UK Commercial Banking industry analysis

SYRACUSE UNIVERSITY

UK Commercial Banking Industry Analysis

Project 1, Assignment 02

Manan Kakkar

3/26/2012

Manan Kakkar 1 IST 755 Project 1 Assignment 2

Table of Contents Industry Overview ......................................................................................................................................... 3

National Environment ................................................................................................................................... 3

Demographics and Economics .................................................................................................................. 3

Population ............................................................................................................................................. 3

Age Demographics ................................................................................................................................ 5

Ethnic Demographics ............................................................................................................................ 5

Gross Domestic Product ........................................................................................................................ 6

Infrastructure .......................................................................................................................................... 10

Telecommunications ........................................................................................................................... 11

Credit Availability ................................................................................................................................ 12

Policy Environment ................................................................................................................................. 12

Market Size and Growth Rate ................................................................................................................. 13

Banking Value Chain ............................................................................................................................... 13

Strategic Analysis ........................................................................................................................................ 14

Industry Rivalry ....................................................................................................................................... 14

Global Comparison .............................................................................................................................. 14

Threat of New Entrants ........................................................................................................................... 14


Bargaining Power of Buyer ..................................................................................................................... 15


Bargaining Power of Supplier .................................................................................................................. 15


Threat of Substitutes............................................................................................................................... 16


Information Systems in Commercial Banking ............................................................................................. 16

Internal Systems for the Employees ....................................................................................................... 16

Barclays ............................................................................................................................................... 17

Royal Bank of Scotland (RBS) .............................................................................................................. 18

Lloyds Banking Group ......................................................................................................................... 18

HSBC .................................................................................................................................................... 19

Observations ....................................................................................................................................... 19


Customer Facing or Transactional Systems ............................................................................................ 19

Plastic Cards (Debit and Credit) .......................................................................................................... 19

Mobile Banking ................................................................................................................................... 19

Online Banking .................................................................................................................................... 20

Global Comparison .................................................................................................................................. 20

Information Systems as Strategic Advantage ............................................................................................. 21

Technology Transformation .................................................................................................................... 21

Service Model ......................................................................................................................................... 21

Bibliography ................................................................................................................................................ 22


Industry Overview The commercial banking industry in the UK is slowly showing signs of recovery after the financial meltdown of 2009 and 2010. In order to help revive the economy, the UK government bailed out two public banks and changed regulations to reduce impact of HBOS going under (Datamonitor, 2009).

There are five major commercial banks in the UK, two of which have significant government investments while three are private. According to current market cap, the top five banks in the UK are:

1. HSBC: £100,520M (London Exchange) 2. Standard Chartered: £38,122M (London Exchange) 3. Royal Bank of Scotland: £30,911M (London Exchange) 4. Barclays: £29,833M (London Exchange) 5. Lloyds Banking Group: £25,006M (London Exchange)

National Environment The key national environment factors in the UK that are important to the commercial banking sector are:

Demographics and Economics The demographics and economic information of UK is crucial to this report since, for a bank, it is the people who deposit in a bank and withdraw from a bank. As we will see later in our Five Force analysis, the customer becomes the supplier and buyer for the banking industry. Since we have five major players in the UK banking sector, the market needs customers for competition in the market. The amount of money deposited in the banks that can in turn be infused back into the economy as investments or loans depends on the nation’s economic conditions such as GDP. If the government rules and regulations allow vibrant competition and openness, the economy grows, this leads to more cash with people to deposit, and the cycle continues. Here’s a quick overview of the demographics and economics of UK:

Population The estimated population of UK up to July 2012 is 63,046,162 (CIA). In comparison to other countries in the Europe and Central Asia region, United Kingdom ranks 5th behind France, Turkey and Germany (World Bank, 2012).


Figure 1 UK Population


Age Demographics

Figure 2 UK Population Age Demographics

The age groups from 65+ are citizens who have retired and are either using their pensions or savings. These are not active users who deposit cash and would be comfortable with their existing bank accounts. The considerable population in the UK is within the 15 to 64 age group that keep the economy active. For banks, this statistic is a positive sign since despite the economic crisis, the majority population will continue to keep the money flowing. With more than 25% of the population in 0 to 14, the banks have new customers to look forward to.

Ethnic Demographics The Ethnic breakup of UK’s population based on a 2001 census is as follows (CIA):

• White 92.1% o English 83.6% o Scottish 8.6% o Welsh 4.9% o Northern Irish 2.9%

• Black 2%

0-14

65+


• Pakistani 1.3% • Mixed 1.2%

• Other 1.6%

The ethnic demographics play an important role in the banking sector, since there ethnic minorities and immigrants face difficulties in opening bank accounts. Lack of identification documents and stringent regulations put in place by the industry watchdog make it tough for banks to offer services to certain ethnic groups (Stacey, 2012).

Gross Domestic Product

GDP Total

Figure 3 UK GDP 2000-2010 (World Bank, 2012)


GDP per capita

Figure 4 UK GDP per capita (current USD) (World Bank, 2012)

The UK GDP per capita saw a sharp dip during the economic crisis and fortunately is back up. With a growing per capita, the banks should look forward more spending and financial transactions. This is a positive sign for the economy and financial services.


GDP Growth Rate

Figure 5 UK GDP Growth 2000-2010 (World Bank, 2012)

The GDP growth rate is an indicator of the economy’s growth. The UK economy saw a quick recovery after the economic crisis. A stronger economy indicates more financial transactions.


Market Openness

Figure 6 Insurance and Financial Services Export UK (World Bank, 2012)


Figure 7 Insurance and Financial Services Import UK (World Bank, 2012)

Imports and exports due to financial services in the UK have seen some slowdown; however, there was no sharp fall during the economic crisis. This is a strong sign for the stability of financial institutions. In a report (TheCityUK, 2011), some specifics about the financial services sector in the UK have been shared:

• In 2010, UK financial services generated £36 Billion trade surplus • In 2009, £124 Billion was contributed by the sector towards the economy

Infrastructure In the banking sector, the IT infrastructure of the country plays an integral role. There is constant data transfer from banks and use of ATM machines spread across the country. As we will see in our IS and IT systems analysis, mobile and internet banking are growing fast in the UK. A strong telecommunications infrastructure is critical for the banking sector to offer secure and reliable services.


Telecommunications

Figure 8 Internet Users in UK (World Bank, 2012)


Figure 9 UK Mobile Cellular Subscriptions (World Bank, 2012)

Credit Availability The credit line for credit cards and loans for end-users depend on the availability of credit. UK’s central bank—The Bank of England—has said more credit will be made available for customers (Douglas, 2012). A 2011 survey conducted by the Bank of England reported that there was increase in availability of credit (Bank of England, 2011).

Policy Environment The policies in the banking sector have been tightened since the economic crisis. However, these regulatory policies don’t intimidate new entrants into the market (Office of Fair Trading, 2010). The Financial Services Authority (FSA) is the regulatory body in UK that governs the banking policies. The IS strategy of banks need to take in to account the policies regarding security, data transfer and risk measurement.


Market Size and Growth Rate The UK banks’ contribution to the economy is a credible metric for market size. In 2009-2010, tax revenues generated from the financial sector was £53 Billion.

Banking Value Chain In banking, the value chain is unconventional since the lender and borrower are present at the end and start of the value chain. The IS strategy needs to be built around this concept and as a result, Customer Relationship Management tools are finding their ways into commercial banks. A basic graphical representation of the banking sector’s value chain is:

Figure 10 Banking Sector Value Chain (Synovate)

Cultural Environment According to Hofstede’s four dimensions of culture, the banking industry in the UK does not have masculinity vs femininity when it comes to the customer. In the UK, people tend to be careful of their investments post the economic crisis and do not take irrational risks. The UK is considered to be individualistic rather than collective (Hofstede's Intercultural Dimensions).

Product Development

Back-end Processing

Risk Management

Distribution Technology


Strategic Analysis We will be using Porter’s Five Forces to analyze the banking industry and the players in the UK.

Industry Rivalry The United Kingdom commercial banking sector is widely considered to be an oligopoly with the five banks leading the market. According to the CEOs of the banks, there is intense competition among the five players (The Treasury Committee, 2011). Given the economic crisis, the government eased on competitive rules allowing banks to merge (Datamonitor, 2009). The UK Treasury committee said that the banks have made it difficult for the customers to switch banks by making it difficult to compare the services offered and cited the Cruickshank Report (The Treasury Committee, 2011). In addition to not letting rivals poach clients, the banks also have been opting for Mergers and Acquisitions to maintain market dominance. Barclays bought Lehman Brothers in what is considered to be one of the deals of the century (Junod, 2009). The Royal Bank of Scotland, as part of a consortium, bought ABN Amro in 2007 (Business Insights, 2008). This has led to consolidation within the sector.

The banks have their own strengths and weaknesses and given the oligopoly status quo in the UK, the banks are concentrating on expanding in other regions to build market presence. The Royal Bank of Scotland is expanding in countries like Ireland and has a strong presence in the Asia-Pacific region. This allows RBS to compete with the UK rivals using resources from these regions. HSBC on the other hand has been focusing on cards; this allows the bank gain credibility in the market (Business Insights, 2008).

The industry rivalry is medium.

Global Comparison As seen in our global analysis report, industry rivalry in the UK is also medium. The banks across the world are trying to survive after the economic crisis and as a result are comfortable maintaining the status quo.

Threat of New Entrants The commercial banking sector relies on creating trust amongst clients, having a competitive infrastructure, and information about customers. For a new bank to attract customers, the bank needs to create brand awareness. The banks need to offer attractive products and services that make customer defect from their bank. The oligopoly setup makes it difficult for new players to enter the market since the customers are spread out across the five major banks (Office of Fair Trading, 2010). The same report further points out, the infrastructure needed to be able to provide customers with competitive services. Branch offices, payment networks and gateways, are some of the components needed for a new entrant to have in place. The investments in infrastructure lead to higher costs for new entrants.

The economic conditions and some banks choosing to disinvest offer newer players a chance to enter the market (Office of Fair Trading, 2010). In many cases, it is the bigger international players that can enter the market with their resources and acquisition of comparatively smaller, regional players.


However, research shows that customers in the UK do not want to opt for non-UK banks (Office of Fair Trading, 2010).

The threat of new entrants is medium.

Global Comparison In our global research, the threat of new entrants was seen to be low due to the capital needed and government regulations; however, in my research on UK’s banking sector, international players with cash can enter the market and potentially disrupt status quo. The chances of new players coming in cannot be ruled due to banks choosing mergers and acquisitions as a way to expand and grow, hence can acquire smaller banks in the UK.

Bargaining Power of Buyer The buyer’s bargaining power is one of the biggest forces in the banking sector since this is a service industry; a supplier’s bargaining power being the other major force. In commercial banking, the buyer and supplier is the customer. As a buyer, the customer’s bargaining power is less since all banks offer essentially the same products. Due to the status quo maintained by the industry, a buyer lost by one bank will end up with another bank resulting in a round robin situation (Datamonitor, 2009).

For the customer using banking services, they have higher bargaining power when it comes to card services offered (Datamonitor, 2009). Banks like HSBC are trying to leverage this higher bargaining power to their advantage (Business Insights, 2008). Barclays on the other hand is hoping to retain customers by offering competitive e-banking services.

The bargaining power of buyer is low

Global Comparison In our research of the global market we found the buyer’s bargaining power being medium due to the product prices offered by the banks. In the UK however, the oligopoly setup and survival-first strategy of banks, the buyer does not have a lot of bargaining power. The banks also make it difficult for the buyer to switch (Office of Fair Trading, 2010).

Bargaining Power of Supplier In the UK, out of five, the Royal Bank of Scotland and Lloyds Bank have investments from the government (Lesova, 2012). This makes the government a major supplier to the industry. In addition to economic support post the economic crisis, the government makes the rules. The government changed the regulations allowing the Lloyds bank’s acquisition of HBOS (Datamonitor, 2009). The end-customer is a supplier to the banks and as such it is essential for the banks to maintain customer lock-in. The recent economic down turn has led to customers’ lack of faith in banking institutions and this has increased the bargaining power of the customer as a supplier (Datamonitor, 2009).

The bargaining power of supplier is high


Global Comparison In our global research we found the supplier’s bargaining power high for slightly different reasons—primarily services offered. In the UK, however, the government yields a powerful influence in policy making as an investor in two major banks. Also, since services offered by the top banks are largely the same, the supplier can opt to switch if he chooses to.

Threat of Substitutes In the banking segment, substitutes are being seen as alternate services that offer basic banking services like investing and saving. These alternates include real estate investments, mortgages and pension funds. The returns in these substitutes vary and are volatile; in addition, these services are less regulated. This makes it difficult for the already skeptical UK customer to trust and opt for substitutes.

The threat of substitutes is low

Global Comparison The threat of substitutes in the global market and UK is low. The reasons in this case are the same. The customers rely on banking institutes due to their existence since several years, the ‘too big to fail’ thinking (The Treasury Committee, 2011) backed by the government bailing the banks (Shaoul, 2009).

Information Systems in Commercial Banking In our global report we explained how the Information Systems and IT infrastructure of a bank can be divided into two main categories:

• Operational systems • Customer facing

Internal Systems for the Employees The internal infrastructure of a bank that is used by employees and used for daily operations is the backend system. Customer Relationship Management suites are now seen as key to a bank’s internal infrastructure. The CRM of a bank brings together the different divisions of a bank with a central focus on the consumer. E.W.T. Ngai proposed the following representation of CRM in an organization:


Figure 11 Classification framework for CRM (Ngai, 2005)

The IT & IS involved in a CRM system includes concepts like IT security, Data mining and Data warehouses. The UK banking industry has been using computing systems dating back to 1926. The Ledger Posting Machines were used for coming up account balance reports. As technology progressed through the years, computing systems found their way into other banking functions such as book-keeping. The cost savings benefits of IT in banking were seen in those years. Computer manufacturers like IBM have been part of the UK banking infrastructure since the early 1900s (Batiz-Lazo & Wardley, 2007).

The IT & IS systems are upgraded and changed for better efficiency and in case of mergers and acquisitions. The IT infrastructure of some of the UK banks gives us interesting insights into the Information Systems strategies of the respective banks, and even the industry as a whole.

Barclays Starting May 2009, Barclays initiated their operational restructuring to adapt with the market crisis. The IT division saw 700 employees being laid off (King, Barclays to lay off 700 UK IT staff by end of year, 2009). A big blow to one of the critical cog in bank’s working, in January 2010, Barclays and Accenture parted ways. Accenture helped Barclay’s in their application development as part of a six deal pegged at £400M (King, Barclays drops £400m Accenture deal, 2010).

In May of 2010, Barclay’s decided to promote their head of Customer Relationship Management (CRM) to head their retail banking division (Parsons, 2010). The move is significant since as we wrote in our global research study, banks with CRM in place have a competitive advantage and banks can come up with tailored products. Having someone who knows the clients’ needs running the division will help the bank understand their customers better.

Customer Relationship Management

Sales

Service and

Support

IT & IS

Marketing


As part of moving forward during the economic crisis, Barclays realized the need of an analytics system. The company roped in SAS for a Business Intelligence tool that would let Barclays conform to better regulatory standards in addition to have more reliable data (King, Barclays SAS system used to improve consumption forecasting, 2012). The problems for Barclays in 2010 were not limited to the economic crisis. Reports of a fraud employee using the organization’s IT infrastructure for money laundering surfaced (ComputerWeekly, 2010).

Royal Bank of Scotland (RBS) In 2005, the Royal Bank of Scotland announced plans to introduce a system to track the performance of their call center employees. The system known as the ‘Productivity Improvement Measurement and Management System’ (PIMMS) was part of the organization’s Human Capital Management suite used by the company’s Human Resources division. PIMMS would let RBS’s HR to know information such as leadership and absence among other parameters of employee performance (Thomas, 2005). The PIMMS system comprised of four modules that included forecasting, reporting, work measurement, employee rosters and work patterns (Job, 2006).

During the economic crisis, RBS had a tough time and the lack of efficient IT systems to measure risks was understood to be one of the reasons (King, Royal Bank of Scotland did not have right risk measurement IT systems, says FSA, 2011).

During the economic crisis, the bank was said to layoff close to 4,500 employees from the back-office operations in UK. This was going to impact the bank’s IT operations (King, Royal Bank of Scotland cuts 9,000 back office jobs, 2009). The report also suggested the bank adopting a new IT system. In October of the same year, more information about the new IT system was shared. At a cost of nearly £6 Billion in a span of five years, RBS planned to integrate ABN Amro’s system with theirs. For RBS, integrating their various IT systems was a challenge that they hoped to solve with the massive investment (King, Royal Bank of Scotland to spend £6bn on IT, 2009).

Lloyds Banking Group In June 2011, the bank announced major cost cutting steps as part of the restructuring initiatives. During the economic crisis, the bank announced their acquisition of the Halifax Bank of Scotland and the IS of both organizations had to be integrated (Nguyen, 2011).The bank also severed ties with several of its IT suppliers such as VMware, Oracle, SAP and Microsoft. Like the Royal Bank of Scotland, Lloyd announced their plans to integrate HBoS’s information with their platform (King, Lloyds Banking Group lines up huge HBOS system switch, 2011).

Less than a year later, Lloyds Banking Group announced that the integration was complete (Llyods Banking Group, 2011). The integration was a considerable expenditure for the organization but would allow the new entity to offer comprehensive and integrated services to their customers.

The bank has deployed McAfee’s security solutions to secure their networks and Skybox Secure for risk modeling (British Telecommunications).


HSBC As explained above, Data warehousing plays an important role in CRMs and First Direct leverages its data to offer better after-sales support to its customers. As seen in our Porter’s analysis of the industry, the bargaining power of supplier is high; the customer can choose to take his business to another bank in case he feels dissatisfied with one bank (Ryals).

Observations As we’ve seen, the economic crisis led the major banks to evaluate their expenditure, take drastic cost-cutting steps like layoff manpower, and re-think their IT strategies.

Customer Facing or Transactional Systems The options available to the end-user to interface with the bank have evolved with time. Users like the option to track their accounts using online banking and the penetration of smart phones has led to users opting for mobile banking while using cards.

Plastic Cards (Debit and Credit) Card transactions are a popular payment method used by consumers. The UK Card Association estimates £37.9 Billion worth of transaction done using plastic cards (The UK Cards Association, 2011).

Figure 12 Average Month Expenditure (£ Billions) Figure 13 Spending on plastic cards (Annual growth rates)

The security involved in card transactions has improved over the years with a 41% fall in losses due to couterfeit plastic cards (Kirk, 2011). The IS systems involved in card banking include the ATM infrastructure spread across the country.

Mobile Banking IBM believes that by 2016, there will be considerable change in people’s banking habits due to mobile devices (IBM Global Business Services). The leading commercial banks in UK like Lloyds, Barclays, HSBC, and Royal Bank of Scotland have applications or mobile optimized websites for their customers to use. The benefit of having mobile optimized websites is that the bank does not need to develop and maintain apps for multiple platforms.

Reports from industry watchers suggest the UK market is split between Android and iOS devices. In September 2011, Nielsen’s report placed Android as a popular choice while Apple’s iPhone had the


highest brand loyalty in the UK (Nielsen, 2011). However, in February, Apple’s iPhone was the top selling smartphone in UK (Arthur, 2012). The UK is seeing rapid growth in mobile banking. According to a report, there has been a 136% increase in daily mobile banking users from December 2010 to December 2011. An estimated 4.8 million customers used their smartphones for netbanking in ;ast quarter of 2011 (comScore, 2012).

Online Banking In comparison to mobile banking, January 2008 saw almost 10.9 Million users using online banking services (comScore, 2008). The infrastructure needed to keep the websites running is a challenge for the IT departments of the banks. In 2011, HSBC UK faced severe downtimes when their servers crashed. The company was quick in responding to the situation but the outage highlights a concern (Espiner, 2011).

The online banking services offered by most banks are the same. Customers can make transfer and track their spending using detailed reports.

Global Comparison The Information Systems deployed in the UK banks and globally are similar. IT infrastructure needed for CRMs, mobile and online banking is not different. Vendors and pricing vary based on regions.


Information Systems as Strategic Advantage While the five major players in UK are comfortable with the status quo, they are trying hard to cut costs. Initially, the some banks decided to downsize their IT departments; they are, however, bringing in new IT systems to improve efficiency. The focus on the customer and developing a strategy around their Customer Relationship Management system, banks are trying to leverage IT and IS to improve their operations. In our global analysis we observed that banks are using two alignment perspectives (Henderson & Venkatraman, 1999). Similarly, in the case of UK’s banking sector, banks use two perspectives for business and IS alignment.

Technology Transformation Post the economic crisis and bailouts offered by the UK government, it is essential for both private and public banks to have a well-defined business strategy. The banks are using IT systems to reduce costs and increase efficiency; in order for this strategy to work, the banks have to know their business strategy first. The CRM systems deployed will have little return on investment if the banks are not using the information and reports produced using these systems. Banks like Barclays are using BI tools to gather better information and use this to tailor their products (King, Barclays SAS system used to improve consumption forecasting, 2012).

Service Model For the banks to operate efficiently, they need to change their infrastructure according to the business strategy. Barclays, for example, decided to put their head of CRM in charge of retail banking (Parsons, 2010). For the banks to achieve operational excellence, they need to work towards building a structure that understands how the IT and IS work together. The organization needs to make optimum usage of the technology provided to stabilize.


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UK Commercial Banking industry analysis

Economy & Finance

Transcript of UK Commercial Banking industry analysis