Globalization of Banks - Essay Example

Globalization of Banks Banking industry is one of the sectors undergoing rapid changes due to global effects of business transactions. Transactions across the states are more than ever before. Customers are focusing on efficiency of service delivery (Cetorelli & Goldberg, 2008). It is more convenient to access the details of one’s account without geographical or time constraints. Globalizing involves provision of financial services both in the national and international market by focusing on improving efficiency, capacity, and performance to make business expansion (Ashcraft, 2008). This study examines the factors contributing to banking globalization and the consequences of going global. By going global, banks aim to achieve various goals such as market development and increasing profitability. The operation has both negative and positive effects on the banking. The expansion of the global market has contributed to rapid development of global business. Many businesses are operating in the international market, and that has contributed to increased demand for financial services in the international perspective (Cetorelli & Goldberg, 2008). As more people travel across the border and engage in financial transactions there is increasing demand for expansion and integration of financial institutions in order to increase consumer convenience through effective delivery of standard financial services (Goldberg, 2009). The use of ATM, debit card, credit card, Telebanking, internet banking, home banking, mobile banking, swift banking, safe deposit vault, corporate cash management, etc. have increased globalization of banking because they enable customers to enjoy financial services over broad geographical boundaries (Ashcraft, 2008). Globalization of banks is characterized by fewer policy restrictions and increase in average distance between the main bank and its subsidiary branches. The expansion of banking services enabled businesses to expand their coverage in wider geographical area in order to enjoy economies of scale (Ralph & Lelyveld, 2010). The elimination of cross-border barriers opened up market for foreign banks to venture in new geographical market which resulted to rapid growth of the banking industry. With the entry of international banks that created room for competition the banking industry became more efficient and enhanced consumer choice as well as market efficiency. The banks changed from being processors of transactions and became more customers focused (Goldberg, 2009). They started focusing on customer needs and prioritizing goals in order to satisfy particular needs of the customers. The governments protected small business from the influence of multinationals and large organizations against influencing their performances. Those organizations influenced the structures of local industries and could not make small industries rise to the surface (Goldberg, 2009). The government imposed regulations to protect those young domestic industries in order to create job opportunities for the citizens and ensure accessibility of services to the citizens. However, since 1980s the states started derogating industries in order to pave the way for competitive performance of organizations (Cetorelli & Goldberg, 2008). Deregulation of the financial industry offered room for bank mergers that resulted to a significant transformation of financial service markets. Also, it opened up room for entry of new players and service network. Deregulation of financial institutions resulted to stiff competition in the financial service industry and struggle for customers who had not been reached previously (Ashcraft, 2008). In addition, the emergence and use of internet resulted to spread of financial services across the globe. Therefore, liberalization and privatization of the banking industry as well as advancement of technology led to diversification of financial serves across the globe. The use of ATM has increased banking transactions by getting rid of the constraint of space and time (Goldberg, 2009). It has improved the way customers carry out their banking transactions through improving quality and standards of services (Goldberg, 2009). Clients can access their bank details and conduct nearly all financial transactions from across branches and banks irrespective of the location. In addition, different banks have merged their services to enable customers get basic services form any bank available in their location (Ashcraft, 2008). Therefore, when customers are traveling to different regions they can conveniently carry out operations without having to travel to a particular branch to access their bank accounts. This has particularly improved business activities since business people can send and/or receive money from any part of the world. The use of internet banking (e-banking) has revolutionized the banking industry. Most banks are offering online banking services that enable clients to access their account details and conduct all transactions at the comfort of their home (Cetorelli & Goldberg, 2008). Globalization of banking and integration of financial services has resulted to increased information sharing between and across the banking industry. Large financial institutions are well placed in the global market since they have the advantage of technological advancement and innovations (Goldberg, 2009). Therefore, globalization of banking is contributed to rapid expansion of banks compared to small banks. In a regulated market with low technological advancement businesses experience stiff challenge to expand their geographical boundaries due to the high cost associated with the development programs (Ashcraft, 2008). However, improvement in communication and information technology has eliminated barriers to economies of scale by eliminating the barriers restricting expansion of banks to different geographic regions. Currently, banks are operating in a wider geographical region through use of Automated Teller Machine (ATM) networks and online banking cost effectively (Goldberg, 2009). Banks that are technologically connected can operate competitively across the globe and interact effectively with their customers and other stakeholders. Therefore, banks can offer their services to the clients in the global market through technology-enabled systems. As earlier mentioned, deregulation of financial services created a room for geographical diversification of banks through various strategies such as mergers, strategic alliances, outsourcing and acquisition (Ashcraft, 2008). This increased efficiency of service provision to customers because firms that could not compete effectively were free to quit the market while the firms that were highly competitive had the opportunity to join the market. Associations of financial services helped the firms to increase economies of scale and engage in cost reduction strategies (Goldberg, 2009). The goals of businesses operating in the global market are to establish strong product base and generate more revenue for the shareholders (Ralph & Lelyveld, 2010). To achieve those goals banks have to focus on cost reduction strategies and increase productivity of their activities in order to enjoy economies of scale. Therefore, banks have continued to expand their operations in the global market and due to the competitive nature of the international market and the desire for achieving efficiency in order to reduce operation cost. In order for the banking industry to achieve expansion of services and market, they should focus on diversifying the banking services and improving the financial derivatives. The intensification of banking services includes transferring of banks debt services to securities and new investment options such as currency transactions, establishment of investment funds and issuance of insurance portfolio for the benefit of the clients who have the opportunity to access better services (Goldberg, 2009). Banking globalization is not without risk to the banking industry. Due to expose to high level of risks banks should implement appropriate strategies to safeguard themselves against internal and external risk exposure (Goldberg, 2009). One of such cautions against the globalization risk is strengthening of capital base. This measure was established in 1988 by Basel Committee as a formal requirement for all banks irrespective of their location (Ashcraft, 2008). Business globalization ensures are establishing unitary banking services and coordination of global financial and capital market. That has been achieved through swaps and arbitrage due to international price variations that has allowed banks and other financial services to conduct their simultaneous activities in various financial markets across the globe (Ralph & Lelyveld, 2010). Establishing global financial services cause intense competition among the small banks and financial institutions while large banks focused on expanding market activities, revenue maximization, cost reduction, offering innovative services and customer focused. Such activities could be achieved with adequate knowhow and conversion strategies aimed at expanding geographical market, creating new market and overcoming the challenges of rivals (Ashcraft, 2008). Expansion of banking services to the global market has caused a challenge related to product mix because of increased competition and need for better resources, coping with new roles and banking legislation requirements (Cetorelli & Goldberg, 2008). The banks must have the capacity to determine sectors offering comparative advantage and establish the advantage that may become relative in the future. In a global market, the customer needs are quite diverse and competitive. Therefore, banks must enlarge their product mix and bring innovative market into the market continuously instead of relying on customary financial services and be able to achieve low cost, efficient product and services as well as increase the profit margin (Patel, & Pithadia, 2013). The management must focus on strengthening technological structure, marketing and promotional activities in order to keep abreast of the rapid changes in technology since they have potential for future challenges. Another significant service provided by banks both domestically and in the global market include lending of finances to individuals and corporations or organizations. Globalization of banking creates more demand for finances with better opportunities for increasing profitability (Cetorelli & Goldberg, 2008). However, the banking industry is exposed to greater risk and requires better management tools to manage risks in lending processes in order to ensure better products for the consumers and achieve efficient management of assets and liabilities. The regulatory and monetary authority may lose control over a foreign bank that has strong foreign influence in the international market (Patel, & Pithadia, 2013). Should that occur, the bank activities may have diverse impact on the domestic economy. Expansion of banking services to cross-border customers results to management issues. Various customers have different needs that require diversity management approach (Ralph & Lelyveld, 2010). The financial institutions should hire competent workers from diversified background in order to address the customer issues effectively. It is a great challenge for a globalized financial institution to balance the global demands of the customers with organizational needs (Patel, & Pithadia, 2013). Furthermore, maintenance customer data and protection of consumer privacy increases challenges of globalized banks. Therefore, institutions should put adequate security measures to ensure safety of the consumer information exchanged across affiliate institutions. Lack of competence in management of customer information can thwart the goals of profit maximization, cost reduction and increased competence (Cetorelli & Goldberg, 2008). In conclusion, banking globalization is opening up activities of the financial institution to offer expansive and diversified financial services across the border. Elimination of cross-border restriction policies and technological advancement are the main contributing factors for globalized banking services. The efficiency of the banking industry, competence, ability to satisfy particular needs of the clients are the driving force for diversifying and expanding financial services. However, effective expansion and diversification of financial services require appropriate knowledge, market expansion, risk mitigating factors and managerial capacity to manage risk. The management should diversify product mix and increase capitalization in order to maintain competitiveness in the global market. The management must have thorough knowledge about the global market and understand particular needs of the clients in order to maintain their global presence. References Ashcraft, A.B. (2008). "Are Bank Holding Companies a Source of Strength to Their Banking Subsidiaries?" Journal of Money, Credit and Banking, Vol. 40. No.2-3: 273-294 The Ohio State University. Cetorelli, N. & Goldberg, L. S. (2008). "Banking Globalization, Monetary Transmission, and the Lending Channel." NEBR Working Papers. National bureau of Economic Research: 1-39. Retrieved on 26th November 2014 from Read More