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Commercial Dynamics in Financial Services Market Assessment
Key Note Publications Ltd, Jan 2001
Introduction
Commercial Dynamics in Financial Services is Key Note's analysis of the forces which are continually reshaping the financial services industry: competitive pressures and political imperatives, changing market demands, technological opportunities, the power of brands, and the rise of strategic partnerships. `Financial services' are cash management, savings, investments, loans, credit cards, mortgages, and long- and short-term insurances.
Competitive Pressures and Political Imperatives
Hsbc is the UK's biggest bank. Its profits in 2000 dwarfed those of all other banks in the UK. Lloyds TSB, Barclays and Royal Bank of Scotland follow Hsbc in terms of pre-tax profits. The banks fared much better than the insurers in 2000: long-term insurance was hit by the public's reluctance to invest in pensions and endowments because of falling returns, and general insurance was hit by rising claim values. Royal and Sun Alliance, for example, achieved a marginal profit, and Cgnu posted a huge loss.
The Government halted Lloyds TSB's £17bn hostile bid for Abbey National, on the grounds that the takeover would be against public interest. The decision has far-reaching implications for domestic banks and insurers: during the lifetime of the current administration, `public interest' is likely to prevent any mergers which concentrate more than around a quarter of any market in the hands of one company. Increasingly, therefore, companies will look to expand abroad. Lloyds TSB and Barclays both earn over 85% of their profits in the UK, and in recent years have grown by acquiring UK organisations, a process that will be difficult to continue because of the concentrated nature of UK financial services. Halifax and Bank of Scotland are expanding through a merger with each other, but when this is accomplished, further growth by acquisition or merger will be hard to come by. Further details and figures are given in Chapter 2 - Strategic Overview, and Chapter 11 - Company Profiles.
The leaders of the UK's financial services industry are extremely well rewarded, especially at Hsbc, Barclays, and Royal Bank of Scotland. Shareholders are trying to exert more control over salaries, bonuses and fees. Typically, chief executives of large financial companies received well over £500,000 in 2000. Further details are given in Chapter 6 - The Human Factor: Power in the Boardroom.
Overall weak growth, and a continued decline in manufacturing, are likely in the UK during 2001 and 2002. Rural industry is suffering from the impact of foot and mouth, exports to Europe are costly because the pound appreciated against the euro, and worldwide falls in share prices make corporate and private investors feel less wealthy. Less wealth means less demand for most financial services, with the exception of secured and unsecured credit. This is an important point for banks and insurers generally and, in particular, for those that are homing in on wealth management, including Hsbc, Lloyds TSB and Barclays. Property should be more popular with the public than equity-based investments, until stockmarkets have settled down.
Between 1996 and 2026, a fall of 7.5% in the 30 to 44 prime working age band is expected, while there could be a rise of 76.6% in men aged 75 and over, and over 33% more women aged 75 and over. The forecast increases in the over-90s are even more striking: a near trebling of men over 90, and a rise of 57.5% in women nonagenarians. The elderly represent a substantial new market for financial services, especially for schemes to augment pensions. Further details are given in Chapter 9 - Pest Analysis.
Changing Market Demands
The early UK entrants in the `senior citizens' market were mainly foreign: NPI, owned by AMP of Australia GE Life, part of General Electric of the US Sun Life, part of the French AXA group and Cornhill, part of Allianz of Germany. It is surprising that these companies were so much quicker than most domestic companies to see a market opportunity. In the important personal pensions sector, the bombshell dropped by Equitable Life on 16th July 2001 - when it slashed its with-profits funds by 16% - is likely to have far-reaching repercussions. This serious example of dashed expectations is likely to reduce public interest in stakeholder pensions, for which the Government so much wants the majority of adults to save. The Government now needs to rethink. Some form of state guarantee is required to underpin savings for personal pensions.
The increasing financial pressures on `middle Britain' may translate into a new demand for mutuals and co-operative organisations. The Nationwide, the Chelsea and the other surviving building societies all emphasise the advantages of mutuality for customers.
Banks that invest in environmentally dubious projects, such as oil drilling in Alaska, or tree clearance in the Amazon basin, will face more critical public scrutiny. The ethical indices, Ftse4Good, launched in London in July 2001, are a significant move, because they reflect public worries about investments that could harm people or the environment.
Further explanations of all these issues are given in Chapter 12 - The Future.
Technological Opportunities
Customers are getting used to the disappearance of branches, and are quickly accepting online banking - except the less affluent. Call centres need improvement because they are often not at all user-friendly. The elderly, especially, often find product information confusing, so it would be a good idea for companies to present essentials in clearer language. Consumer research indicates that insurers will have difficulty in expanding the domestic market profitably, and that huge damage has been done to the pensions business. Flexible all-in-one accounts, which can link cash, mortgages and personal loans, have very quickly become popular. Credit and credit management will remain growth sectors, as customers prefer today's tangibles to tomorrow's uncertainties. Further details are provided in Chapter 4 - Cost-Cutting Pressures, and Chapter 10 - Consumer Dynamics.
The Power of Brands
Mergers and acquisitions create branding problems. Hbos (Halifax Bank of Scotland) is very similar to Hsbc (Hong Kong and Shanghai Banking Corporation). Royal and Sun Alliance is perhaps too long a name to retain, as is Cgnu which has now opted to use the respected Norwich Union brand in the UK. Barclays has so far retained the Woolwich brand, and Royal Bank of Scotland has kept National Westminster. The use of multiple brands gives the public an illusion of choice, because only those who closely follow the financial news can really appreciate who owns whom.
Brand development is becoming a big headache because of fragmentation of promotion channels, audiences and messages. The straightforward advertisement has lost its impact. Brand development now needs to be integrated across many channels in order to build and reinforce the message. Further details of brand development and multiple brands are given in Chapter 7 - Promotion and Advertising.
The combination of branch closures and the growth of call centres suggests that staff are now more remote from customers. The growing lack of familiarity between staff and customers results in the rise of control measures which can reduce customers to a set of numbers. Companies which are keen to rebuild links between staff and customers include Bradford and Bingley, with its financial advisers Abbey National with the coffee-shop-bank concept and Alliance and Leicester with its `movingimproving' finance shops. These former building societies appear closer to customers than the big banks do. Chapter 4 - Cost-Cutting Pressures gives more details.
The Rise of Strategic Partnerships
Partnerships enable companies to expand without creating obvious monopolies. In May 2001, five banks from five nations - Barclays of the UK, Deutsche Bank of Germany, Bank of America, Scotia Bank of Canada, and Westpac of Australia - joined forces to create a global ATM (automated teller machine) alliance, so that 36 million customers can take out cash, without being charged, from 23,000 ATMs. Partnerships have been used with notable success by Royal Bank of Scotland, helping to make it into an international bank, and by Bank of Scotland, to maintain its status as a leading national bank. Chapter 5 - The Partnership Web discusses partnerships in greater detail.
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