Banking Industry PESTEL analysis
The banking industry is a highly fragmented and made up of various segments including retail banking, corporate and investment banking as well as asset and wealth management. During the period from 2006 to 2011, the retail banking segment had seen significant growth and is expected to grow even faster in 2017. In the global banking industry the largest market share is held by Europe – 43%. However, during 2006-11 banking in the Asia Pacific region has seen much faster growth. Compared to both the European and North American region, this region continued to grow at a faster rate.
Opportunities for growth in this region are also huge. India and China both present major opportunities for the banking sector. Apart from these trends there are several other forces and factors too that also influence the growth and business of the banking sector. Growing middle class income, increased technology usage, legal and regulatory factors and in this way several forces impact the banking sector. Here is a PESTEL analysis of the Banking industry that analyses the impact of these forces on the industry and its growth.
Political factors acquire a very important role in the context of the banking and financial services sector. Traditionally, these financial institutions have held immense power and influence. Due to this the level of government scrutiny and regulation they have to deal with is also very high. However, because of being the leading repositories of the public’s savings, the banks must be regulated and still strict regulation has often been criticised for hindering growth. Apart from it the level of involvement between the banks and eh government has also been high since always. There has always been a high level of involvement between banks and the federal, state and local governments.
A dual banking system has regulated the banks in US where both Federal and State authorities hold significant regulatory authority. While everyone knows the reasons why governments have regulated the banking system, whether this regulation must remain strict or be made lenient has remained a topic of debate. In response to the financial crisis of 2008, the Obama administration passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The provisions of this act are intended to decrease risks in several areas in the banking system. A number of new government agencies were established and tasked with the job to oversee compliance.
However, the Dodd Frank act has also been criticized for being over restrictive and for reducing the US firms’ competitiveness against their US counterparts. In 2017, it is expected that the American government will reduce the regulatory pressures on the banking system. It is expected that the regulatory system will be less zealous in terms of reinforcement as well as more measured when levelling fines. Such changes will encourage the banks to increase their focus on the customer facing activities.
The banks have been forced to bear massive costs related to compliance which also might be reduced owing to these changes. Overtime, it has also come to light that the regulation have benefited the U.S. banking sector. U.S. banks have grown at a stronger rate compared to their European counterparts. The U.S. banking industry is in a very healthy shape compared to a decade ago. It is in its healthiest form since the financial crisis. The U.S. China trade wars have also affected the banking system in China. The Chinese banks grew at a tremendous rate for last several years but are now facing a tougher situation.
Banks and economic growth are interrelated. A growing economy is good for banking sector and a healthy banking sector can be good for the regional economy. Investment banks play an important role in the regional economies and this is particularly true in the case of the US economy. In case of the mixed economies, large corporations and governments depend upon the investment banks when they have to raise funds.
In the 21st century, the banks have emerged as important players facilitating business growth. They have emerged as critical partners for small and large businesses helping them with loans, consumer transactions and several other things.
These banks are important partners for the individual economies. While on the one hand their health depends upon the state of the economy, on the other, the economy’s health depends upon the operations of the banking sector. Both are complementary. In today’s globalized world, a lot of business takes place online. Even the individual consumers make online payments using their credit cards and bank accounts. These trends have grown fast in the last 5 to ten years because of increased activity in the banking sector.
Moreover, like the developed economies, the banks have a very important role to play in the fast developing and developing economies too like India, Nigeria, Malaysia , Singapore and Hongkong where apart from creating opportunities, they can also fuel the growth of Micro and Small Enterprises. Particularly in nations which are not yet developing at a fast pace like Nigeria, the banking industry can help bring economic reforms with help from the government. The banking industry is an important part of the global economy. However, the two are also interdependent.
Sociocultural forces too can have a deep impact on the banking industry. Changing social trends and people’s preferences can affect the business and growth of the banking brands. Consumer demographics and people’s attitudes towards the financial services have also changed a lot. The millennials whether students or professionals make use of credit cards for small and big transactions. Businesses whether small or big are more open to taking financial assistance from the banks. Consumer confidence has surged owing to economic factors but socially to the acceptance of bans and banking services has risen.
So, several things have changed in the twenty first century. The millennials wants great customer service and convenience and it sis why the banks have focused in providing a whole range of services online combined with round the clock customer assistance. In this way, banking industry has taken an entire new direction in the 21st century and customer satisfaction as well as customer orientation has become important for them just like other big businesses. Socially other small and big changes to affect the banks like growing use of banking services in the rural sector, among the women and the growing income of the middle class consumers.
Technology is virtually everywhere in the 21st century. A large part of the tasks carried out by the banks are carried out online. Information technology has taken center stage and from customer accounts to loans and insurance, several services can be availed of online. Technology has added convenience to banking. However, some issues have also arisen amid all this technological development and innovation. Privacy and security concerns have also grown bigger with the rising use of technology. Banks have to spend significantly large sums on the maintenance of a large technological infrastructure. Apps are common and customers use them any time from their smartphones to shop and pay online. These apps are full of features and make it easy to pay bills online.
Sustainability and environment friendliness has become important for the banking sector too just like other businesses. Energy management and other environmental concerns are being addressed by banks globally. Banks like HDFC are investing in energy management. Many have already taken important steps towards paperless transactions. In order to control its environmental footprint, HDFC has also introduced solar ATMs. “These use rechargeable Lithium Ion batteries which use solar energy for their functioning, thereby reducing the consumption of conventional energy”. Banks also publish their yearly environmental reports highlighting their critical achievements over the year in this area. It creates a positive image and also reduces costs in several operational areas.
The banking industry globally is impacted by several laws. It is also a large employer and is affected by the labor laws. Legal risks are immense because oversight and regulation are very high in this sector. In US alone, several laws have been introduced to regulate this sector of the industry. Since the Federal Reserve act of 1913, the Glass Steagall Act and the Dodd Frank several laws have been introduced and several agencies founded to oversee and ensure compliance. Customer concerns and social responsibility have also made the government introduce several laws. Banking is a heavily regulated area where compliance requires a lot of focus and also spending.
The Impact of Government Policy and Regulation on the Financial-Services Industry: MH Education