Lekhnarayan Thakur, IIM Sambalpur

Porter’s Five Forces Analysis on

Banking/Finance Sector

One of the most significant economic sectors, the banking industry is also one of the most influential
and adaptable to both local and global change.

The whole banking sector is undergoing a modernization phase as it transitions from in-person bank
visits to internet banking.

The Porter 5 forces help to better understand the banking sector as a whole. They are namely.

1. Rivalry among Existing Competitors

2. Threat of New Entrants
3. Bargaining Power of Suppliers
4. Bargaining Power of Buyers
5. Threat of substitute products

1. Rivalry among Existing Competitors

The banking sector is quite cutthroat. Most consumers who use financial services already have
accounts with not just one bank, but several. Banks provide improved services, such as higher
interest rates on deposits, lower interest rates on loans, and greater customer support, in an effort
to entice both current and potential clients. The Government of India recently amalgamated many
PSBs (Public Sector Banks), as is customary in the banking industry, in order to strengthen their
financial capacity and expand their reach internationally.

2. Threat of New Entrants

There are 155 banks active on Indian land, according to the most recent list from the RBI. Some of
them include the private sector, regional rural banks, small financing banks, public sector banks,
financial institutions, and the most recent group, payments banks. These 20 public sector banks
were reduced to 12 as a result of mergers involving several of them. Customers' faith in their current
banks, which handle their hard-earned money, is a big barrier for new banks since they are often
reluctant to try out new banks. The banking sector has lately changed from providing deposit or
money-lending services to managing mutual funds, fixed deposits, etc.

3. Bargaining Power of Suppliers

Any bank's basic resource is capital, and there are four key sources of capital in the market
(additional sources, including fees, contribute to varying degrees).
I. Deposits from clients.

2. Loans and mortgages.

3. Securities based on mortgages.

4. Credit advances from different financial organisations.

The bank must make sure they have the resources needed to satisfy their clients' borrowing
demands while preserving adequate capital to meet withdrawal expectations while employing these
four key suppliers. Market factors heavily influence the supplier's power, which can range from
medium to high.

4. Bargaining Power of Buyers

The final consumer might be a company or a person. Although they don't directly threaten the
whole banking sector, the banking players may have serious concerns if transferring between banks
isn't expensive. Various banks will make an effort to get consumers to do business with them, and in
this situation, the switching fee may play a significant role in their choice. A relatively low switching
cost combined with greater possibilities might push a person to move banks, and a large switching
cost could serve as a barrier.

This barrier has been significantly lowered by the current internet-based banking services, and
switching banks is now relatively straightforward from a time and cost perspective.

5. Threat of substitute products

Between banks in the public and private sectors, there is intense competition. Public sector banks
assist to enforce the faith with which people put their money in the banks by offering more stability
due of their backing by the government, even if private banks often offer superior facilities and client
experiences.

While there is no serious danger of replacements to the business in terms of deposits or

withdrawals, there are numerous banking services that are also provided by non-banking
organisations, such insurances, mutual funds, and fixed income securities.