Issues of Competition an Expansion of the Customer Base
This research project entails a critical review, analysis and subsequent discussion of the major competition issues as well as the expansion of the customer base within the banking sector with a specific focus on the interstate banking framework in the United States.
The need to carry out this research was informed by the realization that the introduction of the interstate banking framework has revolutionized the financial sector in the United States and created competition issues as well as the expansion of the customer base factors that are unique to this framework in comparison to the previous framework where banks operated intra state.
This research study will focus on these issues by initially identifying them and subsequently discussing them in great detail so as to determine their scope, depth and extent. The corresponding impact of these issues and factors on the larger national economy as well as the financial services sector will also be evaluated and discussed in this research project.
A preliminary outcome of this discussion indicates that there are about 5 main issues that relate to the competition which exists within the interstate banking frameworks. These issues have been discussed appropriately with a focus on the corresponding literature which has either supported or dispelled them. Their subsequent impact on the rate of the expansion of the customer base in the American market has also been discussed in this paper.
The research methodology which includes the approaches used in the collection of data, the specific data sources used, and the analytical framework which will be applied has also been highlighted in this paper.
The research study concludes by giving a summary of the overall findings in relation to the underlying problem and research objectives that the study sought to initially accomplish.
Key Research Question
This research paper seeks to find out: “The specific competitor issues that have arisen from the emergence of the interstate banking framework and how banks can deal with these issues especially in their pursuit to expand their overall customer base”.
Background
Definition of Interstate Banking
According to Lista (2013), interstate banking is described as the operation of a bank along state lines that are beyond its primary jurisdiction of incorporation. In this regard, a bank which was initially incorporated or licensed to operate in one state sets up several other operations in many other states across the country through its holding company.
Interstate banking came into play in the 1980s after the enactment of the necessary Legislation which now permitted banks to acquire smaller banks in other states through their respective holding companies (Lista, 2013).
Competitive Issue in Interstate Banking
According to Hasan (2013), the coming of interstate banking resulted in the emergence of certain competitive issues that were unique and synonymous only with this new operating arrangement when compared to the old framework where banks operated entirely within a unitary state. Dorn (2016) adds that these issues have continued to evolve and impact the operations of the bank in terms of its profitability as well as overall growth rate.
Wilson, Barbra and McMillan (2015) further add that there exists a direct correlation between the competitive issues within the interstate banking framework and the banks` corresponding ability to not only expand their customer base, but to also retain the existing customers.
The competitive issues that are unique and synonymous with the interstate banking framework can be summarized into five man tenets according to Lista (2013). These tenets are:
Value for Money
According to Hasan (2013), the coming of interstate banks created a competitive environment whereby customers now have the pleasure of choosing form a variety of banking options as opposed to the previously available limited options. In this regard, customers tend to leave one local bank in favor of an interstate bank based on the price which they are paying for the banking services that they seek and the corresponding level of service.
This horizontal movement has over time resulted in a massive exodus from domestic to state banks in a number of geographic jurisdictions across the country according to Dorn (2016).
Sophistication of Interstate Banks
The second competitive issue which has arisen as a result of the emergence of interstate banks is the creation of large banking entities and financial conglomerates that have often been referred to as being “too big to fail” according to Wilson, Barbara and McMillan (2015).
As a result, the immense size of these institutions that have emerged mainly through mergers and acquisitions implies that the smaller domestic state banks are unable to compete fairly with these big players.
Dorn (2016) adds that this unleveled playing field has often resulted in the winding up of the operations of some of the smaller banks in some states. In other cases, these smaller state banks have been the target of cannibalization and hostile takeovers by the larger more sophisticated interstate banks according to Hasan (2013).
Quality of Service
The third main competitive issue which is associated with the emergence of interstate banks relates to the quality of service offered given the unique operating conditions that characterize the current contemporary business environment (Lista, 2013).
Within the banking sphere, new operating challenges have emerged such as the issue of identity theft which has at times resulted in the loss of customer deposits by vulnerable banks (Lista, 2013).
According to Wilson, Barbra and McMillan (2015), these issues are often too big to be borne by a single small domestic bank and the intervention of the state banking industry as a whole is often needed to address them in totality.
However, the coming of interstate banks has resulted in a scenario whereby these banks possess the economic muscle to deal with these issues on their own internally, and to leave the smaller banks to grapple with their inability to address the said issues (Lista, 2013). Consequently, many smaller state banks have fallen on the way side as they are unable to challenge this skewed existing competitive environment which has directly arisen as a result of the emergence of interstate banks (Hasan, 2013).
Customer Segmentation
Wilson, Barbara and McMillan (2015) add that the fourth major competitive issue that has arisen as a result of the emergence of interstate banks relates to customer segmentation. This segmentation refers to a scenario whereby customers in smaller states who were used to the convenience of being served by a smaller state bank which understands their personal and unique needs are forced to join a larger and more sophisticated interstate bank which has most likely acquired the smaller state bank forcefully.
In this regard, Dorn (2016) adds that in most cases, certain customer segments of the markets are no longer served as effectively and efficiently as was the case before the coming of the interstate banks.
These affected customers end up feeling disgruntled and dissatisfied with the overall service offering despite the fact that vertical growth has taken place through the movement of one smaller state bank to another larger and more sophisticated financial institution (Dorn, 2016).
Innovation and Technological Advances
Hasan (2013) notes that the coming of interstate banks has not only revolutionized the operating structure of the local domestic banks, but it has also brought with it technological advances that have changed the way banking transactions are conducted going forward.
Through the introduction of platforms such as mobile money transfers, the banks, both state and interstate, that have adopted and embraced these technologies have emerged to be competitive and ahead of the pack in comparison to those that have stuck to the traditional operating systems that are archaic, inefficient and ineffective from a cost as well as an operational perspective (Hasan, 2013).
Connection Between Competitive Issues and Customer Base Expansion
Wilson, Barbra and McMillan (2015) assert that there exists a direct correlation between the existing competitive issues that have arisen in in the interstate banking framework and the ability of the respective underlying banks to retain their existing customers and to expand their current customer base.
This relationship can be summarized as being skewed in favor of the banks that have been positively impacted by the emerging competitive issues.
Dorn (2016) adds that the financial institutions either domestic or interstate that have been able to tap into the emerging opportunities that have arisen as a result of the coming of the interstate banks have subsequently succeeded in growing their customer base as well as preventing customer turnover by retaining their existing clientele.
These institutions are mainly those who have embraced the solutions to the existing competitive issues that will be discussed in the next section shortly.
Solutions to Competitive Issues
Automate Customer
According to Hasan (2013), the competitive issues arising from the emergence of interstate banks can be resolved by both the state as well as the interstate financial institutions through the adoption of automated customer services that rely on the latest technological trends to provide superior services.
These services include platforms such as online banking; dispute resolution platforms that are fully automated; virtual banking systems where customers can undertake all their transactions online among other similar service options. Through this approach, the state banks that have been adversely affected by the interstate banks due to an unfavorable competitive framework would now stand a realistic chance of not only retaining their existing customers but also expanding their targeted customer base as well (Hasan, 2013).
Lower Operational Costs
The second approach through which state banks can compete with the larger interstate banks in the wake of the significant competitive issues that they face is through the lowering of their correspondent charges that they levy on their customers. These charges include loan rates, banking fees, service charges among other similar levies (Dorn, 2016).
Digital Revolution and the Use of Social Media
The third approach which can be used by the local state banks in dealing with the competitive issues that are attributed to the emergence of the interstate banking framework is the use of digital media analytics to reach the customers directly in a personalized and bespoke fashion (Wilson, Barbra and McMillan, 2015).
This approach creates a personal relationship between the banks and their customers and this relationship will prevent the customers from moving to the larger banks that are unable to provide a similar engagement due to the sheer size of their operations. In the long run, this strategy will also pull new customers towards the smaller banks, thereby leading to an increase in their customer base (Wilson, Barbara and McMillan, 2015).
Innovative Bank Designs and Niche Banking
According to Wilson, Barbara and McMillan (2015), the smaller state bank can further deal with the existing competitive framework through the adoption of the niche banking strategy in which they focus on certain segments of the consumer market that are underserved by the larger interstate banks.
These markets may include micro lending to small borrowers or the creation of lending facilities that are specifically dedicated to certain sectors of the economy. Consequently, these smaller banks will be able to attract the customers who prefer receiving these services from a smaller bank that better understands their needs rather than a larger bank whose large customer base subsequently prevents it from offering a superior service proposition (Wilson, Barbara and McMillan, 2015).
Approach and Methodology
Methods and Approach
In undertaking this research study, the deductive approach will be applied as the primary framework within which the data collection and analysis process will be undertaken. According to Collins (2010), the deductive approach entails the testing of an existing theory which has been previously advanced so as to ascertain whether indeed it is true or whether it yields a null hypothesis. The theory to be tested in the case of this study is the evaluation of the identified competitive issues associated with the interstate bank framework and the determination of whether these issues are true or false.
Data Sources
Secondary sources of data include information which was previously advanced by other scholars and theorists and which is contained in books, journals, periodicals among many other types of publications according to Collins (2010).
Areas that Will be Excluded
In the course of undertaking this study, the research will avoid focusing on issues that relate to competition or the banking sector, but which do not draw a line between the relationships that exist in the competitive issues arising from the emergence of the interstate banking sector.
The study will also avoid areas of study that do not focus on how the financial institutions that have been affected by the emergence of the interbank framework can grow or expand their customer base in the wake of these identified competitive issues.
Analysis Procedure and Data Sources
Model Used
According to OECD (2011), the SCP Model is used in the evaluation of the competitive factors and issues that affect the banking and financial sector of the economy in the United States and the globe as a whole.
The SCP Model refers to the Structure-Conduct- Performance framework which measures each of these said components and how they subsequently impact the competitive environment within the financial markets.
According to OECD (2011), Structure refers to the underlying formation and composition of the market in which the financial institutions operate in. Conduct on the other hand refers to the behavior of the players who operate within the market.
This behavior can be said to be either collusive or primarily competitive depending on the specific actions of the market players. Finally, Performance refers to the overall efficiency of the market from a social perspective (OECD, 2011). According to this model, the higher the markets power of a given player, the lower the social efficiency and vice versa (OECD, 2011).
The SCP Model was used in the data analysis in the case of this study principally due to its relevance and application in the evaluation of the competitive environment within which the financial institutions operate within the interstate banking framework.
Sources of Information
As previously mentioned, this study adopted a qualitative technique in which the data and information which was used was derived from secondary sources.
Consequently the secondary sources of data that were the focus of this research included books; academic journals from both online as well as print sources; and periodicals that specifically cover the banking industry as a whole in the United States.
Summary
Based on the research question and objectives of this study, it can be concluded that there exists a myriad of competitive issues that affect the banking industry as a result of the emergence of the interstate banking framework which came into place back in the late 1980s.
These competitive issues are double-edged in nature, whereby they seem to favor the larger interstate banks more than they do to the smaller domestic state banks.
However, there exist viable opportunities for smaller banks to exploit fundamental weaknesses in these issues and to utilize those weaknesses in their favor. The research has also determined that these identified issues have a direct bearing on the ability of both the large interstate banks and the smaller banks` ability to retain their existing customers and to subsequently expand their customer base in line with their growth strategies.
Conclusion
In closing, this paper has undertaken a comprehensive evaluation and review of the competitive issues that affect the interstate banking industry since its emergence. The research has identified and discussed five key issues which were seen as being the most critical as a result of their impact and corresponding influence in this sector of the economy.
The issues that were the focus of this paper included customer value propositions, customer segmentation, technological issues, sophistication of the institutions and innovation within the banking industry.
The paper has also discussed various solutions that can adopted in dealing with these issues by the interstate banks and more so by the smaller domestic banks that have been affected the most by these issues. In closing, it is expected that the adoption of the proposals contained in this paper will enable the banks to deal with these competitive issues and to expand their respective customer bases going forward.
References
Collins, H. (2010). Creative Research: The Theory and Practice of Research for the Creative
Industries. NJ: AVA Publishing
Dorn, N. (2016). Controlling Capital: Public and Private Regulation of Financial Markets.
New York: Routledge
Hasan, D. (2013). Globalization of Financial Institutions: A Competitive Approach to
Finance and Banking. New York: Springer
Lista, A. (2013). EU Competition Law and the Financial Services Sector. NJ: Taylor and
Francis
OECD. (2011). Bank Competition and Financial Stability. Washington: OECD Publishing
Wilson, J., Barbara, C. and McMillan, D. (2015). Contemporary Issues in Financial
Institutions and Markets. New York: Routledge
