PORTER FIVE FORCES IN BANKING INDUSTRY

Indian banking system is the dominant financial intermediary in India. In the last 5 years, the banking
system has done well when taking in account several parameters such as Annual credit growth,
profitability and the Gross NPAs. By various estimates, Indian GDP growth will make the banking
industry the third largest in the world by 2025.

Presently, the banking Industry is going through a transitional phase. With the rise of digitization and
more and more online transactions, the physical needs of banking are slowly but surely fading. Banking
is primarily divided into two segments in the country: Public and Private sector. Public sector contribute
to roughly 80% of banking industry assets but lack the modern tech and are burdened with massive
manpower. On the contrary, Private Banks are making steady progress all round and are leaders in
adoption of mobile banking, phone banking and internet banking.

Porter five forces model helps analyze the balance of power in an industry and the potential of the
industry.

Threat of new Entrants

Bargaining power of Threat of Substitutes

Industry Rivalry
Customers

Bargaining power of
Suppliers

Industry Rivalry:

Banking industry is a highly competitive industry. Many people engaged in banking services, especially in
metropolitan areas, have engagements in multiple banks. Banks give attractive interest rates, innovative
schemes and other offerings in hopes of capturing the maximum possible market share. But in the heat
of the gaining maximum ground, banks often experience lower ROA (Return on Assets). Recently, given
the nature of the industry, the Government merged many Public sector banks into single entities to
widen the horizon of the financial capabilities.
Threat of new entrants into the industry:

After the recent consolidations and mergers, currently, there are 34 banks operating in the country.
Earlier, there was a good mix of small finance banks, regional rural banks etc. The Public sector banks
count was brought down from 27 banks in 2017 to 12 in 2021. The major hindrance that new banks are
the trust factor as the industry deals with others money. People are better willing to place their trust in
big and trusted names and are apprehensive in dealing with new banks. One threat that the banking
industry faces is companies offering other financial services. For example, an Insurance company is
relatively well equipped to start offering mortgages and loans. Wary of the threat, the banking industry
has also recently evolved from money lending to portfolio management, fixed deposits etc.

Bargaining Power of Supplier:

Capital is the major source for any banking system and there are mainly four suppliers of capital in the
industry:

 Money from customer (Customer deposits)

 Securities
 Mortgages and loans
 Loans from other financial institutions

By effective utilization of these four suppliers, banks can ensure the borrowing needs of the customers
are met while maintaining enough capital to meet other expenses. The power of suppliers is also
predominantly based on how the market is performing and can vary from medium to high. Also, though
the suppliers of capital may not pose a big threat, but there always remains a risk of losing the human
capital.

Bargaining Power of Customer:

The customers in the banking industry can be an individual or a firm. Customers don’t directly pose a
threat to the banking industry but can switch between banks if the switching costs are low. With the
increasing influence of private banks and their ability to lure customers with low costs involved, the
costs involved in changing banks becomes extremely critical. While low costs are favorable for
customers, high switching costs can be a barrier. The emergence of the Internet has greatly affected the
costs involved in the banking industry as the Internet-based services are both cost-efficient and also
save a lot of time for customers.

Threat of Substitute Products:

As the range of services provided by banks has widened over the years, so has the emergence of non-
banking finance companies that provide similar services. Banks don’t have any real threats of substitutes
when it comes to savings, deposits or withdrawals but the other services such as Mutual funds,
Securities, Insurances etc. are seeing competition from unconventional firms. Also, big players such as
jewelers, electronics shops etc. tend to seek favorable financing options with low interest rates. Non –
banking companies are able to offer lower rates of interests on loans than what the traditional banks
offer. For example, SKODA offered attractive financing options that had lower interest rates than
traditional banks to customers who buys its cars.

FUTURE TRENDS IN INDIAN BANKING:

In the near future, radically transformed Banking systems will emerge. Innovative technologies,
Partnerships, emergence of FinTech etc. will raise the bar in setting the new norms and service
standards. A few of the trends that will emerge in the future:

 Consolidations and Acquisitions:

Since last year, there has been a continuous activity in the banking sector with regards to
mergers among the banks. A robust banking system is critical to a country’s economic growth so
it was imperative to make sure that it was optimized. Prior to 2000’s, consolidations and
mergers were triggered by weak financials of the bank. Post that period, many banks that were
consolidated were done so purely driven by business and commercial decisions. Central
government has favored the mergers of PSBs having a government holding close to 51% with
those banks that have a higher state holding to ensure business growth does not suffer from
capital constraints.

 FinTech partnerships:
FinTech players from world over are striving to change the status quo of the financial world.
They are constantly trying to solve the most common problems in the financial industry
leveraging technology and other high end means. India is fast becoming a digital economy with
over a billion mobile phones, 330 million internet users (c.94% on wireless devices) and 240
million smart phones. Relaxation of KYC norms for smaller ticket transactions, exemption from
two-factor authentication for each digital wallet transaction, the Aadhar initiative, and NPCI
initiatives have all played a role in making Fintech more accepted with the customers.
Fintech players are expected to drastically reduce the costs of financial intermediation, which in
turn will erode the lender’s profit margin. In this process of disruption, Banks and Fintech firms
have become naturally interdependent, a clear result of the process. Fintech players have built a
bouquet of innovative products and services on the strong backbone of the banking and
payments infrastructure in the country. Banks, on the other hand, have relied
on innovative solutions developed by fintech players to better address the needs of their
existing customer base. Some examples of the Banks FinTech partnerships:
Critical factors to ensure a successful Bank Fintech partnership:
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 Buy vs. build:
Banks and Fintech companies should align product capabilities with the objective of enhancing
customer experience
 Trust:
Banks will have to be extremely selective in choosing the right Fintech firm as Trust will have to
to be built on sensitive information
 Vision:
Fintech firms are usually aggressive in their vision to create sustainable and profitable products.
Banks will have to be aware of their role as enablers for the same

Artificial intelligence and Cognitive scope:

With the Dawn of AI and implementation of Cognitive computing, the banking experience will
see a massive shake up. With all of the unstructured, demographic data of the customers, the
banks will leverage new age technologies to identify, apply and execute behavior based triggers
for customers that will be beneficial both in the short and the long run.

Some of the already adopted AI based Customer engagement services are:

 Cognitive engagement - Improve customer understanding and activation through
personalization, influencing desired actions
o Early adopters: Santander announced that it will provide secure transactions using voice
recognition via its banking app, while Royal Bank of Scotland has trialed “Luvo” AI
customer service assistance to interact with staff and potentially serve customers in the
future. In Sweden, Swedbank’s Nina Web assistant achieved an average of 30,000
conversations per month and first-contact resolution of 78% in its first three months.
Nina can handle over 350 different customer questions and answers. Several other
banks in the UK and internationally have similar systems in place or are trialing them

 Cognitive automation - Automate repetitive, knowledge & natural language rich, human
intensive decision processes.
o Automation using artificial intelligence is made possible by the combination of new
types of software and recent breakthroughs in computing power. Business benefits are
much broader than cost savings and include better use of highly skilled people, faster
actions and decisions, better outcomes, etc.
o Early adopters: Fonetic, a provider in voice and text management solutions, partnered
with Banco Bilbao Vizcaya Argentaria (BBVA) in rolling out the Fonetic linguistic analysis
and trading compliance solution to proactively monitor and prevent trading malpractice
at its London and New York headquarters.

 Cognitive Insights – Detect key patterns and relationships from billions of data sources in real-
time to derive deep and actionable insights.
o Personalization is a major talking point for banks and many are experimenting with
innovative ways to match products and services to the consumer. There are also
examples of companies embracing new apps in personal financial management (PFM)
which help consumers make smarter purchase decisions, manage their finances, and
make cost savings while they are out and about spending money.
o Early adopters: UBS used the help of artificial intelligence when delivering personalized
advice to the bank’s wealthy clients by modeling 85 million Singaporean individual’s
behavioral patterns. Fine-tuned for financial services, the technology allows SQREEM
(Sequential Quantum Reduction and Extraction model) to build a profile of an individual
showing potential match-ups with different types of wealth management products.

 Blockchain and Distributed Ledged technology adoption:

Another key technology to emerge lately is the blockchain technology. The solution leveraged a
‘distributed ledger’ architecture under which all users who participated as ‘nodes’ in the
network had a copy of the entire ledger.
 Various banking institutions have taken a test-and-scale approach to Blockchain and some of the
success seen by them has attracted other players to join on the change. For instance, the R3CEV
Blockchain Consortium was started by 9 banks in September 2015 to further research and
development in Blockchain and DLT. In less than a year, it counts over 50 global financial
companies as its members.
Also, Santander estimates that by 2022, Blockchain based distributed ledger systems can help
Banks save $15-20 billion annually.

While these are still early days for the technology, these developments help us to uncover a few
emerging themes:
• The underlying principles of Blockchain technology are so fundamental that they may be
adapted to a diverse set of applications
• Banks – across the board – have realized that they need to capitalize on this technology in a
proactive manner to counter any external threats of disruption from technology players
• Reciprocity is at the core of successful Blockchain implementations. Banks are realizing this
and therefore collaborating among themselves and with Fintech startups operating in the area
of Blockchain and DLT.

RECENT NEWS ARTICLES ON FUTURE OF BANKING:

Link: https://www.rfigroup.com/rfi-group/news/uae-emirates-nbd-launches-new-digital-branch
Link: https://timesofindia.indiatimes.com/blogs/voices/ai-at-the-helm-of-indias-digital-inclusion-
journey/

Link: https://www.financialexpress.com/industry/banking-finance/why-traditional-banks-need-to-
partner-with-fintech-firms-for-delivering-essential-banking-solutions/2138806/