had to be preceded by some legal changes, notably the Gramm-Leach-Bliley Financial Services Modernization Act of 1999

which repealed the Glass-Steagall Act of 1933.

If a bank offers transaction services in addition to transformation services,

its core competence stretches from mere asset-liability management skills to

corporate finance and capital markets expertise. The concept of a company’s

“core competence” is at the heart of Hamel and Prahalad’s resource-based

views (Hamel & Prahalad, 1990), which are discussed in Section 3.5.

Banks’ wholesale clients could also consider using insurance companies for certain services. Most importantly, insurance companies in the

field of asset management and corporate pension schemes could replace

banks. The imminent pressure on most European governments to promote funded pension schemes requires companies to offer their employees

retirement savings plans. The structural change in European demographics entails altered financing of provision for old age. This trend has contributed to the creation of bancassurance conglomerates, with Allianz/

Dresdner Bank and Lloyds TSB being the two most prominent cases in

Germany and Britain.

On the sales side, the scope for substitution of distribution to wholesale/

corporate clients appears limited as the corresponding banking products are

far more customer-specific than retail banking products, which tend to be

relatively standardised. However, some large consultancy companies have

made inroads on the strategic consulting of the M&A advisory business,

monitoring the transaction process for their clients.



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