constistablity Flashcards
lower barriers to entry
Lower barriers toentry: The high start-up costs and sunk costs have been lowered significantly - use of internet removes need for high street branches i.e. customer facing technology removes the need to meet physically; firms can now out source to cheaper providers (e.g. Transferwise) of banking functions and data processing systems
New entrants (e.g. Funding circle and Zopa) can be accessed on line andvia apps. They, as the newcomers, have the advantage ofsetting up their systems from scratch whereas the existing banks are stuck with using old and outdated systems because ti is too costly or inconvenient for them to upgrade.
the abnormal profits being made by existing high street banks attracts new entrants
government intervention to increase competition
. New startu p banks need less capital reserves than existing banks. .2 Govt has legislated that a new SWITCHING SERVICE must be implemented by al banks - a customer
can expect al existing banking services to be switched to a new supplier within 7working days; al the paperwork is to be done by the new supplier with the full cooperation of the existing suppliers losing the business.
3. CMA (Competition and MarketsAuthority) stepped in to investigate why the switching servicewas being implemented slowlv.
4. Foreign banks have been able to enter the UKbanking industry (due tofree trade agreements e.g. EU membership; many banks want to have a presence in London because as a global financial centre it attracts m a n borrowers and savers).
5. Financial deregulation (started inthe UK with the “Big Bang” in 1986) allowed new entrants e.g. supermarkets, the post office, regional buildingsocieties and insurance companies to enter retail banking. They have not had to invest in establishing a customer base because they havetargeted their existing customers using their own customer information databases.
evaluation low barriers to entry
Older generation are less comfortable with technology and are slow to adopt internet banking
2. Security issues put people off using the internet e.g. Tescos bank recently suffered on line fraud (Nov 2016 15,000 customers saw money stolen form their on line account). Natwest siteh a s crashed 3 times in last 15 months.
3. Existing banks arequickly adapting and offering their own on line services
Existing banks may use their abnormal profits to buyn e w entrants firms
eval government intervention to increase completion
h e Government backed Financial Services compensation scheme (whichguarantees losses on deposits of up to £75,000 p.a.) does not apply to new peer top e e r lending firms.
2. Hit and run firms can more easily exist now - firms who enter the market quickly tobenefit from supernormal profitsbut exit quickly e.g. some believe that thehigh savings returns of peer to peer lenders are simplv not sustainable
and they may go bust fi they continue to offer such rates.
Customer churn rate isn o w higher and customer lovalty is now lower:
attractive and innovative new products / services being offered bynew entrants. Thisis effective in would switch accounts within a year (only 2.3 m l achieving product differentiation. actuallydid. e.g. Funding circle pays an average of 7% return on savings versus High street bank average of 1.5%; a £2,000 peer to peerloan typically costs £7-27 per month (versus as much as €123 for a bank overdraft 85% of lending to ME (small medium enterprises) has or f50 with a credit card)
Eval
In 2013 initial exception were that 5min consumers would switch accounts within a year
85% of lending to SME has has been retained by the largest six banks
existing banks are using their abnormal profits to fight back the new entrants
customers are risk averse with their money they fear that changing banks could go wrong
customers can build a long term relationships with a bank for example a track record of staying in credit which then assures them of help when they need it in the future
