Porter's Five Forces Analysis: Banking and Finance Sector

Porter’s five forces analysis: Banking and Finance sector

Michael Porter a stated that the profitability of a company is determined by the five forces
which are
1. Bargaining power of buyers
2. Bargaining power of supplier
3. Rivalry among existing customers
4. Threat of substitute products
5. Threat of new entrants
According to above five forces I have analyzed Banking/finance sector the detailed analysis
is given below:
1. Bargaining Power of Buyers: In the Banking or Finance sector a person can not pose
much threat to the Banking sector at individual level. There is a factor in banking sector
which affects the power of buyers, that is switching cost. The switching cost is relatively
high. 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 convince the
customer to switch their bank is a great challenge because the customer wants to stick to their
current bank i.e. they do not want to change their bank. Improvement in the technology and
internet played a major role in increasing the power of buyers. Because customers can now
easily identify better plans for banking and can compare the rates.
2. Bargaining Power of Suppliers: Capital is the primary resource on any bank and there are
four major suppliers (various other suppliers contribute to a lesser degree) of capital in the
industry.
1. Customer deposits.
2. mortgages and loans.
3. mortgage-baked 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. The power of supplier depends on the number of suppliers
in the market. If there is monopoly in the market then the supplier have more power rather
than a perfect competitive market.
3. Rivalry among Existing Competitors: The financial services industry has been around
for hundreds of years, and just about everyone who needs banking services already has them.
The banking/finance sector is highly competitive in nature. 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. And then there
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 Substitutes 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, jewellers, car dealers, and more tend to offer
preferred financing on "big ticket" items. Often 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: From year 1977 to 2002, despite of having regulatory and
capital requirements for opening a new bank a good number of banks were opening every
year (the number was 215). With so many new banks entering the market each year the threat
of new entrants should be extremely high. However, due to mergers and bank failures the
average number of total banks decreases by roughly 253 a year. A core reason for this is,
what is arguably, the biggest barrier of entry for the banking industry, trust.
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 a
customer’s financial needs under their roof (this can clearly be seen in the business model of
banks like Wells Fargo's). 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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