A comparative analysis of the US and EU retail banking markets - Wsbi

Since then, established banks have responded quite
aggressively in the UK: via offering a wider range of deposit
accounts with varying interest rates, highly competitive
mortgage packages and competing with each other over
interest paid on current accounts. The result has been that
the new entrants in the UK have been unable to sustain the
attractive interest rates offered initially to lure in customers,
or to sustain their share of the mortgage market. They are
no longer leaders in the league tables of mortgage or
deposit rates.
In Italy, the main sources of consumer credit and personal
loans are some 41 companies, 24 of which are non-captive
finance houses 400 , 9 of which are banks, and 8 of which are
car makers’ finance houses. Together, they are responsible
for 65% of the total consumer credit market granted to
Italian households. There has also been some concern in
Italy about the growth of ‘loan sharks’ who have taken the
advantage of restrictions on interest rates and accessibility of
credit, and who have thrived because of weak competition
from legitimate lenders.
Banks in Italy also face some notable competition from Poste
Italiane, which was established as a bank in 1999 and has
now expanded into financial services. By March 2001, it had
over 1 million retail banking clients (out of Italy’s 29 million
current accounts) and 230,000 corporate accounts. It is in a
good position to take advantage of the growth in the
financial services sector since it has about 14,000 branches,
many of which are in rural areas from which the banks have
withdrawn through branch closures. It has also set up a
payments card business, established a life insurance company
and has started selling equity-linked bonds. One could in
fact consider Poste Italiane as a fully-fledged universal bank
that is a new entrant.
In Spain, many large retailers have their own consumer arms,
and could become major players in the banking market if
the opportunity arose. El Corte Inglés, the leading department
store, offers loan and investment services through its Centro
de Seguros, and its store card is estimated by the Federation
of Spanish Savings Banks to be used by 7% of the population.
Insurance companies in Spain are also launching new life
insurance products which compete directly with savings,
and it is likely that they will move more directly into the
banking business at some point in the future.
The majority of these specialised credit institutions are
actually owned by banks and, all in all, it is considered that
they are not a threat to Spanish banks.
The Swedish banking market is very much controlled by the
four main retail banks, sharing 90% of the market’s assets
between them. The remaining 10% of the market is split
between some small savings banks, and four non-banks
including Ikano Banken, an off-shoot of IKEA furniture
retailer, WasaBanken and SkandiaBanken (off-shoots of
insurance companies), and GE Capital Bank.
The above case studies serve to give an idea of the activity
of non-banks in the consumer credit segment of the retail
banking market in Europe. Looking at Europe as a whole, it
can be concluded that the scale of non-bank activity in
Europe is small, less than 1%. Also, in many European
Member States, non-banks operate in cooperation with
established banks or are part-owned by those banks,
lessening even further the competitive threat that they
represent.
In the one country where non-bank activity has had a
notable impact on competition, the UK, the strategies of the
new entrants have not had a lasting impact. A number of
new entrants sought to attract clients initially by offering
attractive products and high interest rates on accounts, but
a very limited range of banking services. Further, the high
interest rates could not be sustained as the established
banks responded aggressively. Other new entrants on the
UK scene offered a wider range of products and services but
have failed to provide more than peripheral competition for
the established banks.
There are however some factors which could lead to the
non-banks becoming a more serious threat in the future.
Consumers have become more price sensitive and less loyal
as competition has intensified, and convenience has also
become more important.
On the latter, ‘near-banks’ such as auto banks, supermarket
banks, finance subsidiaries of retailers, credit card specialists
and insurance companies offer the biggest competitive
threats as they can bring their knowledge and skill to bear
on very specialised segments of the market and they can
also build on critical mass and economies of scale.
400 Captive finance companies use the financial strength of their parent company to raise low cost capital and their product knowledge to efficiently resell assets
acquired in loan defaults, hence decreasing their total cost of capital. Non-captive finance companies supply finance products marketed by other companies,
and typically have no comparative advantage in raising capital or disposing of products acquired in a loan default. Non-captive finance firms depend on
offering other financial services (such as consulting, sales financing, and accounts receivable factoring) to survive.
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