Banking and Insurance Industry - Essay Example

PESTLE ANALYSIS OF BANKING AND INSURANCE INDUSTRY Banking and Insurance Industry is going through a very tough phase as the new developments into theprofession suggest that there are lots of changes taking place. After the demise of Enron, supervisors in many countries are now focusing hard in bringing in new regulatory frameworks. The following section of the appendix will analyze the various strategic issues faced by the financial sector industry in general. Political Issues In order to assess the political strategic issues related with the financial sector industry we need to divide this industry into two different geographical realities. In developed world where most of the sector is de-regulated and enjoy substantial degree of freedom and autonomy, political influences may not be there however, in developing countries, this may not be the case. Developing countries do not have very well grown financial sector and most of the institutions are either directly owned or controlled by the government themselves or governments have the substantial share in them. This allows the government to largely influence the banks especially to engage into practices which may not be in direct interest of the deposit holders of those banks. The era after 9/11 have seen a new shift into the industry in terms of influence of political forces on it. The anti-money laundering rules, terrorist funding etc were some of the key strategic issues which put extra pressures on the banks and insurance companies to devise methods and strategies which can effectively help in tackling issues like illegal money laundering, channeling of funds through SWIFT etc to the supposedly terrorist organizations etc. Economic Analysis The current economic trends especially the crisis emerged due to the subprime mortgages is considered now as one of the great strategic challenge faced by most of the players in the financial sector industry. Subprime mortgages are considered as the threat which has largely been created by the banks themselves as they tend to violate their own prudent lending policies in order to capture the market. This has therefore provided them an opportunity to earn at the cost of incurring high cost. “Sub-Prime lending typically has been characterized as lending at relatively costly interest rates and fees to credit impaired or otherwise high risk borrowers.” (Lax, Manti and Raca). Subprime loans are among the newly popular mortgage products, such as interest-only loans, for people with strained budgets, including first-time buyers. Homeowners increasingly use them to refinance and consolidate household debts when their credit scores fall in the wake of bankruptcy, high medical bills, or other setbacks. (Blanton). This is therefore currently the most important strategic issue in terms of economic forces which are faced by the banks and insurance companies. This is also important due to the fact that these crises are now spreading and engulfing banks into other areas also as the funds which are being stuck up into the subprime mortgages could have been utilized more productively by the banks in other areas of business. Social Analysis It has increasingly being felt that the banks and financial institutions through their innovative products have almost put people into vicious circle. The never ending debt mounting on the consumers suggest the growing unrest towards banks as many feel being trapped by them. There are reported incidents that many people committed suicides due to the fact that they were forced by the mounting debt burdens to take excessive measures. This subtly suggest that the banks and financial institutions need to be more considerate of the pricing methods they employ when pricing their products as well as implementation of other ethical practices which lessen the impact of this issue. Apart from this, in Muslim societies, banks and other financial institutions are not being considered as Islamic way of doing the business. For banks like HSBC which claims to be the world’s local bank with presence in most of the Muslim countries, this factor may prove one of the decisive factors in shaping the overall future of the banking industry in those countries. Thus the mixing of religion with business is another very critical social challenge which banks have to face in terms of their overall future presence in Islamic countries. Further to this, it is also important to mention that Banks, as one of the most important businesses in a person’s life, tend to engage themselves into activities which may not be wholly considered as ethical in nature i.e. slapping of irrational fines, delay payment fines, hidden charges etc. Thus in order to meet the future strategic issues related within this context need to take into account these factors also. Further the more the reliance on the IT, less will be the human involvement into the affairs of the company therefore it may be a social issue that technology may ultimately overtake the humans in performing the jobs. That would mean that the drastic job cuttings in future may not be discounted in this sector especially. The increased reliance on the information technology, the emergence of internet banking coupled with the brick and mortar companies provide a new social challenge to the banks to keep that side of doing the business balance also as the future may unfold itself into a shape which may be drastically against the social norms of the time. Technological Analysis Banks and Financial Institutions are increasingly becoming more Information technology oriented. Mobile banking, Internet Banking, ATMs etc are the new tools provided by technology to increase the overall productivity as well as the competitiveness of the banks. However what is most important to discuss here is the fact that increased dependence on information technology has increased the risk of doing business with the banks. The increased security concerns are one of the biggest strategic challenge which organizations are facing as the new technologies emerge every now and then which may allow illegal intrusion into the personal accounts of the millions of accounts holders. The illegal intrusion and illegal fund transfer therefore is one of the most important strategic challenges faced by the banks. Legal Issues The financial industry is facing stiff regulatory challenges in terms of improved prudential regulations as well as the risk management practices. The emergence of BASEL II and other related regulations are clearly posing a great strategic challenge to most of the banks working internationally. BASEL II is an accord which basically links the capital of the bank with its risk sensitivity thus effectively forcing banks and financial institutions to put into place various methodologies and practices which help them better manage the risk as well as ensure that the capital of the bank is secured and hedged and have proper robustness to sustain the bigger economic shocks. However what is most important is the fact that banks are increasingly find it difficult to effectively implement this accord as its requirements are especially difficult and require certain level of skills and technological support which for Banks like HSBC may not be difficult to obtain but for banks from developing world, this is one of the strongest challenges which banks are currently facing. Apart from this the increased role of effective anti-money laundering rules and the issues like terrorist funding are critical in nature as they are putting the reputation and goodwill of the banks at risk. Any mishap can cost the bank its whole corporate existence. What is challenging in this regard is the fact that banks on one hand are feeling pressures to maintain their targeted deposit positions and on the other hand must also have to ensure that funds flowing in are not bad. Thus this is like a double sword for the banks. Environmental Issues Though banks are not directly related with the environmental issues as they deal in services however being the businesses of the present market, Banks may be required to comply with certain environmental rules and regulations. These strategic challenges may come in the form of environmental challenges such as construction of Bank buildings, banks’ financing for green housing projects etc. Many also believe that the future role of banks in terms of financing the green housing projects is very bright as the banks may directly contribute towards improving the environmental standards. Thus the future strategic challenges to be faced by the banks could easily come in the form of environmental issues related with the conservation and development of alternative and sustainable resources. The continuous focus on the alternative business strategies as well as the sustainability issues provide banks a unique opportunity to contribute towards creating sustainable resources within the economies in which they work. Since the banks provide necessary financing for the production of such kind of resources therefore banks would have an indirect role in facing the future challenges of environmental issues which most of the organizations in conventional goods markets are facing. It must also be noted that the response of the banks in this regard may come in the form of policies changes with new and more innovative product development and pricing tailored especially for such companies. Three Important Strategic Issues Subprime mortgages I believe that what is most challenging and most important issue being faced by the banks in current scenario is the subprime mortgages. It is believed that the outstanding in the subprime mortgage market only in US has been around 1.3 trillion US dollars. (Ramady). This figure may be small in terms of numbers but the impact which it has on the overall world economy is great. Banks and financial institutions in the past have provided funding to the customers which were not technically eligible to get the credit. Banks in order to earn higher from those relationships allowed financing to subprime customers to finance their homes however what is more problematic is the fact that most of the banks and financial institutions have securitize their exposure on the subprime mortgages therefore when subprime mortgage borrowers started to default, banks still have to pay to their bond holders thus effectively reducing the available funds for lending in the whole banking sector. This act of the banks have created serious liquidity crunch and most of the largest banks in the world especially Citibank has shown billions of dollars in terms of the provisions being made into the financial statements on account of subprime mortgage defaults. The financial innovation therefore has put the banks and financial institutions at the cross roads as the banks and financial institutions are finding it difficult to match with the current market conditions. The increasing prices of oils would further drain the liquidity out of the banking channel thus increasing the overall risk profiles of many large and once stronger banks. This is just the tip of the ice berg as the banks are increasingly finding it difficult to cope with this. This issue is therefore of most significance strategic importance because of the fact that it is putting in danger the very existence of the banks and financial institutions. The reason for choosing as the top strategic challenge being faced by the banks toady is the fact that this issue is of very critical nature and have impacts on the overall banking sector which were not predicted effectively by the analyst. In order to avoid such incidents into the future, financial institutions need to have better risk management parameters in place as it will allow them to exercise prudently while making lending decisions. Further it will also allow banks and financial institutions to innovate and upgrade their existing systems and procedures so that the impacts of such economic events may effectively be predicted as well as being managed effectively so that the overall interest of all the stakeholders into the banks should remain safe and not jeopardize. It must also be noted that economic forces may be cyclical in nature but if they are not being properly monitored they can create significant strategic challenges for banks and financial institutions. Regulatory Challenges The era starting after 9/11 is an era which is radically different from all its previous eras. Not only has it political impacts but business are also got affected by this. Due to 9/11 , fall of Enron and World Com, regulators of banks have become more conservative in their approach and have devised regulations which are more tougher and require compliance with many issues. This therefore would create a significant strategic challenge for the banks to meet successfully the regulatory challenges. The emergence of BASEL II has ushered a new era into Bank however at the same time it has also forced banks to make strategic changes in the way they do business. This has not only increased the overall cost of doing the business but also diverted significant resources into non-productive activities. Banks like HSBC which have traditionally relied on low cost services are now facing themselves at difficult points as the new regulatory requirements have increased their cost without significantly contributing to their revenue. This is important strategic issue because of the fact that the present strategies of the banks in financial sector may not be good enough to ensure the future sustainability of the business. Banks have to evolve themselves in order to effectively and profitably work into the high regulatory environment. Further increased regulatory requirements would also mean that the regulatory authorities have greater role into the overall businesses of the banks therefore they may not be able to decide freely and independently as they should have been in largely un-regulated environment. Technology The most critical issue related with the technology within the context of the banks and financial institutions is the fact that it has exposed banks to increased risk. Banks in order to gain competitive advantage on non-pricing factors as banking industry is largely undifferentiated have started to offer online banking services to their customers. Though this may seem innovative and cost effective however the related security issues are very critical in nature as they may create significant goodwill issues for the banks This can therefore become an issue of strategic importance because any un-authorized intrusion to the system could not only put the whole information technology system of the banks at risk but will also expose the accounts of the deposit holders to the hackers. This therefore could create very strong public relation issues for the banks because of their supposed failure to effectively guard the deposit holders money. The reason for choosing this as the third most important strategic issue is the fact that most of the banks have developed effective systems to have a check on the security issues however it still present a significant threat to the bank’s reputation if any unauthorized access to the accounts happen. Works Cited Blanton, By Kimberly. "Dark side of subprime loans Mortgages for those with bad credit leap in popularity despite high foreclosure rate." 3 August 2005. boston.com. 15 July 2008 . Lax, Howard, et al. "Subprime Lending: An investigation of Economic Efficiency." Housing Policy Debates 15.3 (2004): 533-571. Ramady, Mohamed A. "US Subprime Market Tsunami — The Fed Is Worried..." 9 April 2007. Arab News. 15 July 2008 . Read More