Provide an Insight of the Current Banking Scene in Singapore Essay Example

will have the opportunity to expand through careful acquisitions abroad instead of eventually being acquired by foreign players. The government has removed the 40% limit on foreign ownership of local banks; however, approval from the Ministry of Finance is required for foreigners seeking to acquire 5%, 12%, or 20% or more of a local bank as a safeguard.

The government has granted "qualifying full bank" (QFB) licenses to six foreign banks, allowing them to operate up to 15 customer service locations, which can be branches or off-premise ATMs. Out of these locations, ten can be branches. The banks also have the freedom to relocate existing branches and share ATMs with each other. Furthermore, they are permitted to provide electronic funds transfer point-of-sale debit services, accept Central Provident Fund (CPF) fixed deposits, and offer Supplementary Retirement Scheme and CPF Investment Scheme accounts. In December 2002, the government eliminated the 20% aggregate foreign shareholding limit on finance companies. However, officials maintain that they do not intend to permit a foreign firm to acquire a local finance company.

In May 2003, MAS granted Wholesale Bank licenses to eight banks, completing the second phase of the banking liberalization program. However, foreign banks in the local retail-banking sector still face restrictions that local retail banks do not have. These restrictions include limits on the number of foreign qualifying full banks and their service locations. Foreign qualifying full banks are also unable to use the local ATM networks, giving them a major competitive disadvantage. In contrast, local retail banks do not have these limitations. Customers of foreign banks cannot withdraw cash or make transfers and bill payments from ATMs operated by other banks.

(Source - mas.gov.sg)

Pricing decisions in the banking system are primarily based on similar products and services with minimal price differences. The unique aspect of this industry is interdependence, where one bank's actions significantly impact its competitors' well-being.

If DBS bank were to increase its home loan interest rate above the current level (P in fig 1.2), its competitors would not do the same; they would prefer to let DBS bank lose sales to them. DBS bank would then anticipate that its demand curve for price increases would be relatively elastic (dK). However, if DBS bank were to decrease its home loan interest rate, competitors would follow suit in order to protect their market share, resulting in DBS bank gaining only a few extra sales. DBS bank would then expect that its demand curve for price reductions would be relatively inelastic (KD1). In general, the bank would believe that its demand curve is kinked at the current price P, as depicted in Fig 1.2.

It is easy to understand why this belief will result in price stickiness as the bank would lose market share quickly if it increases its prices and gain little if it reduces them. The kinked-demand (average revenue) curve, represented by dKD1, has a discontinuity (L-M) in its corresponding marginal revenue curve below the kink point K. The marginal cost curve could vary between MC1 and MC2 without causing the bank to change its profit-maximizing price P (or output Q). This is because the windfall that the banks had anticipated from the opening of the HDB housing loan market did not happen.

All four banks have aligned their interest rates for the first two

years of their fixed-rate packages in order to compete with foreign banks. They have also lowered the rates on their variable-rate loan packages, matching HSBC's rates. The banks deny any collusion and claim they are responding to market conditions. This increase in competition has resulted in a housing loan price war that benefits consumers.

To prevent a price war, a bank can communicate its pricing plans publicly, enabling coordinated pricing strategies and avoiding unnecessary damage from price-cutting activities.

Bank A may decide to issue a press release announcing a 10% price increase to take effect in 60 days. By publicly timing its announcement well in advance, the bank can gauge the reactions of its competitors. If other banks respond positively by announcing a similar price increase, Bank A can proceed with its planned pricing change, anticipating that its competitor will do the same. However, if competitors show disagreement by not making any announcement or by announcing a smaller increase, Bank A can choose to retract its announced price increase or lower it to match its rival's. Using the media to communicate pricing intentions and decisions can be an effective strategy for understanding how competitors in the industry will respond to a price increase. This tactic can also be applied when Bank A believes that price levels in the industry need to be adjusted downwards.

By announcing its intention ahead of time and explaining the move in terms of evolving market and cost conditions, a company can avoid rivals interpreting the price-cutting move as aggressive market share expansion. Additionally, these explanations attempt to persuade competitors to recognize the logic and benefits of lowering prices, encouraging them to follow suit.

(Source: Economics of the firm) With the government's financial sector liberalization program, foreign players have entered the local market, testing the strength of local banks and highlighting the importance of marketing strategies. As conditions in the marketplace constantly change due to technology advancements and increased competition, supply tends to increase, shifting market power in favor of customers.

Once supply exceeds demand, a buyers' market emerges where there are more goods available than customers to purchase them. In order to survive, organizations must ensure that their products meet the needs of customers who are becoming increasingly scarce. The most effective approach to address this issue is to provide exactly what customers require before allocating resources for production. Now, the customer's preferences take priority over the production process. (Source: Economic Theory & Marketing Practice)
Example: UOB Visa Infinite Card
This exclusive card is designed for individuals earning above S$350,000, which represents only 0.1 percent of Singapore's population.

Membership in this exclusive club is limited to a select group of 4,000 Singaporeans who have been invited and meet the necessary qualifications. The annual fee for joining this prestigious club is a substantial S$1,500. Having this card goes beyond providing value for one's lifestyle expenses; it symbolizes prestige and acknowledgment of one's social standing. This unique card has been specifically designed for a specialized market of individuals who spend lavishly. Despite facing competition that does not revolve around price, QFBs have achieved success in the credit card industry, partly due to their worldwide reputation. However, with local banks merging together, customers are left with just one card after the consolidation process. As a result, there is potential for an increased share

of the market in this particular area.

Local banks should focus on capturing new markets in order to make up for any losses incurred through merging. Instead of reducing prices, banks should employ innovative strategies to increase their market share. These strategies may include branding, advertising, free offers, and after-sales services.

Branding plays a crucial role in conveying information to consumers and establishing customer loyalty in the financial services sector. The customer's perception of the organization is often the most significant aspect of branding. Offering a good or high-quality product can contribute to establishing a strong brand name. For example, when thinking of banking, DBS/POSB immediately comes to mind, demonstrating their success in creating a well-known brand.

According to the DBS Annual Report 2002, there are 3.5 million ATM card holders in Singapore, which accounts for the population of 4.2 million.