The findings of the analysis will be critically evaluated in order to achieve the main aim of the report in the conclusion from which suitable recommendations will be made. These recommendations will acknowledge all the problems identified in the analysis and evaluation and advice how they may be dealt with.
2. Evaluation
Industry Analysis
The British banking industry has come under extreme scrutiny over recent years and it is likely to continue during the foreseeable future. The perceived anti-competitive nature is as a result of a century of mergers and take-overs like the ones that created NatWest and latterly the merger with The Royal Bank of Scotland. Such instances throughout the 20th century have seen the financial services in Britain transform from many small bankers offering a limited range of services to a wealthy minority comprising of a few global players offering a varied range of services. Currently four high street banks of which RBS (NatWest) is one dominate the industry, the others are Barclays, HSBC and Lloyds TSB.
A useful analytical tool here is a PESTEL analysis. PESTEL enables the user to set the external environmental scene in which an organisation is operating by categorising environmental factors and how they apply to the organisation. The headings under which the environmental influences are placed are as follows; Political, Economic, Social, Technology, Environmental and Legal. These headings can then be used as a ‘checklist’ of factors to be analysed. It has been used here to display NatWest’s position within the British banking industry and how the above factors effect the bank.
PESTEL
- Political: The political system in which a bank operates is important and NatWest’s UK operations are carried out in a controlled democratic environment and a free market economy. However a government review in 2000 was very critical of the banking industry was very critical and this has prompted further investigations likely to have a detrimental effect on the large banks such as NatWest (appendix 1.).
- Economical: Crucial to all financial services are interest rates and although in Britain they have not increased drastically the steady rise in The USA and Asia and the inflated housing market would indicated that it is only a matter of time until they do. Banks have experienced good profits over the last few years while interest rates and inflation have been low, this cannot be realistically expected to continue. Interest rate hikes will reduce lending activity and reduce the industry’s revenue.
- Social: The banks have a responsibility to consumer groups such as The National Association of Bank Customers and The Consumers’ Association who are particularly vociferous in their condemnation of they way the large banks operate in the UK. Consumers’ Association spokesman Phil Telford “It’s a lot of money that people are being overcharged year by year for accounts which are not really providing the sort of services that in the 21st century people expect and demand."
- Technology: Internet banking is an extremely fats growing market and NatWest are one of the front-runners in a highly competitive part of the industry. In recent years the introduction both Internet and telephone banking have injected fresh competition into the industry. Prudential’s launch of its Egg savings account has been one of the most successful. Dangers lie here because Internet banking drastically reduces overheads and as a result further redundancies and branch closure may lie ahead for high street banks such as NatWest.
- Environmental: With little to choose between the financial products and services that banks offer, their attitude and policy towards environmental factors may be key in obtaining a greater market share.
- Legal: The Competition Commission has been asked by the government’s 2000 review to determine whether the banks are acting within the law and also recommends the blocking of any further mergers within the banking sector until any reforms are implemented. The review also states that some existing bank units should be split off to ensure greater competition. Andrew Parkinson of The British Chambers of Commerce said: "We are increasingly concerned that the concentration of banking services in a small number of banks is restricting choice in the small business sector.”
Company Analysis
The results of the PESTEL analysis assists in understanding aspects of the environment in which NatWest operates however it does not identify the possible advantages that may be gained from the environment. Further analysis is required to highlight the potential advantages NatWest may be able to gain over the competing banks. The ideal tool to do this is the Five Forces model proposed by Porter. The model works when it is applied to a specific business or organisation rather than a whole industry as with the PESTEL analysis. The forces included in this model are; the threat of entry, industry rivalry, the threat of substitutes, the power of buyers and the power of suppliers. In this case the 4th and 5th forces will be grouped together because in the banking industry the buyers are also the suppliers and vice versa.
Five Forces
- The threat of Entry: There is virtually no threat of any new entrants to the high street banking industry due to the enormous amount of capital required and the economies of scale involved. One possible risk may be Internet banking where a new entrant may have a better chance due to the relatively low costs.
- Industry Rivalry: Even though the four main banks, Barclays, RBS (NatWest), HSBC and Lloyds TSB control 80% of personal accounts in the UK high levels of competition do exist. One product of this climate is the merging of major financial institutions in order to increase market share and benefit from greater economies of scale. However it is unusual for individual customers to change bank accounts and it is said, “People are more likely to get divorced than change their bank account.” (Don Cruickshank, 2000).
- Threat of Substitutes: There are not really any substitutes for banking that are legal in the UK.
- The Power of buyers and suppliers: Interest rates are the single most important aspect of bank profitability they are the bargaining power. Most bank profits are derived from net interest income. This is interest income received on loans minus interest expense for borrowed funds. Interest rates determine the amount of money a bank can earn. Another measure is banks' net interest margin, which is a bank's net interest income divided by its average earning assets. This is a common measure of a bank's ability to squeeze profits from its loans. When interest rates fall, they have a positive effect on a bank. However because within the British banking industry there are only a small number of large suppliers the most power lies with the banks.
The information collated in the PESTEL and Five Forces tools may now be combined and tabulated in order to show the direct effects of strategic decisions which may be taken (appendix 2).
Likely Consequences
From the analysis carried out above it is now possible to see how the banking industry may change in the future and where it is possible for NatWest to capitalise in the changing environment. From the PESTEL analysis it is clear that future political and legal intervention may result in actions against the large banks that dominate the UK, if they are found to be anti-competitive restrictions may be imposed. Banks such as The Royal Bank of Scotland may be seen as monopolising the market and their merger with NatWest in 2000 may be seen as an indication of how competition will reduce further if banks continue to behave in such a way.
Rising interest rates may also be detrimental to NatWest’s profits in the future, however there is not much action that can be taken to avoid this. Failing to predict accurately, how interest rates may fluctuate in the future may leave the bank susceptible to reduced profits and a reduction of share value.
NatWest, for the first time in many years now face a substantial risk of new entrants to the industry. The reasons for this are technological, due to the increasing popularity and development of the Internet. New Entrants into the online banking industry may now proceed without the high costs of setting up a large high street bank network, NatWest may experience a reduced market share as a result of this. These low overheads also offer an opportunity to NatWest to capitalise on this niche market.
Alternative Solutions
NatWest now has the option of capitalising on new forms of technology. The bank already has an Internet banking service but it is used only as a service for existing account holders to manage their accounts, it may be possible for NatWest to start a separate division of financial services solely for internet and telephone customers. An expansion of this kind would entail the setting up of a subsidiary company such as Prudential’s inception of its Egg savings account and credit cards.
Such a venture would prove advantageous in attempting to gain a greater market share in the Internet banking market. The venture would also be relatively cost effective because there is no need for new branches.
Possible disadvantages would be that although relatively low, the capital required would still be substantial. Such a move may also be looked upon unfavourably by The Monopolies and Mergers Commission and may be seen as anti-competitive. There are also the security fears of customers to consider.
Findings
The British banking industry is an extremely large one and although there are only a few major players it is competitive. NatWest is one of the largest banks and enjoys a huge market share. However new technology is bringing slightly more potential competitors towards the industry and future government intervention may also cause many barriers to entry to be dissolved in order to increase competition.
3. Conclusion
All indications from the information gathered in this report suggest that the banking industry is likely to become more competitive in the near future, it is therefore important for NatWest to capitalise on the large market capitalisation it possesses. New Technology is a reason for this and it is therefore important for NatWest to capitalise on this in order to preserve the organisation’s position as one of the largest banks in the world.
4. Recommendations
The main recommendation from the findings in this report is for NatWest to harness the increasing popularity of the Internet, offering a wide range of financial services to Internet customers should do this. This should not just be the existing account services already available online, but an entirely self-sufficient entity existing as a subsidiary of NatWest Bank Plc.
The aim of this is to counter the threat of possible new entrants and to give the organisation a sounder footing should the market become more competitive in the near future.
Possible drawbacks with such an online service would be security threats to accounts held by online customers. Also the broader issue of an anti-competitive industry may withhold such an expansion by one of the market leaders.
- Bibliography
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Gerry Johnson & Kevan Scholes (2002) Exploring Corporate Strategy Sixth Edition. London: Prentice Hall.
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Henry Mintzberg, James Brian Quinn, & Sumantra Ghoshal (1995) The Strategy Process: European Edition London: Prentice-Hall
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- news.bbc.co.uk/1/hi/business
Appendices