The Financial Services Sector in the United Kingdom - Assignment Example

The Financial Services Sector in the United Kingdom EXECUTIVE SUMMARY The financial services sector in the UK is very large and diverse, consisting of many different business structures offering a plethora of commercial and retail services to consumers. The sector provides 11.6 percent of total government tax receipts and contributes over 11 billion of revenue to the UK economy. This represents a very large sector that is highly beneficial to the national economy. Research findings in the report identified a rather negative political and economic environment that causes many current and potential future challenges to banks. However, social trends for utilisation of social networking and mobile communications provide ample opportunities to engage consumers more efficiently using social media and digital service marketing strategies. A small-scale qualitative study was constructed involving an interview with a major banking institution in this industry to determine current service marketing strategies at the bank. Results returned that the bank was not properly focused on setting up a control and measurement system to evaluate the return on investment for its digital marketing strategy, something dangerous in an industry environment where competitors often replicate successful competitive strategies of major players within an oligopolistic market structure. It is recommended, therefore, that the organisation involved in the study spend the next five years coming up with a better system of measurement and gain real-time consumer sentiment in order to measure whether the digital marketing strategies are meeting with budget expectations and overall satisfying consumers. An analysis of the financial services sector in the United Kingdom Defining the sector The financial services sector in the United Kingdom is rather colossal, consisting of a variety of accountancy businesses, investment firms, credit card companies and banking institutions. In 2004, the industry contributed £8.61 billion to the national economy. By 2011, the sector had grown substantially, providing £11.64 billion to the UK economy (Marks 2013). In 2012, the entire financial services industry contributed 11.6 percent of the total governmental tax receipts (PWC 2012). The sector further employed 1.2 million people in 2012, which is approximately four percent of the entire national workforce. This is substantial in a country where unemployment rates are high and service industries do not provide high salaries for specialised knowledge and experience in an important industry sector. The breadth of different organisations operating and competing in this sector requires an analysis based on the banking industry. Major competing banking institutions in the United Kingdom include Lloyds Banking Group, HSBC, Barclays, Standard Charters and the Royal Bank of Scotland Group. Several competing banks have very long-standing histories in the United Kingdom, thereby giving them a recognised brand identity throughout the country. The Royal Bank of Scotland Group was established in 1727, Barclays in 1690 and Lloyds Banking Group founded in 1765. This impacts the competitive behaviours of other banks that were only recently founded at the end of the 20th Century and dictates the brand-building focus with these banks. In 2011, Lloyds Banking Group sustained total revenues of £23.5 billion (Lloyds 2012), which is created through a business model that supports commercial banking, investment banking, and investment management services. Barclays boasted £26.9 billion in revenues in 2012 (Barclays 2012), another banking institution involved in investment, commercial, and retail banking with a diversified strategic model. The Royal Bank of Scotland maintained revenues of £25.78 billion in 2012 (RBS 2013) with an even more diversified business model involved with mortgages, insurance and corporate banking. These banks sustain very high profit capabilities which provide the banks with necessary financial capital for expansion, to place high expenditures on marketing, and to acquire new assets both domestically and internationally. All of the major banking institutions in the UK operate in an oligopolistic market structure, whereby there are few companies available to service a broad market (Hirschey 2009). In the oligopoly, the companies that dominate the market are usually very large organisations, therefore their strategic actions and developments make a significant impact on the market. It is commonplace for decision-making within the organisation to be based on knowledge of competitive actions and competitors quickly respond in an effort to outperform other businesses in the oligopoly. Businesses in this market type compete intensely against other players and often attempt to create entry barriers that include differentiation, pricing competition, and even the utilisation of various intellectual property laws to distinguish the business from other competitors and protect their market position. Companies that operate in the oligopolistic market typically have achieved economies of scale. This is defined as being able to achieve substantial cost advantages that are possible through the scope and size of business operations where output costs decrease whilst the business is able to spread fixed costs over a larger volume of unit outputs (Gelles and Mitchell 1996). It is better operational efficiency that allows the firm to achieve economies of scale and better operational efficiency continues to lower the total costs of capital. Hence, the banking sector is a very dynamic and influential sector which is characterised by several large, multi-national financial organisations that have adequate cash flow and annual revenues that come from being involved in multiple business services. Opportunities and threats of the sector The PEST framework of analysis was utilised in order to understand what threats and potential opportunities are available in this highly competitive sector. Political - As a result of the 2008 recession, the government took a much more active investment role and regulatory position over the financial services industry. In order to prevent a complete collapse of the United Kingdom’s economy, government invested significant financial capital into the banking system, injecting new operating capital for major banking institutions. The UK government now owns a 43.4 percent stake in Lloyds Banking Group and a whopping 82 percent of shares for The Royal Bank of Scotland (Kennedy 2009). The government provided major banks with £250 billion in loan guarantees and an additional £50 billion that could be borrowed by banks directly from the government (BBC News 2008). This represents a substantial threat to bank autonomy as under UK securities laws, having majority ownership of a firm’s common stock provides the ownership with considerable decision-making authority. Those individuals holding controlling interest is able to veto decisions made by a company’s Board of Directors or executive management. Controlling interest also has the right to become the Chairman of the Board and influences election or termination of the Chief Executive Officer (Michie 1999). Banks are constantly under the threat of having their internal organisational structures distressed by the UK government, which is a fundamental conflict of interest in a free market economy. In the free market system, which is that of the UK, government is to have their control over internal and operational practices of businesses minimised (Bockman 2011). With controlling interest, the government could radically force restructure leadership and the general business model. The government also developed a new monetary policy which was designed to stimulate the economy, but had detrimental impact on the banks in the sector. The government implemented quantitative easing, which is a non-conventional monetary policy where government buys significant volumes of assets from major banks in order to stabilise a crumbling economy. The purchase of the assets drives down the yield on bank assets and increases the monetary base, which is the volume of commercial bank reserves maintained within the country’s central bank alongside the total amount of currency that is currently in circulation (Brunner 1987). Quantitative easing, though beneficial for government and society, created many negative economic consequences for the country’s banks. The increase in the money supply depreciates a country’s currency against other basket of international currencies (Inman 2011). This makes the cost of borrowing and lending between large banks much more expensive, thereby reducing financial capital in the bank. It is common practice for banks to lend one another money in an effort to improve national economic health and ensure higher revenue production. The government, also as a response to the 2008 recession crisis, ordered the construction of two powerful regulatory agencies to ensure stability in the financial services sector. The Financial Conduct Authority is funded by charging fees to members of the financial services sector and has been instrumental in creating new legislative and regulatory frameworks that now supervise financial services firms at the individual level. This particular regulatory group is able to conduct investigations of suspect firms, place different requirements associated with company generated products, and regulate the conduct of marketing of financial services and products (FCA 2013; The Telegraph 2011). Banking institutions operating in this sector are now under more scrutiny by government and non-government regulatory bodies that require more investment and labour into conducting internal auditing and ensuring compliance to new regulatory frameworks. This was not a problem in the industry until the recession when government became instrumental in intervening and attempting to control business practices. Economic – Intervention by the government for injecting capital into banks and new quantitative easing as a monetary policy drove down inflation rates in the country. Whilst this might appear to have economic advantages, it reduces the export competitiveness in the UK by weakening the Pound Sterling (Capital Business Media 2014). Businesses that cannot improve their financial position in the export market are unable to expand, thereby limiting deposit volumes at major banks and the ability to generate profitable loans to struggling companies. Lowered inflation could have serious consequences for revenue growth at banking institutions as well as from supplementary financial services for businesses. In business, when the costs of capital are reduced within the business, the organisation increases the utilisation of fixed assets, leading to job losses through efficiency (Griffin 2013). Large organisations, due to an extraordinarily low national interest rate, are now able to borrow large volumes of money through loans with very low rates. This is attractive to banks as small businesses are having problems recovering from the lingering effects of the recession. Therefore, banks are providing these loans to large corporations who are, in turn, utilising these loans to improve utilisation of fixed assets. However, this ideology is a short-term type of thinking without considering the viability to offer riskier loans to struggling small business owners and entrepreneurs. This would have greater economic benefits for the banks if more loans were refused to large corporations in favour of small businesses who would provide payments on the loan at much higher interest rates than the credit-rich corporation. Social – In the UK, two-thirds of the entire population has a Facebook account and nearly one-third of the population uses Twitter (CSN 2013). All of the major banks in the UK, except for HSBC, are not adept in utilising these social media networks to improve customer service and brand exposure. HSBC sends an average of 68 Tweets per day responding to customer inquiries and engaging consumers with a 30 minute lead time for responses (CSN 2013). It takes Barclays an average of 11 hours to respond to customers via social media. The major banks should be considering social media as a viable and brand-enhancing method of engaging with existing customers or potential new market segments to gain more interest in the bank and seek services and deposits for having a first class service model. Technological – The technological environment is supportive of modern banking activities, ranging from mobile banking utilising a smartphone to tangible enhancements of ATM machinery and a variety of other contemporary technologies. However, it is slow to evolve as, in the oligopolistic market structure, competitors are quick to replicate existing technologies of competition. There are no substantial concerns or implications of the technological environment other than its positive availability to major banks and the ongoing threat of competitive imitation through technology procurement and development. Comparing competitive service marketing strategies Banks in this sector often consider how best to transform existing, tangible resources to achieve higher profitability and performance gains, but ignore the intangibles of service that are critical for customer retention (Raffey and Anwar 2012). People and physical evidence are two under-looked service marketing elements in the 7 Ps of marketing. Banks have generally been rather sterile and homogenous in terms of the internal servicescape, which is causing banks to attempt new marketing strategies to achieve total customer satisfaction. Banks in the UK have turned toward scent marketing, a contemporary servicescape dimension that stimulates olfactory nerves (leading to a mental response) and to prevent customers from feeling frustrated in long queues that are common in large metropolitan region banking facilities (Winter 2014; Air Aroma 2013). The servicescape is a critical dimension to what drives consumer behaviour and banks are recognising new methods to give customers a more positive banking experience. Because scents create an immediate emotional response, it is becoming an effective method for successfully communicating with customers during their short experience in the bank environment. Banks are also providing more training to employees related to the people dimension of the 7 Ps in relation to proper service recovery tactics and strategies. Service recovery has a direct relationship with building consumer trust in the company, loyalty and word of mouth (Blodgett, Hill and Tax 1997). A study was conducted using a sample group of 2,000 respondents which revealed that even minor mistakes associated with account management practices of the bank led to a decrease in loyalty behaviours (Jones and Farquhar 2007). Emphasising new strategies for service recovery and providing employee with more advanced training in this area are changing the dynamics of customer relationships and their banks in the UK. Because the banking sector in the UK is an oligopoly, it does not have benefit to heavily publicise service marketing strategies due to the fact that major players will immediately respond and duplicate these marketing models if they are known to bring competitive successes. Hence, there is not a great deal of literature available on the competitive service marketing strategies with the four main competitors; a gap in the research. However, it is clear that the banks are becoming more aware of the intangibles of service including people and physical evidence that shape the customers’ short- and long-term impressions of the banking facilities. Therefore, a brief interview was conducted with a bank manager at a division of The Royal Bank of Scotland to determine service marketing philosophy. The brief qualitative study indicated that this bank focused on using digital marketing in the form of email reminders and special promotions along with text messages on mobile devices to satisfy and prompt consumers. The participant, however, was unable to supply statistics or metrics about the potential return on investment of the effort since it was a very new service marketing activity at the bank. Key service marketing issue At the Royal Bank of Scotland, coming up with a control measurement process seemed to be the fundamental problem with their service marketing ideology. Clearly, this bank was aware of the growing trend for consumers to prefer mobile banking and digital relationship development with banks which is what drove the decision to undertake digital marketing as a new service dimension. The bank manager did not seem to understand that it is crucial to have some form of evaluation instrument to determine whether the service marketing strategy was meeting with appropriate customer response and satisfaction levels. Therefore, over the next five years, The Royal Bank of Scotland should be developing a variety of online surveys dealing with such concepts as customer satisfaction and loyalty to the bank for its digital marketing services. With growing international consumer usage of the Internet and smartphone technologies, it is not going to be a short-lived trend that customers will be responsive to and appreciate digital relationships with their important banking facilities. This will assist the company in justifying their marketing budgets and creating new service marketing innovations based on consumer demands. The company can become more well-versed and provide training to the marketing department to identify numerical counting methods to determine the frequency by which customers respond to email advertisements and mobile device reminders. Marketing performance and measurement (MPM) helps the business to focus on operating activities associated with service delivery and gives a recurring snapshot of whether the company is utilising its resources (people, facility and financial capital) effectively (Powell 2008; Aberdeen Group 2007). The interview conducted with the manager of RBS provided evidence that the company was unsure of the importance of utilising people properly and ensuring that digital service marketing was aligned with best practice (or innovative practice) in this sector. The bank should be learning whether customers find this digital and mobile practice to be invasive or beneficial as the bank could be creating dissatisfaction in customer segments without really understanding this. Customers gauge whether or not to re-patronise an organisation or maintain willingness to recommend through word-of-mouth through evaluation of service quality (Boulding, et al. 1993). The Royal Bank of Scotland seems to be essentially launching a new service marketing concept and allowing the company to proverbially fly blind without having any established control systems. Though the company has taken steps to improve and enhance the internal servicescape of the organisation, it is not fully investigating whether the digital and mobile service dimensions are meeting with customers’ expectations for service quality. This creates a situation where RBS needs to evaluate real-time customer responses and then critically analyse or adjust service marketing strategies to align them with customer needs and values. Simply because customers utilise the Internet and mobile devices to conduct banking activities does not justify that they would be content with email reminders, scent marketing, or digital promotion. A recent study indicated that the largest reason why customers switch banks are service quality issues (The Financial Brand 2011). Conclusion In general, based on research findings, the banking sector in the UK has many positive aspects that drive business practice and marketing strategies. Political factors clearly were the most detrimental and risky for the banking sector ranging from too high of influence and control over future business practices and the negative economic consequences of new and radical monetary policy. However, social trends are supportive of the use of digital marketing for relationship development along the service model, something that RBS attempted to capitalise upon to gain more consumer loyalty and provide satisfaction. RBS was not apparently concerned with achieving service marketing goals in a cost-efficient method. It is impossible to know whether the new service marketing activities achieve objectives effectively without some form of metric, something that could seriously limit the competitiveness of RBS when other competitors in the oligopoly make immediate and duplicate responses in an effort to seize a potential competitor advantage. 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