ABSTRACT

Porters 5 force model

PORTER’S 5 FORCE ANALYSIS- BANKING
INDUSTRY
can help us determine
the factors involved and
various market forces
that influence the
functioning of the Bank
business model. It helps
in understanding the
level of competition the
banking industry faces,
competition is an
important factor to
determine the level of
profits the banking
industry can achieve.
Understanding the
model helps banking
industry to gauge its
market positions.
Understanding the
competitors in the
market can help the
banking industry to
gauge its strengths and
weakness, and better
equip itself to face the
ever changing trends in
the market, to optimize
its profitability.

Yashasvi Sharma
PORTER’S 5 FORCE ANALYSIS

 Porters model is, applied microeconomic principles to business strategy and analyzed the
strategic requirements of industrial sectors, not just specific companies. The five forces are
competitive factors which determine industry competition and include: suppliers, rivalry
within an industry, substitute products, customers or buyers, and new entrants. Although the
strength of each force can vary from industry to industry, the forces, when considered
together, determine long-term profitability within the specific industrial sector. The strength
of each force is a separate function of the industry structure, which Porter defines as "the
underlying economic and technical characteristics of an industry."

 Collectively, the five forces affect prices, necessary investment for competitiveness, market
share, potential profits, profit margins, and industry volume. The key to the success of an
industry, and thus the key to the model, is analyzing the changing dynamics and continuous
flux between and within the five forces. Porter's model depends on the concept of power
within the relationships of the five forces.

 Porters 5 force model can help us determine the factors involved and various market forces
that influence the functioning of the Bank business model. It helps in understanding the level
of competition the banking industry faces, competition is an important factor to determine the
level of profits the banking industry can achieve. Understanding the model helps banking
industry to gauge its market positions. Understanding the competitors in the market can help
the banking industry to gauge its strengths and weakness, and better equip itself to face the
ever changing trends in the market, to optimize its profitability.
1.1 Bargaining Power of Suppliers to Banking industry
The Bargaining Power of Suppliers is high as there is rise in investment avenues like Mutual Funds,
Tax-free bonds, Equity market etc. Providers of funds could be more demanding. As quality of
services provided with minimum time matters a lot.
The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or
services. Supplier bargaining power is likely to be high when:
 Interest rates play a major role in the functioning of the bank.

 Valuations of Dollar, Euro and Rupee play a major role.

 The economic out look of the country determining the future of lending and borrowing
capability of the bank.

 RBI( Reserve Bank Of India) is the supreme controller of the functioning of the bank.

The functioning of the bank is very sensitive to the fluctuations in the interest rates of the Federal
Reserve Bank in the US.

Since the bank has offshore operations in many countries its interest rate policy and products are
directly related to the law of the land and the economy of the country. Example: Switzerland, Japan.

The bank does not have direct influence on the prevailing conditions it should adapt to the market and
economic conditions.

1.2 Bargaining Power of Customers for Banking industry

Bargaining power of customers is very high, as banks have also forayed into the long-term finance.
Similarly, the bargaining power of customers determines how much customers can impose pressure
on margins and volumes. Customers bargaining power is likely to be high when: They take large
volumes of loans and deposit large sums of money; there is a concentration of buyers. The consumers
have a wide choice of banks and services to choose, which offer very attractive offers for the
consumers.
Retail lending (especially mortgage financing) formed a significant portion of the portfolio for
banking industry and they have customized their products to cater to the diverse demands. With
better penetration in the semi urban and rural areas the bank garnered a higher proportion of low cost
deposits thereby economizing on the cost of funds.
Apart from streamlining their processes through technology initiatives such as ATMs, telephone
banking, online banking and web based products, banking industry also resorted to cross selling of
financial products such as credit cards, mutual funds and insurance policies to augment their fee based
income.

Banking industry’s Foray into Rural Markets

Banking with the poor is a challenging task as the natures of demand requires doorstep services,
flexibility in timings, and timely availability of services, low value and high volume transactions and
requires simple processes with minimum documentation. The nature of supply however involves high
cost of service delivery, rigid, inflexible timings and procedures and high transaction costs for the
customers. With these features on the supply side, traditional banking is not poised to meet the
requirements of the demand side. The reach of the banking sector in the rural areas was as low as 15%
in terms of credit potential, and 18% in terms of population with physical access to a bank branch.
Banking industry chose to pursue the unreached rural markets as part of its strategy of being a
universal bank. However, instead of taking the conventional branch banking model for increasing its
outreach, the Bank decided to work with models which would combine the strengths of intermediary
forms of organization with the financial bandwidth of a banking institution.

1.3 Threat of New Entrants for banking industry

Licensing and Government and RBI requirements, investment in technology, skills required for
financial management, distribution reach, good branch networks. The entry of foreign banks is posing
a big challenge.
The competition in this industry will be the higher, if it is easier for other companies to enter this
industry. In such a situation, new entrants could change major determinants of the market
environment (e.g. market shares, prices, customer loyalty, financial services, and deposit interest
rates) at any time. There is always a latent pressure for reaction and adjustment for existing players in
this industry. The threat of new entries will depend on the extent to which there are barriers to entry.
These are typically:
 Economies of scale (minimum size requirements for profitable operations)
 High initial investments and fixed costs
 Cost advantages of existing players due to experience curve effects of operation with fully
depreciated assets
 Bank reputation and brand loyalty of customers
 Protected intellectual property like patents, licenses, etc.
 Scarcity of important resources, e.g. qualified expert financial experts and adequate staff
 Good network of branches with ATM’s channels are controlled by existing players.Existing
players have close customer relations, e.g. from long-term financial service contracts.
 Moderate switching costs for customers.
 Legislation and government action that control the banking sector.

Indian private banks seems to be a step towards facilitating entry of foreign banks into India. The
twin-phased roadmap also seems to be towards fulfilling the key objectives of competition,
consolidation and convergence in the sector. Policy initiatives such as lifting the 10% cap on voting
rights in private banks was another much awaited decision for facilitating foreign ownership in private
banks. This initiative is expected to pick up momentum once the sector opens up for foreign
competition post FY09, banking industry has high vested interested for such moves.
Given the low credit penetration and strong capex cycle, credit growth for banking industry is
expected to remain robust despite the prospect of rise in interest rates, going forward. While better
asset quality projects a positive outlook for the bank, margin pressures and capital crunch remain
some of the prime concerns.

1.4 Threat of Substitutes for banking industry

Threat of substitutes is also high as there are large numbers of investment and borrowing avenues.
NBFCs and small co-operative banks are also posing a major threat to the market share of the bank.
A threat from substitutes exists if there are alternative banking services available with lower prices of
better performance parameters for the same purpose. They could potentially attract a significant
proportion of market volume and hence reduce the potential sales volume for the bank. This category
also relates to complementary products. Similarly to the threat of new entrants, the threat of
substitutes is determined by factors like:

 Close customer relationships

 Switching costs for customers
 The relative price for performance of substitutes
 Current trends
 High returns during Bull market.
 People are not very conservative and are risk takers.
Non-banking financial companies (NBFCs) are privately owned financial intermediates focusing
mainly on leasing, hire purchase, car and consumer durable finance, investment banking and advisory
services. NBFCs are able to earn higher returns due to their ability to manage high-risk assets. For
instance auto financing is high yielding. Banking industry also faces strong competition from mutual
funds and stock markets.
FIs are not required to maintain cash reserve ratio (CRR) and statutory liquid ratio (SLR). Priority
sector lending norm of 40% (of total advances) is not applicable to them. While this is at their
advantage, they do not have access to low cost demand deposits. As a result their cost of funds is
always high, resulting in thinner interest spread.
Non-banking finance companies (NBFCs) and housing finance companies (HFCs) that were banned
from accessing the overseas market for resources by the Finance Ministry a few years back will now
be able to access low cost funds through the FCCB route. This will not only ease pressure on their
fund mobilization but also exert heavy pressure on banking industry and will have to face a stiff
competition. Investors’ awareness of trading in the Indian capital markets is a serious threat to the
Revenue generation of banking industry.

1.5 Competitive Rivalry between Existing Players for banking industry

There are numerous informal financing in the rural area. There is intense competition due to the large
number of capital markets in India for investing. This force describes the intensity of competition
between existing players and banking industry in financial markets. High competitive pressure results
in pressure on prices and margins and thus on profitability for every finance organization in the
segment. Competition between existing players is likely to be high when There are many players of
about the same size
 Players have similar strategies.
 There is not much differentiation between players and their products, hence, there is much
price competition.
 Low market growth rates (growth of a finance organization / individual is possible only at the
expense of a competitor).
 Barriers for exit are high (e.g. expensive and highly specialized service oriented approach).
 Less paper work in case of rural / local financers.
India’s capital markets have experienced sweeping changes since the beginning of the last decade. Its
market infrastructure has advanced while corporate governance has progressed faster than in many
other emerging market economies. Its Regulatory framework institutions like SEBI, Sock exchanges
play a major role in India’s capital market.
An enabling environment is coming in place and there is an overriding increase in the domestic
investors’ knowledge regarding the merits and risks of capital market investing. Professional financial
services not only execute trades for their clients but also provide them critical and timely investment
advice.

A person who had invested 10k every month from 1996 to 2006 in mutual funds have reaped an
amazing returns of around one crore rupees. By timing the market properly based on technical or
fundamental analysis, the returns are very huge compared to what one gets from investing in fixed
deposits or other schemes in the banks.
Rural people have easier access to local financers rather than banks. Getting loans from informal
financers is easier with hardly any paper work than undergoing a formal process in the banks.
Illiteracy still has its strong hold on the minds of rural people and they feel that bank is not for poor
illiterates like them. Informal financers are very proactive in their restructuring initiatives be it in
implementation or pursuing people. The rate of inflation draws the urban mass closer to the capital
markets.
Many financial institutions such as SBI, HDFC, HSBC, ICICI Banks will spend the rest of this
decade positioning themselves to meet the demand for long-term savings products and for life-
cycle wealth management services. Bringing intensive awareness in the rural people about the
services provided by the banks and by eradicating illiteracy, banking industry can become a
great success in the rural areas of the country. Having its branches even in the remote areas of
the country is a necessity to overcome the challenges of the informal financial organizations or
individuals. By offering effective life-cycle wealth management services and by predicting
changes in consumer preferences through the cycle banking industry can be very successful, at
least in developed markets. Branding, product mix, customer service and performance metrics
must all support the goal of building a long-lasting and multi-faceted relationship with the
customer.

KEY TAKEAWAYS

 Porter's Five Forces is a framework for analyzing a company's

competitive environment.
 The number and power of a company's competitive rivals,
potential new market entrants, suppliers, customers, and
substitute products influence a company's profitability.
 Five Forces analysis can be used to guide business strategy to
increase competitive advantage.