Being a large manufacturer and wholesaler of household furniture for modern and urban living, SKN Style is faced with the challenge of providing additional services to its customers. This has consequently led to the decision by its management to come up with ways of increasing its services through opening up to new markets so as to increase its market and sales shares. One of the investment considerations that company has settled on is the retail banking in the UK as it feels this is an area that will easily help it accomplish its corporate goal. As the consultant of the organization, I was given the responsibility to explore the situation in the UK banking market so as to offer the management and board of directors some relevant information that will help them decide if this is a corporate goal. What follows below is an Executive Summary report of my findings.
The current accounts in retail banks in the UK play a major role in customer bank relationship. The current accounts provide entry to holding deposit services as well as possible saving services access, debit facilities and cheques money transmission and possible overdrafts allowing for vehicle for credit. This is key in improving the relationship between customers and banks because it provides a gateway via which any interested supplier is able to cross-sell additional banking products, such as saving products. Market share distribution in the UK has continuously changed in the recent past. This has resulted in a marked price dispersion that has persisted over time. Switching costs is one of the interesting factors of the UK retail banks that SKN should take a closer look at. These costs in the UK result mostly from current account switches. This means that the costs will always rise due to the need of redirecting direct debits that are outgoing in the inflowing payments (Berger, 1995).
Now that switching accounts require the customer to leave behind the already established relationship with the bank, such accounts may possibly lead to increased asymmetric information existing between the customer and the bank. This will also induce firms to step in and increase or artificially create switching costs with their clients by switching contractual costs. Some banks in the UK have gone to the extent of offering smooth switching processes through providing already finalized processes to their customers that are willing to switch. In some situations, gross benefits of direct switching accounts appear to be limited, especially to the average customers. This is normally not the case with accounts for ancillary services, such as saving facilities and overdraft. This can be a good area for SKN Style to venture in in case it decides to involve itself with switching costs (Boot, 2000).
On the other hand, search costs are mostly incurred by a customer when he or she decides to search for different market options that best fit his or her preferences. For most of the current accounts in the UK, these costs are on the increase due to the growing differentiation and complexity of products. The other reason for the increase of such costs is the difficulties that arise when customers apprehend the characteristics of products and also the availability of a variety of products that may result in increased welfare of customers. Taking this into consideration, SKN Style can come up with ways of cutting on such costs so as to attract more customers.
The key products that the banks in the UK deal in can be categorized into two main groups, namely: financial services and loans and savings. The main differences between the above services lie in the income nature derived by the banks from these services. Services like granting loans and accepting deposits offer retail banks a chance to gain income through charging interest rates. The rates on interests’ savings are lower compared to rates from the loans; therefore, banks need to cut down on their operation costs so as to be profitable. Savings products in these banks include: deposit account, current account, terms savings and Individual Savings Account. (ISA). Loan products include: personal loans, overdrafts, mortgage loan and credit card. In venturing into business with retail banks in the UK, I would recommend that SKN Style invest in financial services sales, such as share sale and purchase, life assurance, insurance and foreign exchange pensions. Such services have proved to be less profitable but at the same time less risky. The banks can easily gain extra income form charging fees on money transmission, penalty charges and larger loans (Bowen and Hoggarth, 1999).
Services Not Offered
Banks in the UK still engage in poor practices that impact negatively on their profits. Despite the introduction of electronic payment clearance, it is still common for cheques to take more than three days to get cleared. SKN company should therefore avoid the challenge of using cheques as a means of payment. Most of the banks tend to raise rates on current accounts but only for a short time before customers return to original banks in order to enjoy higher rates. Thus customers gain very little by switching accounts for only a few months. The situation is complicated by the fact that customers are required to have a certain balance in their respective accounts to enjoy higher rates. Most banks are also experiencing a shortage of cashiers leading to customers receiving poor services. The software that was recently introduced in the UK market to improve the relationship between the management and customers has been a big flop as the investment did not pay off (Cruickshank, 2000).
The reason behind the failure is the fundamental misconception that having customers closer is all CRM information technology can offer. The best way to create a network that will include every customer participation and interaction with the bank is to have an organized and working customer care centre. Innovation in these banks has also proved to be rare. Though retail banks are trying to be on par with rapid technological changes as well as changes in the business environment, they are doing nothing more than simply investing in new products. The consolidation that is common in these banks has resulted in innovations being stifled. SKN can get into this business but adopt more advanced innovations that would make the operations of the banks more efficient (Heffernan, 2002).
Though the UK retail banking market does lack a few products, the industry still enjoys some market strengths making it a preferred destination. The price dispersion of banks has continued to increase despite the recession situation all over Europe. This is due to the gradual adjustment of the price dispersion that came as a result of the strong market share enjoyed by the banking industry in the UK. The highly competitive market forces different banks to offer high quality services and end up sustaining higher prices. The UK government is also in full support of the banking industry, therefore, most banks enjoy government incentives and protection from unfair competition from foreign banks. SKN Style can make the most of these strengths by investing in retail banks in the UK (De Bandt and Davis, 2000).
Most of the leading banks in the UK have been accused of increasing their rates so as to earn huge profits at the expense of their customers. Furthermore, the same leading banks are alleged to have had their borrowing and saving accounts manipulated so as to boost their interest rates. These moves have resulted in a bad impression of the bank industry as customers go home believing that the main aim of setting up banks is to rip them off. This has resulted in many investors shying away but the matter has since been resolved by the government and things are getting back to normal. SKN Style should be careful while investing in any of the banks in the UK lest it tarnishes its good image (Gilbert, 1999).
The industry still has the potential of developing a better operating model so as to come up with a desirable cost control. The CEO’s of these banks can as well re-introduce the old banking values that are mainly centered around giving customers privileges. The immediate opportunity of the retail banks in the UK is in the improvement of productivity and revenue enhancement. Banks should make the most of the opportunities requiring technology enhancement and tough cultural changes.
In the last ten years, retail banks have experienced turbulent times. Mortgages, deposits and credit cards revenues have continuously been going down and the trend is expected to continue in the future. A decrease in deposit revenue and a drop in interest rates always overshadow any revenue growth in the bank industry. The situation on the ground indicates no easy relief in the future in relation to revenue stagnation (Heffernan, 1992).
The Current External Environment (PESTLE analysis)
Now that the retail banks in the UK deal in similar products, it all depends on the skills and motivation of a new investor to make an impact. For any bank to remain successful in this market, it has to be profitable and competitive for many years. Most of the well-established banks in the UK record profits of great margins year-in, year-out, thus this should be a major attraction for SKN Style Company. Most of the banks have also come up with long-term working prospects and are working towards achieving them. This will form a good platform for SKN Style to have a long-term investment. Product managers have also changed the old market research based approach and launched new services that focused on real customers being reached through branches. This serves as an advantage to both the bank and the customers as the bank will ensure that its research team has direct contact with the customer while the customer enjoys bank services at their doorsteps.
This can be a better chance for SKN Style to have its name advertised in every part of the UK. Banks are also taking advantage of the competition to boost their employees’ productivity by giving them a chance to interact with employees, suppliers and customers. This approach ensures that the employees are more efficient and ultimately leads to huge gains for banks. Demand for resilience, flexibility and money value has led to the management of UK banks to invest more in technology and IT. This has ensured that banks open up to even wider markets and operate more effectively. The technological position will make it easier for SKN Company to merge its operations with banks (Llewellyn and Drake, 1993).
Advise To The Partnership Arrangements
Retail banking being a sensitive industry, a partnership arrangement in such a field can lead to potential problems if not properly administered and designed. If not properly administered and designed, the services offered by the alliance may turn out to be more expensive leading the partnership incurring more operation costs than what the respective partners used to incur. For this partnership arrangement to succeed, both parties should ensure that;
Come up with legal reforms in their respective companies to ensure the operation of the formed partnership is effective and efficient.