Question

Globalisation is at work in the banking industry, where globalisation refers to an increase in competition by foreign competitors and home institutions’ doing business in the global market. To face up to the challenges of the internationalisation process banks of all sizes and from different countries should deal with long‐term issues and industry analysis as well as firm-specific strategies. Banks are no longer in the business of buying (i.e. saving) and selling (i.e. lending) money but that of offering complete financial services to the banking public. Australia’s major banks include CMA, ANZ, NAB and Westpack.

Drawing on the M. Porter’s Five Forces Model, analyse how the availability of substitutes such as Credit Card affect (average) profitability of the four banks. (worth 6 marks and 350-400 words required)

Answer 1

Porter's Five Forces is a business analysis model that helps to explain why various industries are able to sustain different levels of profitability. The model was published in Michael E. Porter's book, "Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980. The Five Forces model is widely used to analyze the industry structure of a company as well as its corporate strategy. Porter identified five undeniable forces that play a part in shaping every market and industry in the world, with some caveats. The five forces are frequently used to measure competition intensity, attractiveness, and profitability of an industry or market.

Porter's five forces are:

1. Competition in the industry

2. Potential of new entrants into the industry

3. Power of suppliers

4. Power of customers

5. Threat of substitute products

The availabilty of the substitue such as a credit card in place of money has changed the whole scenario on how people go about their expenditure. Even with no cash in hand people can buy the goods on credit and pay them later . The dependance on cash has decreased and also people enjoy a specific credit limit without paying any interest and at minimal annual charges. The banks that provide people with the credit card facilities are at a Risk of the accounts becoming NPA's and declining the asset quality.

Morover the credit cards require a robust system to function because all the transactions are real time therefore it requires a proper infrastructure to function so that no borrower can avail credit exceeding the sanctions limit.

But the credit cards have a positive impact on the earnings and profitability because the more number of cards means more use of them thus banks charge a margin of 1-2 % on the transaction from the point of sale and thus it has a huge cumulative positive impact on the earnings.

for the banks who have not updated themselves to the credit card business now has lower customer base of borrowers and have been alienated from the market in this profitable segments