Porter Five Forces On Banking, Finance Industry

Finlatics FMEP Program 2020
Sector Project 1: Banking/Finance
Porter’s Five Forces Analysis on Banking/Finance Industry:
Porter’s Five Forces

By Michael Porter, a Professor of Strategy at Harvard Business School
Competitive Rivalry:
The Banking Industry is considered highly competitive. There are many competitors in
Banking or Finance sector. Banking sector is one of the fastest growing sectors in the country.
This growth has brought many opportunities. Regulation of banking system in India started
with Banking Regulation Act, 1949. Competition in the financial sector matters for a number of
reasons. As in other industries, the degree of competition in the financial sector matters for the
efficiency of production of financial services, the quality of financial products and the degree of
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innovation in the sector. Greater development, lower costs, enhanced efficiency, and a greater
and wider supply resulting from competition will lead to greater access. The relationships
between competition and banking system performance in terms of access to financing are more
complex. Banking sector attract their customers 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). Major Banks tend to prefer to acquire or merge
with other banks than to spend money marketing and advertising.
Bargaining Power of Buyers:

Buyers in industry are powerful, when
1. There are plenty of suppliers to choose with low switching costs:

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
2. Few buyers: As the banking/finance sector has plenty of customers, there is no threats
of having few buyers.
Buyers can exert pressure and drives prices down. 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.
Bargaining Power of Suppliers:

If suppliers have high bargaining power they can influence pricing and thereby influence profits.
Capital is the primary resource on any bank and Suppliers in industry are powerful, when
1. Few suppliers: there are plenty of suppliers in banking/finance sector. 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.
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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.
2. High switching costs: For high switching cost most people still prefer to stick
with their current bank. The power of the suppliers is largely based on the market,
their power is often considered to fluctuate between medium to high.
Threat of Substitutes Products:

Substitutes are alternatives that serve the same need.
1. Higher number substitutes: 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, withdrawals,
however insurances, mutual funds, and fixed income securities are some of the many
banking services that are also offered by non-banking companies.
2. Lower number substitutes: 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.
Threat of New Entrants:

Every market has established market leaders and new entrants can eat into the leading market
share. Despite the regulatory and capital requirements of starting a new bank, between 1977 and
2002 an average of 215 new banks opened each year. With so many new banks entering the
market each year the threat of new entrants should be extremely high. after a certain period
barriers to entry in this sector becomes higher , banks started merging and total banks decreases
by roughly 253 a year. Because the industry deals with other people's money and financial
information new banks find it difficult to start up. Due to the nature of the industry people are
more willing to place their trust in big name, well known, major banks who they consider to be
trustworthy. The banking industry has undergone a consolidation in which major banks seek to
serve all of customer 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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How does competitive rivalry impact banks?

What factors influence the bargaining power of buyers in the banking industry?

Finlatics FMEP Program 2020

Sector Project 1: Banking/Finance

Porter’s Five Forces Analysis on Banking/Finance Industry:

Porter’s Five Forces

Bargaining Power of Buyers:

1. There are plenty of suppliers to choose with low switching costs:

Bargaining Power of Suppliers:

Threat of Substitutes Products:

1. Higher number substitutes: Some of the banking industry's largest threats of

Threat of New Entrants:

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