VALUE CHAIN ANALYSIS OF THE BANKING INDUSTRY

| Updated: September 16, 2019 |

Banking industry value chain Analysis

Introduction :

A decade later than the financial crisis, the banking industry is now in healthier shape. It has grown bigger in size and more profitable than ever during last 10 years. Its resilience is also much higher compared to a decade ago according to Deloitte. Total assets in the banking industry have reached $124 trillion according to the Banker’s Top 1000 world Bank’s Rankings for 2018. ROA or Return on Assets stood at 0.9 percent in 2018. However, the U.S. banks are doing better when compared to banks in other parts of the world including Europe. In 2018, the total assets of U.S. based banks reached $17.5 trillion, the highest ever. ROE or Return on equity in the U.S. Banking industry is the highest since the financial crisis at 11.83 percent.

In China too, the banking industry has seen enormous growth. Chinese banks have grown at a better rate compared to the European banks. However, the trade wars between U.S. and China are affecting their growth prospects. Most of the U.S. banks have benefitted from higher interest rates, loan growth and tax cuts. Outside the U.S., banks have benefitted from higher loan demand and by better management of costs. Digital technology has also supported faster growth of the banking industry worldwide. The retail industry worldwide has embraced a mobile centric consumer experience. Larger number of customers are now handling their bank accounts from their mobile devices. The banking industry has changed a lot in a decade. Banks have optimized their value chains since it has helped them bring operational costs down and grow their profitability. The value chain in the banking industry is different from the others. Risks are higher and risk management is an important priority in the banking value chain. Check out an analysis of the primary and secondary activities in banking value chain.

Banking Value chain analysis

Primary Activities in the Banking industry value chain

Marketing:

Just like the other businesses, marketing has a special significance for the banking industry too. Competition has grown intense in this sector and there are several international players in the market. As such marketing becomes important for banks to overcome competitive pressure too. Attracting and retaining customers requires more focus on marketing. Moreover, segmentation is important for banking and insurance companies as segmentation makes it easier for them to serve the various consumer segments. The banks and insurance companies target different customer segments with suitable plans and services.  Brand image is also an important concern for the banking brands.

Most often the brand image is influenced by the service quality. Still, marketing plays an important role in raising brand awareness and it is why banking companies spend as much on advertising and other marketing and promotional activities. Visibility remains an important concern if brands are to expand their customer base. It is also why banks focus heavily on marketing of their brand and financial services. Post-recession growth in the developing countries has remained slow and therefore attracting and retaining customers was somewhat difficult for the brands. So, in this period they were mainly forced to rely upon marketing to retain their customer base. The marketing activities in the banking industry are mainly made up of sales support, branding and advertising activities. However, its overall aim is to maximize profits by driving sales higher and build strong brand awareness.

Sales:

Sales is an important function in the banking value chain which is because of the importance of sales for banks. The banking industry is highly competitive and apart from entering new markets and finding new customers, it is important that the banks also retain their existing customers. The sales function serves a very important role at this point where it does not just sell but also works at customer engagement and retention.  Another important thing about this function is that it is the main touch point between the bank and its customers. This function’s performance also has an important effect on the bank’s image among customers. Sales and service staff being the main connection between the bank and the customers are also partly responsible for marketing.

How they interact with prospective customers and serve them affects the financial institution’s image. Now a days online sales have also become more relevant than ever in the banking industry. However, the human touch still plays a core role in driving sales. The role of the sales staff in driving sales and revenue is big. Another factor that has grown the role of sales staff in the banking industry is the expansion of financial services. Banks are managing their sales staff more efficiently and using technology and technological training to help them manage sales more efficiently.

Product:

The products offered by the banks are also an important part of their value chain. From loans to deposits, banks provide several kinds of products and services. However, in a banking context, rather than just having a great product portfolio, it becomes impertinent for the banks to provide great service.  Banks provide a series of products and services, some of which are tangible and several intangible. From deposits and loans to credit cards and foreign exchange services, banks offer a large variety of products and services. However, in the banking world, the words products and services generally mean the same thing.

Transactions:

Another primary activity down the value chain of the banking industry is transaction. Technology has made this task easier. Millions of transactions are carried out everyday throughout the world online and offline. From ATMs to online payments, several millions exchange hands in the form of transactions. Variety of payment clearance systems and settlement systems are used by banks globally. Some of them are ACH networks, ATMs, bankcard networks and check clearing systems. Another method of transaction prevalent in the banking sector is the internet based bill payment system. The debit and credit cards have remained at the forefront of this growth in electronic payments. Banks also offer payment services for online businesses. However, apart from banks, other online payment solutions have also emerged led by Paypal. Digital technology has aided the proliferation of banking and payment solutions.

Supporting activities in the banking value chain are as follows:

Technology:

The role of technology has grown increasingly important in the banking world. Specifically, several of the most important developments have taken place during the last two to three decades. Digital technology can also be a source of competitive advantage for the banks since it helps deliver services more efficiently. Technology has made banking easier and also improved the bank’s productivity. Several of the services can be availed of online and customers do not always need to go to the branch to receive these services. Now, banks are using technology is every aspect of business including sales, marketing, customer service and other functions. The bank websites play an important role in driving brand awareness, sales, marketing as well as customer acquisition and retention. Digital technology has driven the level of consumer convenience higher in the entire banking industry including the Asian markets.

Human Resources:

Despite the growing role of technology, human resources continue to play an important role in the value chain of the banking industry. Their importance in the banking industry is higher because trust plays an important role in the banking environment globally. Banks train their sales staff and manage them strategically. Not just staff training, banks are also paying special attention to overall management of human capital. They are using digital tools and technology to design effective training programs and to deliver them efficiently. Human resource management is critical in every industry and in the banking industry too the efficiency of staff affects success to a very large extent.

Infrastructure:

Infrastructure also plays a key role in the banking industry. From physical infrastructure to technology and particularly IT, infrastructure plays an important role in the growth and functioning of the banks. Due to increased competition, the importance of IT in banking industry has also grown. With growing risks related to data security and privacy, banks are now focusing heavily on maintaining a strong and impenetrable IT infrastructure. Data centers are also a critical part of the IT infrastructures of the banks. The banks have multi level security frameworks in place to protect consumer data.

Risk Management guidelines:

At last, banking is all about risk taking. Several of the inherent rewards in banking are born of risks. Still, it is essential for the banks to properly manage their risks. It is because neither poorly managed and nor excessively managed risks are good for the health of the banks. Risk management guidelines are therefore an important aspect of the banking value chain. It helps the bank managers to manage their risks and reduce or manage them as required.  While risks are inherent to banking, if not managed efficiently banks can face serious troubles due to excessive risk taking.

Abhijeet Pratap

I am Abhijeet Pratap, editor of notesmatic. I am an MBA with marketing (major). Apart from writing on various topics in business management, marketing and English literature, I like to read and write about technology.