Provide an insight of the current banking scene in Singapore

The objective of this report is to provide an insight of the current banking scene in Singapore, which has undergone various changes over the last few years.

This report also includes proposed market strategies to be adopted by the management at present or in the near future so as to enable it to capture a bigger market shares and maximize its profitability. Last but not least, to be able to compete effectively in the local and international markets in the long run.

Current Scene

In 1997, the world was facing economy downturn and bearish stock markets; our government was fast to realize that it was time to reform our financial sector in order to compete effectively both locally and internationally. Thus, in 1999, the government embarked on a five-year financial sector liberalization program, aims to strengthen Singapore’s banking system and the local banks, and to further enhance Singapore’s position as an international financial centre. The industry has witnessed a series of merger and acquisition bids that reduce the number of local banks from five to three.

 

Merger and Acquisition

As indicated by the government, there will only be room for three banks or even two, this has pushed the banks to turn into seeking other alternative – Consolidation. Mergers and acquisitions have been taking place, as it is able to increase the assets and capabilities of the banks. This helps to minimize duplicated infrastructure and increase the sharing of common networks and operations. Other benefits include lower costs, as banks will have larger economies of scale to defray high initial costs of technology. It also allows cross selling of products. With increased capital and resources, banks would be able to ride on the globalization trend as a result of increase international trades. It will also have sufficient resources and expertise to improve their brand, products and quality of services in order to compete with foreign competitors.

It also enables local banks to keep up with international standards and compete with foreign entrants. They should also be strong enough to avoid being completely marginalized. They will be in a position to expand through careful acquisitions abroad over time, rather than be left with no choice but eventually be acquired by foreign players.

Barrier of entry

Since then, the government has lifted the 40% limit on foreign ownership of local banks, although it has reiterated that it is not prepared to approve any foreign acquisition of a local bank and as a safeguard, MAS requires foreigners intent on acquiring 5%, 12% and 20% or more of a local bank to first obtain its approval from Ministry of Finance.

The government has also granted “qualifying full bank” (QFB) licenses to six foreign banks. These banks are allows to operate up to 15 customer service locations (branches or off-premise ATMs), up to ten of which can be branches; to relocate freely existing branches; and to share ATMs among themselves. They can also provide electronic funds transfer point-of-sale debit services, accept Central Provident Fund (CPF) fixed deposits and provide Supplementary Retirement Scheme and CPF Investment Scheme accounts. In December 2002, the government removed the 20% aggregate foreign shareholding limit on finance companies, although officials say they do not intend to allow a foreign firm to acquire a local finance company. In May 2003, MAS awarded Wholesale Bank licenses to eight banks, signaling the completion of the second phase of the banking liberalization program.

Despite progressive liberalization, foreign banks in the domestic retail-banking sector still face significant restrictions and do not enjoy the same market access as local retail banks. Aside from the limit on the number of foreign qualifying full banks and their customer service locations, the foreign qualifying full banks are not allowed to access the local ATM networks, a major competitive disadvantage. Local retail banks do not face similar constraints. Customers of foreign banks are also unable to access their accounts for cash withdrawals, transfers and bill payments at ATMs operated by banks other than their own. (Source – mas.gov.sg)

Pricing decisions

Most products and services in the banking system are homogenous, with minimal price differentials. The distinguishing feature in the banking industry is interdependence; one bank’s action very much affects a rival bank’s well being. If DBS bank were to raise its home loan interest rate price above the current level (P in fig 1.2), its rivals would not follow; content to let the DBS bank lose sales to them. DBS bank will then expect its demand curve to be relatively elastic (dK) for price rises. However if DBS bank were to reduce its home loan interest rate, rivals would follow to protect their market share, so that DBS bank gains few extra sales. DBS bank will then expect it demand curve to be relatively inelastic (KD1) for price reductions. Overall the bank will believe that its demand curve is kinked at current price P, as in Fig 1.2. One can intuitively see why this belief will lead to price stickiness, since the bank will rapidly lose market share if it raises price and gain little for reducing price. A kinked-demand (average revenue) curve of the form dKD1 will have a discontinuity (L-M) in its associated marginal revenue curve below the kink point K. The marginal cost curve could then vary between MC1 and MC2 without causing the bank to alter its profit-maximizing price P (or it output Q).

This is because the windfall that the banks had expected from the opening up of the HDB housing loan market failed to materialize. All four now charge the same interest rates for the first two years of their fixed-rate packages.

The rate move by the three local banks is to retain their market share against foreign banks, which have steadily been encroaching on the consumer market; they also cut the rates on their variable-rate loan packages to 1.3 per cent for the first year and 2.5 per cent for the second year. This puts them on par with HSBC. All the banks which moved on rates deny they were acting ‘cartel-like’ and explained that they are responding to market conditions and not surprising that they move all at the same time. Believing the banks has seemed the damage in price-cutting.

The recent housing loan price war is an example of consumers benefiting from more banking competition.

Avoidance of price war

To avoid price war, a bank can public announces of its future pricing intention can be a very effective way of communicating directly with rival and therefore by achieving a coordinated pricing moves. For example, bank A, believing that a price increase is warranted, may decide to issue a press release announcing a 10% price increase to take effect in 60 days. By timing its announcement publicly well in advance, a bank is able to test the sentiments of competitors. If other banks respond favorably to this new pricing development by shortly announcing an equal price increase, bank A can follow through the pricing change as planned and be reasonably confident that its competitor will do the same. However if rivals send signals of disagreement by making no announcement or by announcing a lesser increase, bank A can opt to withdraw its announced price rise or revise it downward to match those of its competitor. Whichever the case, using the media to communicate pricing desires and decision can be a useful tactic for learning to what extent a price increase will be matched and ignored by rivals in the industry.

This can also be use, if bank A believe that the industry needs to adjust price levels downward. By announcing its intention ahead of time and taking care to explain its move in terms of evolving market and cost conditions, it can avoid having other rivals interpret the price-cutting move as an aggressive bid for increased market share. At the same time, these explanations serve as an attempt to get rivals to see the logic and benefits of a lower price structure and to follow the move downward. (Source: Economics of the firm)

Marketing Strategies

With the financial sector liberalization program initiated by the government, there has been an increase of foreign players entering the local market. As a result, the strength of the local banks will be put to test therefore the importance of marketing strategies are required.

Market-oriented approach

Conditions in the marketplace are always changing; new technology and increased competition from home and overseas means the supply has a tendency to continue to increase. As such, the balance of power in the market continues to shift in favor of the customer. Once supply is greater than demand, there is a buyers’ market. There are more goods available than customer to buy them. Survival depends on the organization’s ability to ensure its products are those selected by the increasingly scarce customers. The most effective method of addressing this problem is to provide what the customers exactly need before committing resources to produce. The customer now comes before the production process, not after it. (Source: Economic Theory & Marketing Practice)

Example: UOB Visa Infinite Card

The premium card is targeting at those earning above S$350,000, which is an elite 0.1 percent of Singapore’s population. Membership is restricted by invitation only, as you would need to be among the top-notch 4,000 Singaporeans to qualify. It has a hefty annual membership fee of S$1,500. Holding this card is not just about getting value for one’s lifestyle expenses, but prestige and recognition of one’s social standing. This product is a new differentiation card and specially tailors for the small market but big spender.

Non price competition

QFBs have been successful in the credit card areas partly due to worldwide recognition. However, local consolidation process has resulted in consumer being left with one card after the merging. Hence there will be increase potential in this market share. Local bank should try and capture new market so as to cover whatever they have lost in merging.

To capture the market, bank should come out with exciting ideas to increase their market share instead of cutting prices. Such ideas can be in the form of branding, advertising, free offers, after sales services, etc.

Branding

Branding is important as a mechanism for conveying information to consumers and as a means of establishing a degree of customer loyalty in the financial services sector, it is often the customer’s image of the organization, which is the most important type of branding available. A good or quality product can help to establish a brand name for example, whenever you think of banking, DBS/POSB will come to mind. It has successful establish a household brand. They have 3.5 million ATM card holders among Singapore’s population of 4.2million. (Source: DBS Annual Report 2002)