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Must-know: An overview of the Banking sector

Part 4
Must-know: An overview of the Banking sector (Part 4 of 14)

Must-know: The banking landscape

Banking landscape

After the formation of the Federal Reserve, the Federal Deposit Insurance Corporation (or FDIC), and the Glass-Steagall Act, banking became a heavily regulated industry. Banking was and is largely focused on containing risks and maximizing profits. Let’s look at the banking landscape with the help of Porter’s five forces model—figure below.

Porter's 5 forces- Banking 4Enlarge Graph

Industry competition

There a large number of players that are each vying for share in the same market. There are a few large players who are present across the U.S., but most banks have pockets of strength. For example, in the New York metro area JPMorgan (JPM) is the biggest player with nearly 35% share. In Los Angeles the biggest player are the Bank of America (BAC) with 21% and Well Fargo (WFC) with 16% share. In Omaha, Nebraska, a regional bank, First National Bank of Omaha—such banks are generally found in an exchange-traded fund (or ETF) like the iShares U.S. Regional Banks ETF (IAT)—is the biggest bank with 30% share. Citibank (C) has a dotted presence across U.S. So, most banks have pockets of strength, but no bank is number one or two consistently across the U.S. Competition in the banking industry is high, but it’s fragmented with different players vying for growth in different markets.

Threat from new entrants

Banking is a regulated industry. To set up a new bank requires regulatory approval, compliance, and lots of capital. There’s a strong barrier to entry for new players. Banks open new branches in areas where they aren’t present, but find it difficult to gain market share from existing banks. This is due to customers not being willing to switch due to the inconvenience and costs involved. As a result, the threat of new entrants is low.

Threat of substitutes

For a long time, banks—including thrifts and credit unions—have been the most popular avenue for loans because of the low cost of the loans. Banks are most preferred for deposits because of the ease and liquidity, which can’t be matched by any other financial institution. Disruptive innovations like Bitcoin have tried to challenge the banks’ control, but they aren’t significant enough right now. As a result, the threat of substitutes is low.

Supplier’s power

The banks make money from lending. This money is supplied by the depositors. Depositors also receive many services from a bank like cards, loans, and mortgages. As a result, there’s a good degree of interdependence. This interdependence moderates the power that depositors might have had. The supplier power is medium.

Buyer’s power

People who take loans or products like cards from banks are considered buyers. The borrowers generally have established relationships with a particular bank for ease, convenience, and emotional reasons. So, while they can switch they don’t switch often. The buyer’s power is medium.

The composite view

The banking landscape is dotted with a large number of players—a few national and mostly regional—each strong in a pocket or a few pockets. A large number of players make the industry competitive and keep the interest rates low. Banks depend a lot on relationships with customers to stay competitive and profitable in the long run.

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