Banks are financial service institutions which accept deposits from the public and private organizations and create credits to individuals and organizations who are in need of finance. The banking industry is a vital sector of the service industry across the globe. Gradually, competition in this industry has been stiff with some banks opting to shut down while others thriving. The research aims at providing SWOT and PEST analyses of business environments that have contributed towards the success or failure in the banking sector.
Research Methodology
In this research, The Bank of America (BoA) will be used as the case study. The investigation follows a qualitative approach encompassing an in-depth analysis of findings and fact-based inferences on data collected from different sources. The primary source of information was an observation of customers’ behavior, while the secondary sources of data included annual reports of BoA, books about the banking sector, the internet, and economic journals.
Limitations of the Study
One of the significant limitations of the study arises due to the policies put in place to maintain confidentiality. The bank, therefore, did not provide a lot of data on its projects and products, implying that real feedback was not possible in some cases. The findings, therefore, may not be highly accurate. Secondly, the sample size of one bank is small, making it unsafe to make conclusions about the whole banking sector based on the research findings. Normality in the findings cannot be established when the sample size is less than 20. Therefore, there will be high discrepancies in the outcome. The third limitation was the time constraint, since there was limited time to carry out this research. Some of the traits in this study require up to 5 years for conclusive analysis.
Background Information on the Banking Industry
Atack, Jaremski, and Rousseau (2014) in “American Banking and the Transportation Revolution Before the Civil War” explain the intricate relationship between finance and growth. The authors argue that funding and other crucial factors interact to put into motion the virtuous circle of economic growth. While analyzing the history of American banking systems, the authors examine the 19th century, where railroads were the primary mode of transportation. They then help us identify the strong relationships between banking and transportation. Areas with a bank were more likely to get a railroad and vice versa, which was a recipe for economic development. The banking system helped build the rail while railroads helped map out banks in Midwest America. The finance system remains a critical factor for growth in modern America as it is for the rest of the world.
Athanasoglou, Brissimis, Sophocles, and Delis (2008) in “Bank-Specific, Industry-Specific and Macroeconomic Determinants of Bank Profitability,” use an empirical formula for a structure, conduct performance hypothesis (SCP) and do an analysis of the profitability of Greek banks between 1985 and 2001. They establish macroeconomic factors that determine profits in the industry, but acknowledge the market is mainly competitive and consistent. Other than the size of banks, all other bank-specific factors have a predictable effect on the success of the bank. The work follows extensive research of macroeconomic factors, such as GDP, inflation, and unemployment and bank-specific ones, such as size, deposits, capital adequacy, profitability, and cost of funding.
According to Friedman (2010) in his article “Do Believe the Hype,” major banks have collapsed due to the business environment they operate. A bank that collapses due to the hostile political atmosphere, in this case, has been affected by political situations. The same applies to technology, whereby a bank may flourish or fail due to advanced technology or obsolete technology respectively. Advancement in technologies has been on the rise in the banking industry, especially with the introduction of mobile banking. Every bank has been trying to keep up with the trends through innovations to win consumer preference.
Peters and Panayi (2016), explain the role of technology in the banking sector in the book titled “Understanding modern banking ledgers through blockchain technologies: Future of transaction processing and smart contracts on the internet of money”. The authors reflect on the revolutionary technology that has swept across the banking sector and the future of global money remittance, contracting and digital assets. Given the significant number of people with access to the internet, the banking sector has had to shift from traditional banking to smart financial systems. The authors introduce blockchain as the most modern form of banking that goes beyond domains to virtual currencies, crowdfunding, and even gambling. Besides, they give an analysis of the opportunities and threats presented by technology.
Weinstein, Clasen, Lorenzo and Roberson (2015), in their case study of the Bank of America titled “Bank of America customer service: Good is just not good enough” analyze the struggles the bank has had to overcome since its inception to date. According to the authors, the bank has low ratings regarding consumer confidence, coming last in the US customer satisfaction index rating. Pricing and quality of service are responsible for these ratings, and the authors suggest viable alternatives to bring the multinational back on its feet. The BOA is among the largest banks in terms of asset value, profits, sales, and market value and there is every reason to employ strategies for customer loyalty by creating opportunities for improving the lives of their customers (Bank of America Corporation, 2017). This work is valuable to this research for it provides a competitor analysis, consumer attitudes, quality, and pricing while giving important recommendations for best practice.
According to Li (2018) in his article “The next financial crisis: Why it is looking like history may repeat itself,” stated that, Sept 15, 2018 will be the 10th anniversary of Lehman Brothers, the fourth-largest bank in the United States have collapsed due to financial crises in 2008. “After unprecedented policies by the government to stabilize financial markets and reverse the economic carnage, the economic recovery is approaching its tenth year, but significant headwinds threaten to undo the progress made in the aftermath of the financial crisis” (Li, 2018). The Trump administration is removing regulations that were put into place after the last financial crisis. His administration is also pushing the Federal Reserve to keep interest rate low. The removal of the regulations combined with the low interest rates may lead to the banks taking on riskier investments. Li (2018) also wrote that, “Too-big-to-fail banks even bigger now” The banks that have survived such as J.P. Morgan, Citigroup, Goldman Sachs have grown more than 50 percent since before the financial crisis, and Bank of America's assets have increased by more than 50 percent over the last 10 years. Since the last financial crises, the above stated banks have survived are even larger than before. There is more wealth concentrated in the surviving banks. Therefore, if these banks failed the financial crises can be more severe than before. Dodd-Frank Act put restrictions on banks to prevent recurrence of the past crises.
I. Market Domain
History of the Banking Industry
The steam industry was in dire need of entrepreneurs in the 1760s when the Industrial Revolution kicked off. The entrepreneurs provided capital and financed the operations of major industries. There was a rise in business opportunities and wealth creation leading to the need for a place where excess money could be deposited and also an institution where loans for construction activities and other financial obligations could be sourced. The increase in opportunities eventually led to the rise of the banking system (Mints, 1946).
The first central bank (Bank of England) was established in the United Kingdom in 1694 and served as a modern for numerous central banks across the globe. In the 1700s, Mayer Amschel Rothschild extended his banking empire across Europe and placed his five sons in critical positions. They set up banks in London, Frankfurt, Naples, Paris and Vienna and by the mid-1800s, they were dominant in the industry and played crucial roles of lending the governments including personalities such as Cecil Rhodes and Carnegies. America gained its independence in 1776 and the first United States bank was created by the congress.
The banking system was controlled by the elite families such as the Rockefellers, Morgans and Rothschilds had gained control of the global economy through the central banking system. The Federal Reserve was set up in the United States in 1913 and have manipulating the market to benefit themselves since then. The banking was so dangerous in the United States that it led to the assassination of the presidents who challenged the monopoly of the central bankers. The Federal Reserves promoted artificial booms that causes people to lose jobs and their homes.
Factors that Have Led to Obsolescence of Major Banks
Major Banks in the world have collapsed in the recent past. An example is Washington Mutual, which is considered the biggest bank failure in the history of the United States. At the time of its closure, it had assets worth $307 billion and deposits worth $188 billion. Another bank failure is the case of the IndyMac bank in the USA which closed in 2008. Other examples of bank failure include Continental Illinois National Bank, First Republic Bank, American Savings and Loan among others (World Bank, 2016). Bank failure has been attributed to Bank run, which refers to a situation where customers withdraw their deposits in a particular bank in large sums due to panic about the solvency of the bank. The situation forces the bank to urgently sell its assets at low prices to increase its cash at hand to meet the customers’ demand. The losses incurred resulting in insolvency (Weinstein et al., 2015). The remedy for this condition is coming up with reserve requirements, which refers to a percentage of the total assets of a bank that should be reserved by the bank at the federal bank. Another cause of bank failure is fraud and insider abuse where corruption and embezzlement of funds are carried out by the management. These fraudulent activities take place when the bank officials take part in unauthorized transactions. Fraudulent practices have led to the collapse of approximately 35% of the banks (Atack, Jaremski " Rousseau, 2014). Banks need to have proper controls and oversight of the top officers involved in conducting transactions.
Additionally, overly aggressive activities carried out by the management could cause failure in the banking industry. These are mainly overambitious growth plans of the administration, evidently when banks adopt inappropriate lending policies and also when banks give out excess loans than it is required. Banks should take the aggressive approach combined with controls and well-established procedures to remedy the situation or prevent its possible occurrence (Martin, 1977).
Board of directors of the banks that fail are always aggressive and tend to be excessively growth minded in relation to the situations that the banks operated. The aggression is likely to compromise the performance of the employees hence leading to reduced productivity and ultimately failure. The lending and practices of operations of the major banks that have failed also reflects a number of problems. For instance, such banks will have lending policies credit standard that are not appropriate. The banks may also exhibit excessive growth of loan in relation to the abilities of the management of the employees, funding systems or control systems that are in place. Furthermore, the banks can fail due to undue reliance on liabilities that are volatile such as the deposits that are greater than $100 thousand but not necessarily brokered. Such banks may also lack adequate liquid assets as a second source of liquidity.
There can also be problems that involve the CEOs that can in turn lead to obsolescence of a given bank. The CEO is the most vital determinant in the failure of success of a bank. The CEO can lack the capability, experience, and integrity that is necessary to make the bank successful. Therefore, choosing a strong CEO is very essential in making sure that the bank becomes successful. There can be other problems that are related to management deficiencies in the bank. The bank can have excessive credit exceptions such as missing financial statements or the income data about the borrowers.
The bank can also have poor collateral documentation hence leading to the failure of the bank. The banks can also experience an insider abuse such as the over dependence of the bank for services or income by a shareholder or a member of the board or unauthorized transactions by the management officials in the bank. The banks that have insider abuse will also tend to have challenges with material fraud. The problems with insider abuse are due to lack of control and oversight. Lack of enough supervision of the key officials, a decision maker that is dominant are critical condition that promote insider abuse hence leading to failure of the banks.
A good percentage of the bank that fail operated in conditions that were depressed. Such conditions may result from deterioration in oil, agricultural or perhaps the commercial estate economies. However, by simply operating in the conditions that are depressed does not mean that the failure of the bank is due to the economic conditions at the moment. Another factor that affects the performance of the banks that ultimately lead to their failure is capitalization. Capital acts as a buffer between operating the insolvency and losses and the more capital a bank owns, the more it can withstand losses. The capitalization of a bank determines the amount of time the bank has to correct the weaknesses that are internal and to outlast the influences that are negative and emanates externally. Whether a bank fails or recover will depend on the time that it has before it entirely losses its capital. Having noted that, putting in place updated systems as well as strong management is likely to prevent failure of the banks and promote the process of recovery even though there can be difficult financial times. The board of directors and the management team needs to implement the controls and measures positively if at all they intend to safeguard the capital of the shareholder in the long run.
Impact of Obsolescence of Major Banks
Bank failure comes with detrimental effects to the customers, the bank itself and other banks in the industry, the employees and the economy at large. To the customers, they risk losing all their savings in the case of a bank failure. To the bank itself, it ceases to exist since it cannot carry out its daily transactions without assets (Friedman, 2010). To the other banks, through the multiplier and spillover effects, their customers will be gripped with panic and may result in bank runs in the other banks. The employees in these banks, which have failed will undoubtedly lose their jobs rendering them jobless. The economy will also suffer since the government, for instance, will not be able to collect taxes, which is required for financing the development activities of a country. Hence the obsolescence of the banking sectors comes about with significant setbacks to the country’s economy at large (Friedman, 2010).
Banks are known to possess balance sheets that carry huge amount of assets. The assets are mostly financed with a combination of short-term credit, equity and bonds. When a bank has an issue repaying its debts or repaying it, then there is a likelihood that the bank would fail (Li, 2018). Funding problems sometimes may come from the general market conditions but in most cases they take place because the investors may lose faith in the bank for various reasons. There can also be an issue of asset and liability mismatch. When the assets of the bank are not matched correctly according to the liabilities that backs them up, there may be serious problems (Li, 2018). A good example is a floating rate liability that finances a fixed rate loan. When there is a rise of interest rates, then the bank would pay greater interest rates on its liabilities while the fixed loan pays the same rate. The mismatch can translate to a huge loss and when a large portion of the portfolio in a bank is mismatched, then the results can be devastating (Li, 2018).
When the authorities from America blackball the banks from foreign countries, such banks are forced to be out of the business. Such an incident can occur because the bank is located in a rogue nation or the bank has indulged in illegal activities such as laundering of money. Another possible issue is proprietary trading and this is the newest and has created great exposures of banks. For a greater part, proprietary business created huge profits but the regulators believe that the possibility of the great losses are more than the offsets of the profit potential. The business basically included the investment in unhedged derivatives, large blocks of marketable securities, liquid investments and exotic instruments (Li, 2018).
Bad loans have also in the recent past played a crucial role in the obsolescence of the banks. Loans comprise a great part of the traditional banking business along with holding the money of the depositor. Before the part of the 20th century, banks made loans to individuals to buy businesses and homes to assist their growth. To this line of business, credit analysis is essential. Therefore, most great banks have huge training programs that are dedicated to the establishment of the new lending officials that taught how to assess the risks affiliated to the borrowers and protect the profitability and the assets of the bank. When the standards of the credit are brought down to attract some businesses that are lucrative, loan losses greatly increase and create financial challenges. In the previous years, risky loans to overseas nations, real estate investment trusts and the mortgage enterprises have created severe challenges for banks and causing some of them to fail (Weinstein et al., 2015).
Banks have also indulged in non-traditional businesses in the last years as they hope to increase profitability. A good example is the real estate businesses, leasing companies, consumer finance organizations, trusts and other businesses have proved to be unsuccessful and have resulted in losses that has taken compelled some banking institutions to completely shut down. In the past years, the banks have also issued loans that are not appropriate to bank insiders. A good case in point is when many loan banks and saving enterprises made risky loans to the directors and the insiders for projects such as real estate that were ill-conceived. The transactions then resulted in huge losses hence leading to failure of many banks (Weinstein et al., 2015).
II. Competitive Readiness
Internal Competitive Factors: The Case of Bank of America
SWOT Analysis
The SWOT analysis, takes a look into the Strength, Weaknesses, Opportunities, and Threats in the business environment of The Bank of America. The BoA is the second largest bank by assets in the US. The strengths that make BoA exceptional include strategic acquisition and large scales of operations (Bank of America Corporation, 2017). Under the strategic acquisition, the bank of America acquired Merrill Lynch making it join the league or world's largest banking business in investment. Under large scale of operations, Bank of America brags of its operations in more than 150 countries globally. Bank of America has embraced a responsible growth approach and this approach has enabled the bank to earn over $ 17 billion in 2016 rising by 13% in the previous year. The profits are largely fuelled by the brand value and the customer convenience that is present. The bank takes care of a wide range of consumers as well as the small businesses across the United States hence making it one of the best banking institutions in the contemporary world (Bank of America Corporation, 2017).
The Bank of America has faced several challenges in the course of its operations. Some of the significant challenges include high levels of interest rates and low levels of income, especially in other countries other than the USA. Under high-interest rates, critics argue that the Bank of America charges high interest on its loans. Its operations are also affected by regulations of the respective country’s federal banks. In the case of low levels of incomes in other countries, statistics suggest that only 10% of all revenue is earned from operations in other countries, meaning that foreign operations are not profitable (Bank of America Corporation, 2017).
Under Opportunity in SWOT analysis, the Bank of America has an opportunity of developing its technology to other countries, especially the developing countries. There has been a rise in internet banking in these developing countries. Therefore, this presents a great opportunity for the Bank of America to expand to these countries. Another opportunity comes from the fact that the Bank of America operates in more than 150 countries. Broad operations mean that the bank has a high level of acceptability, hence can be readily acceptable in other countries in the case of expansion (Weinstein et al., 2015).
One of the weakness of the bank can be transformed to an opportunity. The bank already has a great presence across the world and this can be converted into good use as the bank can expand its operations outside the United States. Scandals in the home country have slightly diminished the name of the brand therefore other countries present a better opportunity to establish.
In the case of threats under SWOT analysis, high levels of competition have posed a considerable threat to the Bank of America. Rival banks, such as Wells Fargo, pose a significant threat to its expansion. Another threat to the Bank of America is stringent rules and bottlenecks, especially in countries it wishes to expand. The transforming global financial scenario is held together by fine threads and as it is evident in the past, this is always a threat for the companies that are in the banking and the financial sectors. There are also watchdogs and stringent rules that hamper the company. The government regulations and loan guidelines are consistently changing and evolving and that can be dangerous for the BoA as this is likely to affect the customer base. Though the measures and checks are essential, Bank of America has find it difficult when it comes to development. Financial crisis and recession can translate to crunch market situation hence impacting the investors. Such as a situation can be similar to the economic crunch of 2008. Besides, the recent cost cutting by the Bank of America has proved to be a threat.
Strengths to Exploit and Weaknesses to Mitigate Based on SWOT Analysis
The Bank of America can exploit its advantages in the following ways. Firstly, it can establish distribution networks that are reliable, which can reach a large percentage of its potential customers. Also, it can work to ensure that there are high levels of satisfaction among its customers, since client satisfaction has been its major strength. Customer satisfaction brings loyalty which will ensure that the bank has a good reputation not only among the present customers, but also among the potential customers. The Bank of America also brags of having a workforce that is highly skilled. Competence has ensured that both the present and potential customers have a good image of the bank. This area can be improved by more investment in training and workshops for the employees for even better service delivery (Athanasoglou et al., 2015).
Another strength worth exploiting is higher returns on capital expenditure. The new projects, which the bank of America has executed have yielded high returns by ensuring that the total revenue collected is exceptionally high. Finally, the Bank of America has a good reputation as the best brand. Therefore, this strength can be further exploited by ensuring quality service delivery to the customers, favorable interest rates among other incentives. Quality service will ensure that the brand portfolio of the Bank of America is strong. A strong brand will give the Bank of America an easy time in exploring new markets as it would have already won the hearts of potential customers in the new market (Weinstein et al., 2015).
Just like any other great brands, most of the strengths come as a result of the popularity of brand which again is due to the scale of operations. The organization operates in more than 150 nations and it has all of the fortune of 500 companies in the United States as its customers and about 80% of the Fortune Global 500. Strategic acquisition is one of the organization’s strength as the bank acquired Merrill Lynch in 2008 which made it the global biggest wealth manager and this got it to the main stream banking business. Among all the divisions that operates in the BAO, Global Consumer and Small Business Banking are the biggest. Credit card issuance and Consumer Banking are big business of the bank and this is also where the strength of this particular organization lies (Weinstein et al., 2015).
The Bank of America, however, also needs to address and mitigate its weaknesses to be able to compete with its competitors. Bank of America has several flaws that need to be addressed. First, the Bank of America should aim at mitigating low investments in research and development since it is lagging behind compared to its fast-growing competitors in the banking industry. The Bank of America has remained steps backward regarding creativity and innovation as compared to the rivals (Athanasoglou et al., 2015). A lot of resources need to be invested in the field of research to ensure that the Bank of America remains relevant in competition. Another weakness that needs to be mitigated is high inventory as compared to the rivals. The high capital makes the company to increase its capital investment in the channel. Hence this poses a significant challenge, especially for the long-term growth of Bank of America. Besides, the Bank of America also needs to address its low technology investment, especially when planning to venture into the new economies. The level of technology at the moment is so low as compared to the vision of the company (Athanasoglou et al., 2015).
Another weakness that needs to be mitigated is the high cost associated with training the workforce as compared to the other competitors in the industry. The bank of America has spent a lot of money in training its workforce. Cost effective methods, therefore, have to be adapted to cut on the high costs of training the workforce. There is also a need for the Bank of America to mitigate the low success level it has experienced in other businesses outside the core business. The competitors of the Bank of America have increased their product segments. For example, they offer insurance services in addition to the core business which is banking. Therefore, the challenge of expanding into other sectors should be addressed urgently. Finally, the Bank of America should work on the weakness of the low ratio of profitability and also a lower percentage of net contribution since it has been below its expectation.
Even though the organization operates in over 150 nations across the globe, Bank of America produces almost 90% of its income from operations within the US and just 10% from all the other countries combined. Moreover, there has been a great dent in the name of the brand as a result of the WikiLeaks scandal of 2010 and 2011. WikiLeaks maintained that it had enough information to bring down the bank and disclose the malpractices that had been going on in the business. Therefore, the trust that people had in the brand dropped and its stocks also plunged. Since the scandal, it has been a long time but there are still doubts in the minds of the people. The reputation that has already been dented and concentrating mostly on American market is a weakness in the part of the bank that needs to be mitigated and converted to strength (Athanasoglou et al., 2015).
How Ready is the BOA to Compete in the Banking Industry?
Based on SWOT analysis, the Bank of America has come up with strategies to ensure that it competes effectively with its rival firms. The first strategy that the Bank of America has implemented is expanding into the foreign markets. The 10% generated from the outside countries need to be worked upon to ensure that it can raise more revenue. The low returns come at a time when the reputation of the Bank of America has been tainted in the United States. Therefore, expanding into the new markets will be a game changer to the BoA.
Another strategy that has been adopted by the Bank of America is mergers. BoA has merged with Merrill Lynch countrywide. These strategies have increased its profitability as the level of customers has risen tremendously. The alliance has also resulted in creativity and innovation as diverse ideas are brought to the bank. Merging also comes along with an increase in the brand value as the market is familiar with the bank. Merging also helps reduce competition in the industry
The third strategy that the Bank of America has adopted is ensuring that there is a fast-technological innovation and advancement. The BoA is fully aware of the latest trend in the banking industry which is mobile banking. Therefore, it has been on the forefront in adopting the relevant technology to keep up with the ever-changing customer preferences. By exploiting the breakthroughs in the banking industry, the BoA has remained on top of the game in the banking industry. Technology is the core of most change initiatives and most financial services managers agree that digital innovation is the key to transforming the banking industry (Peters " Panayi, 2016). The bank has leveraged on this opportunity and this has promoted efficiency in their current business model hence enhancing the services of the customers. BoA has embraced cloud platform and cyber security affiliated tools to assist in early threat warning and safety of the customers data. Through this approaches, the bank has seen reduced cost and increased productivity because investing in technology automates the tasks that are repetitive (Peters " Panayi, 2016).
Still focusing on technology to show the readiness of the bank, it is has made a bold step into the artificial intelligence technology by having a virtual intelligent assistant dubbed Erica. Erica
is a chatbot that leverages predictive analytics and messaging to offer financial guidance to over 40 million customers of the organization. The company has placed forward a budget of over $3 million to explore potential partnerships and solve some of the challenges in the contemporary world. By incorporating artificial intelligence with mobile banking has helped the customers in the organization to manage their banking needs more efficiently and consistently (Peters " Panayi, 2016). The specialists within the organization also spend more time with their customers to understand their technical requirements and working round the clock to improve their financial lives. The allocation of considerable amount to promote technology has assisted the company to have a clear view on the latest innovations in the financial technology. 2016 marked the second profitable year in the history of the bank after 2006 before the recession and this has been due to the strategic investment of the organization in technology and artificial intelligence (Peters " Panayi, 2016).
Finally, BoA has ensured that there is diversity in its Portfolio. The bank serves diverse categories of customers ranging from individual customers, SME’s and large firms. It also offers products such as financial risk management and asset management which has ensured that it can remain ahead of its competitors (Peters " Panayi, 2016).
External Competitive Factors: The Case of Bank of America
PEST Analysis
The Bank of America is also affected by external competitive factors. They include the political environment, the economic environment, the social environment, and the technological environment.
Under the political environment, political and
