The banking industry in the U.S. is among the most robust in the world, supporting the world largest economy. The industry is comprised of the highest assortment in banking organizations and concentration of private credit. The consolidation of the industry, however, has taken a number of years and it has been more evident in the recent years. The major banks include Bank of America, JP Morgan Chase Bank, Citigroup, Wells Fargo, and Goldman Sachs. The five banks hold a substantial percentage of the entire banking industry, taking approximately 50% of the total assets by 2011 (Hudspeth 1).
The Banking industry is highly segmented to breakdown banking services to smaller segments to improve efficiency. Different banks employ unique segmentation strategies based on products or geographical areas. Small banks often serve local geographic areas and demographics while bigger banks tend to have serve national and even international market.
Key products for segmentation include consumer and business banking, consumer real estate services, global market, and investment management (Kokemuller 1).
Power of buyers
Single bank clients do not present significant threat to the banking industry (Kokemuller 1). Notably, the cost to switch banks is relatively high and affects buyer power (Kokemuller 1). For instance, a customer with a mortgage with a certain bank will find it extremely difficult to switch to another bank. Although some banks lessen switching cost to enticement customers, the difficult procedures deter many customers from switching to other banks. Additionally, a big bank such as the Bank of America creates leveraging products that target to retain both individual and corporate clients.
Power of suppliers
Capital supply in the banking industry poses minimal threats. Nonetheless, human capital is subject to mobility and, therefore, big banks are likely to attract the best talent from the labor market.
Threats of new entry
The regulative aspect and high financial requirement reduce the threat of new entry to the banking industry. Additionally, few megabanks (including the Bank of America) control a huge percentage of assets and, therefore, new banks face stiff competition. However, entrepreneurs can capitalize on subsidiary products such as Internet billing and digital banking to pose a threat to the banking system. Additionally, other threats emanate from other financial companies (like insurance companies) offering services such as mortgage and loans.
Availability of substitutes
There are a myriad of product in the US financial sector that can substitute products offered by banks. Currently, many non-banking organizations including manufacturers offer financial services to their customers. Companies such as General Motors offer 0% financing, consequently, attracting more customers relative to banks that otherwise charge more than 5% interest on car loans. Moreover, Microsoft and other unconventional corporations offer preferential products especially in online and ticket financing.
For a number of years, few players, including megabanks like Bank of America have dominated the US banking industry. The industry is therefore a relatively consolidated oligopoly. However, competition is evident with banks attempting to lure customers to bank with them. Thus, banks endeavor to attract customers by tailoring their products to meet customer needs, lowering financing, operating in preferred rates and other leveraging factors. Competitive rivalry is expensive and leads lower returns on assets (ROA). Therefore, mergers are more likely to consolidate the industry further.
Compliments and industry dynamics
Although regulations such as Dodd-Frank Wall Street Reforms and Consumer Protection Act prevent megabanks from becoming too big, further consolidation is evident. The banking industry, therefore, is still dominated by few banks (Hudspeth 1). Technology, nonetheless, is used to enhance service delivery and banks can work with IT companies in for data collection, analysis, information handling, and service delivery.
Performance by individual banks in the US banking industry is dependent on both strategies and leveraging aspects. Firms that have somewhat robust policies on strategic groups have relatively better performance (Dornier, Selmi and Delécolle 24).
The stage of the industry’s life cycle and what is critical to overcome the limitations
The banking industry has existed for a few centuries without major changes to its traditional operations and legacy systems. Thus, it is difficult to identify the specific life cycle stage for the industry. Nevertheless, certain elements are clear in the US banking industry as the growth is predicted to be minimal – less than five percent per annum. As the US recovers from the fiscal crisis, banks are struggling to outperform each other while contending with exceptional regulatory issues and changes in consumer behaviors.
The banking industry is in the midst of unexpected change occasioned by the following factors.
The current regulatory environment has restricted revenue growth sources, which perhaps led to the previous financial crisis. Further, the industry must grapple with new restriction on relations with customers (PwC 3).
Consumer behavior changes and expectations
After the recession, it was observed that many US consumers have embarked on more savings, less consumption and debt repayment. Further, more consumers feel dissatisfied by their banks and use social media to narrate their experiences with which the banking industry must cope.
Social media and mobile technology
The widespread growth of smartphone users has led to “new robust distribution channels for banks” (PwC 3). As such, Bank of America requires specific mobile banking strategy that goes beyond online banking availability on portable devices.
Moreover, the banking industry must follow various comments posted on social media and use these modes of communications to establish loyalty.
Banking industry consolidation
Some banks have significantly benefitted from the US government financial deals, including the bailouts. Winning banks will find new customers and create strong customer base.
Integration of modern major banking technologies
Banks must now adopt new platforms to “substitute their legacy core platforms” (PwC 3). It is generally expensive for modern banks to run on aging, nonintegrated systems because of high costs of operations and real time demand for information by consumers.
Overall, these disruptions brought about by technologies, customer demands and regulations make it difficult to define the exact stage in the life cycle of the industry. Thus, it is recognized that the US banking industry is operating in a more dynamic new banking environment. On this note, it is imperative for the banking executives to act fast and decisively adopt modern practices or fail to compete effectively. Specifically, for the bank to overcome these limitations and position itself for growth and profitability, it must focus on six major areas for change (Adizes 1).
The bank must deeply understand its customers, their needs and then develop solutions for them while strengthen their relationship.
The bank should customize products and proactively respond to emerging news of customers such as banking on mobile platforms.
The pricing decision generally influences profitability of the bank. As such, the bank has embarked on analysis of customer data to get the precise price for customer segments.
The bank should take into account customer experiences when managing expenses. Cost reduction should focus on both front office and back-office activities.
The bank should define new distribution channels that meet specific needs of a given customer segment. It should focus on robust, distinct channels to drive growth and low costs.
The bank must optimize its business strategy to meet current regulatory environment, capital needs and risk management practices.
The Macro Environment Key Forces
It has been established that about 92 percent of Americans are banked with at least a single financial organization. As such, the bank is presented with a difficult scenario on growing customer base and maximizing profits (PwC 10). Nevertheless, the bank can still appeal to younger consumers with new products and services driven by mobile technologies.
Although the US political environment is stable for the bank to thrive, the 2016 Presidential Election has brought back the banking industry regulation on the spotlight (Hatch 1). Following the financial crisis and the ‘Black Monday’ (uncertainty trading day in the world market on 24 August 2015), all the presidential candidates have promised stringent banking regulations if elected.
As the US economy grows and the interest rate increases, the bank is poised to gain from these new developments. That is, they are most likely to realize more transactions and increased net margin profits after the Fed’s interest rate hike.
The bank and its rivals must continue to grapple with new challenges and opportunities that originate from social media and smartphone technologies. While the bank has equipped its retail segment to cater for mobile banking services, the bank now faces real threats from non-banking players such as PayPal, Prosper, and LendingClub among others.
Adizes, Ichak. Change and Its Repercussions for The Banking Industry. 2014. Web.
Dornier, Raphaël, Noureddine Selmi and Thierry Delécolle. “Strategic Groups Structure, Positioning of the Firm and Performance: A Review of Literature.” International Business Research 5.2 (2012): 27-40. Print.
Hatch, Robert. 10 Regulatory Issues the Financial Industry is Watching in 2016. n.d. Web. 2016.
Hudspeth, Christian. The Five Largest US Banks in 2015: Who Is Winning? Web.
Kokemuller, Neil. Market Segments for the Banking Industry. 2016. Web.
PwC. When the Growing Gets Tough: How Retail Banks Can Thrive in a Disruptive, Mobile, Regulated World. 2011. Web.