Porter'S Five Forces (Banking and Finance)

PORTER’S FIVE FORCES (BANKING AND FINANCE)
1. Bargaining Power of Buyers:

The individual doesn't pose much of a threat to the banking industry, but one major factor
affecting the power of buyers is relatively high switching costs. If a person has one bank that
services their banking needs, mortgage, savings, checking, etc, it can be a huge hassle for
that person to switch to another bank.
To try and convince customers to switch to their bank they will often times lower the price of
switching, though most people still prefer to stick with their current bank.
The internet has greatly increased the power of the consumer in the banking industry. The
internet has greatly increased the ease and reduced the cost for consumers to compare the
prices of opening/holding accounts as well as the rates offered at various banks.
ING Direct introduced high yield savings accounts to catch the buyers' attention, then they
went a step further and made it very easy for customers to transfer their money from their
current bank to ING. ING was successful in their attempt because they managed to make
switching costs very low in terms of time and capital.
2. Bargaining Power of Suppliers:

Capital is the primary resource on any bank and there are four major suppliers (various other
suppliers [like fees] contribute to a lesser degree) of capital in the industry.
1. Customer deposits.
2. mortgages and loans
3. mortgage-backed securities
4. loans from other financial institutions.
By utilizing these four major suppliers, the bank can be sure that they have the necessary
resources required to service their customers' borrowing needs while maintaining enough
capital to meet withdrawal expectations.
The power of the suppliers is largely based on the market, their power is often considered to
fluctuate between medium to high.
3. Rivalry among existing competitors:

The banking industry is considered highly competitive. The financial services industry has
been around for hundreds of years, and just about everyone who needs banking services
already has them. Because of this, banks must attempt to lure clients away from competitor
banks. They do this by offering lower financing, higher rates, investment services, and greater
conveniences than their rivals. The banking competition is often a race to determine which
bank can offer both the best and fastest services, but has caused banks to experience a
lower ROA (Return on Assets). Given the nature of the industry it is more likely to see further
consolidation in the banking industry. Major banks tend to prefer to acquire or merge with
other banks than to spend money marketing and advertising.
4. Threat of substitute products:
Some of the banking industry's largest threats of substitution are not from rival banks but from
non-financial competitors.
The industry does not suffer any real threat of substitutes as far as deposits or withdrawals;
however, insurances, mutual funds, and fixed income securities are some of the many
banking services that are also offered by non-banking companies.
There is also the threat of payment method substitutes and loans are relatively high for the
industry. For example, big name electronics, jewelers, car dealers, and more tend to offer
preferred financing on "big ticket" items. Often times these non-banking companies offer a
lower interest rates on payments then the consumer would otherwise get from a traditional
bank loan.
5. Threat of new entrants:

The banking industry has undergone a consolidation in which major banks seek to serve all of
a customer’s financial needs under their roof. This consolidation furthers the role of trust as a
barrier to entry for new banks looking to compete with major banks, as consumer are more
likely to allow one bank to hold all their accounts and service their financial needs.
Ultimately the barriers to entry are relatively low for the banking industry. While it is nearly
impossible for new banks to enter the industry offering the trust and full range of services as a
major bank, it is fairly easy to open up a smaller bank operating on the regional level.

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PORTER’S FIVE FORCES (BANKING AND FINANCE)

1. Bargaining Power of Buyers:

2. Bargaining Power of Suppliers:

3. Rivalry among existing competitors:

5. Threat of new entrants:

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