Financial Institutions regularly maintain close working relationships with their customers, both with large corporate borrowers and mid-market business borrowers. It serves the financial institutions and the borrower’s interests as they will both benefit as a result. Borrowers see dramatic reductions in fees for due to the effect of having an established relationship with their lender, in particular in loan origination fees.[1]In recent years mid-market commercial and industrial lending has been one of the most profitable opportunity for credit-granting financial institutions.[2] Whilst lending to large commercial and industrial institutions fees and spreads tend to be relatively small, often they are large transactions and as such, they are still important for the financial institutions.2 Thus the financial institution’s interests are served through this established relationship as they are able to maintain their business. According to the Corporate Finance Institute, there are several factors that determine the bargaining power of suppliers (financial institutions supply loans), of particular relevance, in this case, are the cost of switching suppliers and a supplier’s dependence on the sale.[3]
Bargaining strength with large corporate borrowers
The relationship between FI’s and large corporate clients often centers around broker, dealer and advisor activities, with lending playing a lesser role. Large commercial and industrial institution also often partner with more than one FI and have their own financial experts in-house.2 It is apparent that firms will have a low cost of switching suppliers for their corporate loans, as they already have the option of existing relationships with multiple FI’s which, allows them an abundance of choice regarding their source of funding. Thus, diminishing the bargaining power of an individual financial institution. Additionally, the large corporate borrower’s own in-house financial experts further diminish this power as the firm is not dependent upon the experts of the financial institution they are partnered with. In-house experts can also assess the lender’s approach and help make an efficient choice for sourcing finance.
Large corporate borrowers typically request lending of a far greater size than mid-market business borrowers. The FI’s, as a result, are also dependent upon these firms to sustain a large portion of their income, meaning that larger borrowers have a comparatively ‘stronger hand’. Thus, there is a greater dependence on a sale to a large corporate borrower compared to a mid-market firm, and resultingly a diminishment in the strength of the bargaining position for the FI with larger borrowers.
Bargaining power with mid-market borrowers
The ease of dealing with those you regularly work with is likely to increase efficiency and means business can be handled more swiftly. With a pre-established structure for dealing with specific clients there becomes an ingrained dependence upon these relationships. This would suggest that it is beneficial to maintain business with pre-established firms, as such could there be a resulting reduction in the bargaining power for the financial institution. However, it is important to note that this benefit is for both the financial institutions and the firms. As such, the bargaining power is likely to remain approximately as it was. However, the opportunity available to larger borrowers who have established relationships with several suppliers suggests that this would be less impactful than on mid-market borrowers who likely have a greater dependence upon a particular financial institution. The result is that FI’s are in a position of greater strength with mid-market borrowers.
It has been established that relationships with lenders are valuable to smaller borrowers, this is due to the greater credit availability and protection from credit shocks.[4]
Comparatively, it is more important to smaller firms to establish these relationships as lenders likely have less information from which to decide upon their lending than large corporate borrowers. This suggests that financial institutions have a greater bargaining power with mid-market borrowers as they are more dependent upon maintaining their working relationship.
Conclusion
The FI’s have developed diverse strategies over the years, which have been aimed at increasing how activities are undertaken in the business environment. However, there are some factors that should be taken into consideration by the company managers, which include technology and its applications that might affect the performance of the FI’s in the international market. Despite the fact that strategies have been developed to ensure that client requirements have been attained by the FI Company managers, the introduction of the Internet might lead to the removal of barriers and lower entry costs for different organizations. The processes involved in lowering the barriers has prompted the provision of increased values as well as competition to potential clients, which might create an adverse impact on the primary strategies that have been implemented by the FI’s. The customers will also develop an increased dependence on rational banking, which will be one of the influencing factors of technology in the banking industry. Therefore, the bargaining power of clients will increase based on the fact that there are various banking services to choose from, and the process will also affect the strength as well as the position of the FI’s in the national and international market. The company managers, advisors and shareholders in the banking industry should make sure that the roles of technology and its introduction in the business environment have been analyzed before being implemented in the organization. The process should be carried out within the service and product innovation as well as development that has been established in online financial industries, which will assist in the verification of concepts related to technological information connectivity and innovation.
Bibliography
Boston, F. (2018). Is Small Business Lending Valuable to Banks?. [online] Federal Reserve Bank of Boston. Available at: https://www.bostonfed.org/publications/communities-and-banking/2014/fall/is-small-business-lending-valuable-to-banks.aspx#ft1 [Accessed 19 Nov. 2018].
Corporate Finance Institute. (2018). Bargaining Power of Suppliers - Factors that Give Suppliers Power. [online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/strategy/bargaining-power-of-suppliers/ [Accessed 19 Nov. 2018].
Ostromogolsky, Philip. "Lender-Borrower Relationships and Loan Origination Costs." (2016).
Saunders, A. " Cornett, M. M. 2018. Financial Markets " Institutions Management.McGraw-Hill.
[1]Ostromogolsky, P., 2016. Lender-Borrower Relationships and Loan Origination Costs.
[2]A. Saunders " M. M. Cornett. 2018. Financial Markets " Institutions Management.McGraw-Hill. pp.
[3]Corporate Finance Institute. (2018). Bargaining Power of Suppliers - Factors that Give Suppliers Power. [online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/strategy/bargaining-power-of-suppliers/ [Accessed 19 Nov. 2018].
[4]Boston, F. (2018). Is Small Business Lending Valuable to Banks?. [online] Federal Reserve Bank of Boston. Available at: https://www.bostonfed.org/publications/communities-and-banking/2014/fall/is-small-business-lending-valuable-to-banks.aspx#ft1 [Accessed 19 Nov. 2018].
