CHAPTER 1The Financial Services Environment

INTRODUCTIONThe financial services sector has recently undergone changes unprecedented in its history.These changes have had an impact on both the structure of the industry and the nature of competition.A number of external forces have exerted influence on the sector which are:

(i) socio-economic(ii) regulatory(iii) technological factorsiv) Socio-demographic

INTRODUCTIONWithin a rapidly changing environment, financial institutions have been forced to change the way in which they respond to the market place, becoming less focused on products and more focused on customers and relationships, less focused on the short term and more focused on the longer term

THE SOCIO ECONOMIC ENVIRONMENTChanges to the socio-economic environment have an impact on the general demand for financial services.

Personal Income:

(i) Income is one of the key factors influencing demand for financial services. (ii) In relation to financial services, it has an impact on the amount people save, their ability to raise and pay credit and loans as well as their attitudes towards risk and investment

ECONOMIC CONDITIONSIndustry StructureGross Domestic Product (GDP)National Rate of Inflation & Money SupplyForeign Exchange RatesInterest Rates Unemployment Levels

SOCIAL AND DEMOGRAPHICSNational birth rate Population SizeAge DistributionSocio-economic distributionGeographic population distributionEducation/ skill distributionTrend in lifestylePublic opinion and attitudes towards financial services providers andTrend in banking usage

Competitive Issues in BankingCurrent trends in financial services:

(i) International banking (the multinational banking)(ii) trade in international banking services (the international payment system. E.g. Euromarket, Asia market, Japanese banks.

Competitive Issues in BankingScale & scope of economies

Competition in banking

Characteristics in banking

Technology environment (e-banking)

Current evolution of financial service sector

THE REGULATORY ENVIRONMENTChanges to the regulatory environment arguably have had the greatest impact on the financial services sector.Regulation of local banks Regulation of foreign banksRegulation of investment bankRegulation of non-banksRegulation of bank productsTaxation laws, foreign exchange control

THE RATIONALE FOR FINANCIAL REGULATIONTo sustain systemic stability

To maintain the safety and soundness of financial institutions

To protect the consumerFinancial sectors in Malaysia: supervised by BNM under BAFIA 1989.

THE TECHNOLOGICAL ENVIRONMENT Traditionally, financial institutions used paper-based systems for recording customer account details.

The advent of computer technology provided institutions with the ability to automate many of the back office tasks and essentially become more efficient

THE TECHNOLOGICAL ENVIRONMENTComputerisation allow costs to be reduced, but it also reduced the degree of human error.

Computerisation also made it possible for financial institutions to offer more products and to reach more customers.

Technology has also enabled financial institutions to widen their access to customers, providing greater convenience.

THE TECHNOLOGICAL ENVIRONMENTe.g. ATM were first introduced in an attempt to increase the restricted branch opening times and enable customers to have access to cash withdrawals outwith baking hours.

Telephone banking

PC banking

Internet banking

THE TECHNOLOGICAL ENVIRONMENTAs well as providing increased access to financial services, technology has also contributed to increasing customer service. Customers now have a range of methods by which they can access their financial services provider and conduct transactions.

THE TECHNOLOGICAL ENVIRONMENTTechnology has also enabled marketing efforts to be used to greater effect and efficiency through database management.

The institution can identify individual customers (or groups of customers) and describe what products they buy and how they use them.

It is argued that the long term success of financial institutions lies in the effective use of customer databases.

STRATEGY RESPONSES TO THE CHALLENGES OF THE FINANCIAL SERVICES ENVIRONMENTThe banking industry around the world has been changing very rapidly since the early 1970s.The industry has experienced a substantial change in competitive conditions as a result of a number of factors:

(i) the industry tended to go international, led by the leading US commercial banks.

STRATEGIES RESPONSES TO THE CHALLENGES OF THE FINANCIAL SERVICES ENVIRONMENT(ii) New competitors entering the financial services market new approaches to servicing corporate clients(iii) New capital markets emerged- as a result transformed traditional funding of banks.(iv) A wide range of sophisticated products were introduced under packaged sales.

STRATEGIES RESPONSES TO THE CHALLENGES OF THE FINANCIAL SERVICES ENVIRONMENTIn response to competition, banks reacted and began to build up their own multi-national presence through their own brand name.Banks began to channel their marketing resources towards diversification.By the end of 1970s, banks operations had become more complex with the range of services on offer.

STRATEGIES RESPONSES TO THE CHALLENGES OF THE FINANCIAL SERVICES ENVIRONMENTMargins on lending were eroded through competition, fee based services were increasing.Non bank financial institutions were also providing financial services-hence, more competition.New information technology (IT) impacted on the operations of the banks and became one of the key drivers (eg: back office became automated)

STRATEGIES RESPONSES TO THE CHALLENGES OF THE FINANCIAL SERVICES ENVIRONMENTSavings and loans associations initiated interest-bearing transaction accounts and brought direct competition to commercial banks and

Professionals like accountants, lawyers, real estate agents, financial brokers, asset management also offered financial services.

CHANGES IN BANKS STRATEGY IN THE 1980sIn the 1980s the banking industry experienced an acceleration in the pace of change in both:

(a) Retail Banking(b) Wholesale Banking

Retail BankingIncreased segmentation of consumer groups and provided specialist private banking services (e.g. rich individuals, high-net-worth customers)Stratified accounts (e.g. personal loans, credit finance, insurance products, 1st and 2nd line mortgages, deposits FD & s/term)Replacement of paper based accounting systemsIncreased competition for loans and deposits

Wholesales BankingCompetition intensified- banks continued to strive for competitive advantage and in doing so cancel out one anothers efforts.Multinational Companies became stronger in their demands by negotiating their own interest rates and cost of services from banks.

Wholesales BankingJapanese banks took the first 5 top positions in the international banking league.New development in IT change the banks approach to the consumer, wholesale and corporate markets.Increase competition from non-bank institutions.

New Approach to Banks Marketing StyleBanks portray themselves as a One Stop Financial Services Centre.

Banks no longer remain in their traditional service market. They are now more aggressive in providing a full menu of services that will cater for its customers needs.

The competition is so fierce that they can offer any type of service provided their customers are satisfied with the speed efficiency and costs involved.

New Approach to Banks Marketing StyleBanks in certain industrial countries are now mobile in such a manner, that they will visit you at your doorsteps.

Technology is one considered as one of the key drivers that enables banks to cope with the intensity of competition.