Discuss about the Australian Retail Banking Industry for Economics.
It is identified that the Australian Retail Banking industry comprises 4 major publicly listed banks which together hold over 80% of the market share. The remaining is shared between 20 or so different smaller organisations. The main aim of this paper is to discuss the major features which characterise the economics of firms in this industry. Additionally, it also describes a suitable market structure that best describes this industry. It also presents an analysis of the economic and pricing policies that would be expected to find in this industry. In last, it also provides recommendations for a bank for pricing its retail banking products and services.
Major Features which Characterise the Economics of Firms in this Industry
Economies of scale can be a force to reduce competition in the Australian retail banking industry. Firms or major banks can spread fixed costs across a wide range of activities and thus, they are able to take advantage of economies of scale (Assessing competition in the Australian banking market, 2010). Similarly, economies of firms in this industry also affect on the underlying cost of a banking business in different ways such as ADI's credit rating, spread the cost of complying with regulations, IT synergies, payment systems, and financing infrastructure investment in branch networks. It can also be summarized that economies of firms in this industry can be derived from branch network presence, IT capabilities, dispersing risk, and discretionary overheads such as finance, and marketing (Assessing competition in the Australian banking market, 2010). The below are the main features that characterise the economies of firms in this industry:
Continuous product innovation is the main characteristic that qualifies for the economies of firms in the retail banking industry of Australia. As the technologies is changing quite fast, customers expectations from banking and all services are also changing accordingly and banks need to innovate. Over some recent years, technological advances created a key source of innovative models in retail banking. The main reason behind this is that digital offerings have the potential to reduce banks operating costs as well as the intrinsic value to customers. In this, it can be summarized that the use of advance technologies supports banks to reduce dependence on labour and physical presence as well as greater efficiencies (Deloitte, 2014). At the same time, as digital technologies provide convenience to consumers of retail banking products, these are valued by customers. Successful innovation by banks supports them to quickly capture increased market share and attain first mover advantage. Concurrently, it can also be summarized that to attain economies of firms, banks should develop means to deploy innovation at a lower cost, continuously innovate and encourage customers retention rate.
Product features also help in characterising the economies of firms in this industry. It is because product differentiation allows retail banks to charge a premium to present the additional value that is gained by customers. Bundling is one method that is used by Australian banks in this industry to differentiate their products (Deloitte, 2014). This method is beneficial for banks to create more value for customers by reducing their administrative and internal duplication costs.
Branch Network Presence:
A bank with high branch network presence also reflects an important feature, which characterize the economies of firms in this industry (Assessing competition in the Australian banking market, 2010). In this, an efficient branch network presence helps in spreading the fixed costs across a wide range of activities resulting in reducing overall business cost and attaining economies of scale and competitive advantage.
Significant investment in IT capabilities is also an important characteristic of economies of firms in this industry. It is because these support firms to ensure continuous innovation at low cost, which are valued by customers. A significant part of the banking presently is driven by the IT factors like Net banking, ATM transactions etc. Banks need to invest significantly in this aspect.
Market Structure Best Describing this Industry
On the basis of certain features such as size of the market, existing number of firms, number of buyers, product category, and market entry, market structure can be of four types. These include perfect competition, monopoly, oligopoly and monopolistic competition. Monopoly is a market, in which there is only one supplier, which produces goods or services with no close substitute exists (Morton and Goodman, 2003). In this market, there are three entry barriers including natural, ownership and legal that protect a firm from potential competition. In contrast, perfect competition presents to the market with many buyers and sellers of a similar product. On the other hand, monopolistic competition is a kind of imperfect competition as many firms sell products or services that are differentiated from one another either by quality or branding (Baumol and Blinder, 2015). Thus, it shows that the products are not perfect substitutes.
Beside the three market structures, the oligopoly market structure is also a type of imperfect competitive market structure as few large firms dominate the market (Hall and Lieberman, 2007). The main characteristics of this market structure include few sellers, difficult market entry, and either a homogeneous or a differentiated product (Tucker, 2008). Therefore, among the four market structures, the oligopoly market structure best describes the Australian Retail Banking industry. It is because the main characteristic of this structure is few sellers, which also applies to the Australian retail banking industry (Baumol and Blinder, 2015). In this, the 4 major publicly listed banks together hold a large market share more than 80%. Additionally, to describe the oligopoly competition in this industry, it can be stated that four banks dominate the industry. Moreover, the mutual interdependence among the four major banks also puts this industry under oligopoly market structure. It is because the banks are in the situation in which an action by one bank can cause a reaction from other banks (Hall and Lieberman, 2007).
Another characteristic of this structure includes production of either a homogenous or a differentiated product (Tucker, 2008). This feature also applies to the retail banking industry in Australia. It is because it is found that all the major banks in this industry provides either homogeneous or differentiated products. All these banks offer a wide range of products and services including credit and debit card, personal and home loan, fixed term deposit accounts and investment accounts (Deloitte, 2014). It is evaluated that all the four major banks compete with each other by differentiating their offerings in other ways including good quality of service and innovative products.
Oligopoly market structure has also a characteristic as difficult entry due to high barriers such as economies of scale, huge financial requirements, control over an important resource, and other legal barriers (Tucker, 2008). All the major banks in this industry also creates high entry barriers including huge capital requirements, economies of scale and control on resources. However, globalization, change in policy, and technology are some factors that support to reduce these entry barriers. Thus, it can be stated that oligopoly market structure best describes the retail banking industry of Australia.
Analysis of the Economic and Pricing Policies
It is analyzed that prices including fees, interest rates, and charges are tend to be closely matched in this industry. It is because change in rates by one major bank is quickly responded by other banks including smaller players (Deloitte, 2014). It is also examined that all the competitors closely monitor each-other so that a quick respond can be made to retain the significant market share. Thus, based on this, it can be stated that competitive pricing policy would be expected in this industry.
In addition to this, non-price competition would also expect in this industry. It is because it is perceived by all the major banks and other smaller banks that competitors will match any price reduction in an easy and quick manner (Tisdell and Hartley, 2008). It is found that major banks generally compete by using product differentiation as it is more difficult to combat an important product improvement. For making differentiation effective, the banks use innovation, advertising and good quality of services.
Moreover, the price leadership policy would also be expected in this industry. In this, the major banks can play a game of follow the leader without a formal agreement (Tucker, 2008). It is analyzed that due to existence of oligopoly market structure, price leadership policy would expect in this industry. Under price leadership policy, a dominant bank would set the price for the industry and the other banks will follow (Baumol and Blinder, 2015). This policy also assumes that firms will not collude to avoid price competition.
In addition, the cartel is another policy that would also expect in this industry. In this, the four major banks can agree to a peace treaty to avoid price wars. A cartel refers to the situation, in which firms openly or secretly conspire to form a monopoly instead of allowing mutual interdependence to lead to rivalry (Tucker, 2008). Under this pricing policy, all the major banks can formally agree to control the price and the output of their offerings. The main purpose of making a cartel would be to reap monopoly profits by making cooperation instead of competition.
The Australian retail banking industry consists of number of banks licensed to conduct on banking business. Bendigo and Adelaide Bank is selected from this industry to provide policy recommendations for the pricing of its retail banking products and services. The bank provides a wide range of products and services such as commercial mortgages and unsecured loans, financial planning, personal and business banking, insurance, investment product, etc (Bendigo and Adelaide Bank, 2016). Retail banking products and services are provided by Bendigo Bank to more than 1.4 million retail customers through its branch network.
Although the bank is successful to serve many regional retail customers through its offerings, however to get ahead from growing competition as well as attain and maintain market share against the larger four banks, it is essential to use effective pricing policies (Baumol and Blinder, 2015). The below are policy recommendation for the pricing of its retail banking products and services:
Use of Competitive Prices:
The bank should use competitive pricing policy for its retail banking products and services in order to compete successfully against the big competitors. The bank should closely monitor other banks pricing policies as well as other activities such as product offerings, degree of innovation, etc so that in adverse situations a quick respond can be made (Deloitte, 2014). It would be helpful for the firm to retain the current market share and improve profitability position. The bank should also focus on matching different prices including interest rates, fees, etc. in relation to its banking products and services.
Charge of a Premium:
The bank can also charge premium price for its innovative retail products and services. It is because customers are ready to pay high premium price for the products and services that are perceived by them as more quality, easy accessible and additional value created (Deloitte, 2014). The bank can also use this price for its innovative retail products and services that are of good quality and easily accessible. In addition, to make the products attractive and differentiated in the eyes of customers, the bank should use effective marketing and advertising strategies. It would be helpful for the bank to attain a considerable market share against the big competitors.
Follow of Market Leader's Price:
As the Australian retail banking industry is dominated by four large banks, it is likely that they develop a price leadership policy, in which it becomes essential that small retail banks follow the price that is set by the dominant bank. Therefore, the bank should also prepare to adopt this pricing policy as it would be helpful to avoid the situation of price competition in the industry.
The use of all these policies can be helpful to get success and ensure long-term business survival in current retail banking industry of Australia.
From the above discussion, it can be concluded that due to operating the business on large scale, firms are able to gain economies of scale benefits. It is because firms can spread their fixed cost and also develop efficiencies to attain economies of firms benefits. It can also be concluded that branch network presence, IT capabilities, investment in product innovation and product features are the main characteristics that qualify the economies of firms in retail banking industry of Australia.
It can also be concluded that oligopoly market structure best describes the Australian retail banking industry as it is dominated by four big banks, which provide differentiated products and where entry is difficult due to huge capital requirements, control on resources, and other legal reasons. It can also be concluded that due to oligopoly market structure, pricing policies such as competitive pricing, non-price competition, price leadership, and the cartel pricing policy would expect in this industry. Moreover, it can also be summarized that for a small retail bank in this industry, the use of competitive pricing policy, premium pricing, price leadership can be beneficial to ensure long-term business success.
In addition, it can also be concluded from this assignment task, I have also gained various insights. I have come to know that building of IT capabilities, investment in innovation activities so that product differentiation can be attained, and strong branch networks are the main characteristics through which the banks can attain economies of firms benefits in Australia retail banking industry. I have also learned that an industry's market structure can be determined on the basis of its size, entry barriers and product offerings. I have come to know that market structures can be four types including monopoly, perfect competition, monopolistic competition, and oligopoly competition.
I have also learnt that Australian retail banking industry comes into oligopoly market structure as it is dominated by some big banks. I have also learned that on the basis of the market structure, economic and pricing policies exist in an industry. I learned that non price competition, price leadership, the cartel and competitive pricing are some important pricing policies that can exist under oligopoly market structure. I have also learned that instead of focusing on prices, product differentiation, high speed access and good quality of services can be helpful for firms in this industry to attain long-term success and competitive advantage.
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Bendigo and Adelaide Bank (2016) Available at: https://www.bendigoadelaide.com.au/public/about_us/index.asp [Accessed: 6th May, 2016].
Bendigo and Adelaide Bank (2016) Available at: https://www.bendigoadelaide.com.au/public/about_us/group_companies.asp [Accessed: 6th May, 2016].
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