The barriers to entry into the retail banking industry have traditionally been very high, but there are signs they could possibly be tumbling. The high barriers to entry in financial services include two economic categories. First are the structural barriers due to basic industry conditions, and in this industry they include economies of scale, network effects and regulation. The last is significant; to protect the safety and stability of the financial system there are high regulatory walls. Second, incumbents may deliberately promote strategic barriers to keep or drive competitors out, like setting prices artificially low or spending heavily on product and brand advertising. The latter has some importance in banking, but the former does not. However, structural regulation barriers could be considered strategic in this industry as incumbents tend to exploit and lobby for them to their own advantage to keep competitors out. In the UK, these barriers have resulted in the "Big Five' domination: HSBC, Barclays, Royal Bank of Scotland, Lloyds and Santander. Other markets are very similar with a 'Big Five' in Canada, "Big Threes' in Spain and the Netherlands and a "Big Four' in Sweden. It seemed as if regulators would lower barriers to increase competition. However, in the aftermath of the 2008 financial crisis regulations have increased. The dilemma for regulators is that they have two partly conflicting objectives. First, to secure the stability of the financial system they need to increase capital requirements regulation for banks. The second aim is to deliver more efficiency and more services for customers through increased competition. To act on this second objective, regulators have started to encourage more entrants and assist them to find cracks in the barriers without totally breaking them. For example, Britain's Payment Systems Regulator has proposed that banks should cut their ownership stakes in the core payment systems as Managing Director Hannah Nixon confirms: *There needs to be a fundamental change in the industry to encourage new entrants to compete on service, price and innovation in an open and transparent way." The UK's financial regulators have even launched a start-up unit to help new players to enter as Andrew Bailey, former CEO of the Prudential Regulation Authority explained: *The New Bank Start-Up Unit builds on the work we have already done to reduce the barriers to entry for prospective banks, which has led to twelve new banks now authorised since April 2013." It remains to be seen if competition will increase, but adding to the regulators' aspirations is a new breed of potent rivals that may prove more powerful. Helped by new IT technologies, software and mobile banking there are over a hundred so-called "fintech' (finance and technology) start-ups as confirmed in a Deloitte report: *New, agile and hitherto unregulated players are emerging and are disintermediating the traditional incumbents. Even if incumbents also try to jump on this fintech bandwagon they may not be able to dominate it. In contrast to the flourishing fintech start-ups, they are not only behind the entry barriers, but bound by them as the report continued: *Regulation is making it harder to innovate and grow, whilst legacy strategy, infrastructure and thinking, are preventing the existing players from responding aggressively from this threat." Questions 1. Evaluate the strengths of the banking industry's entry barriers according to Porter's criteria. 2. How would you evaluate the ethical behaviour of banks trying to keep competition out? The barriers to entry into the retail banking industry have traditionally been very high, but there are signs they could possibly be tumbling. The high barriers to entry in financial services include two economic categories. First are the structural barriers due to basic industry conditions, and in this industry they include economies of scale, network effects and regulation. The last is significant; to protect the safety and stability of the financial system there are high regulatory walls. Second, incumbents may deliberately promote strategic barriers to keep or drive competitors out, like setting prices artificially low or spending heavily on product and brand advertising. The latter has some importance in banking, but the former does not. However, structural regulation barriers could be considered strategic in this industry as incumbents tend to exploit and lobby for them to their own advantage to keep competitors out. In the UK, these barriers have resulted in the "Big Five' domination: HSBC, Barclays, Royal Bank of Scotland, Lloyds and Santander. Other markets are very similar with a 'Big Five' in Canada, "Big Threes' in Spain and the Netherlands and a "Big Four' in Sweden. It seemed as if regulators would lower barriers to increase competition. However, in the aftermath of the 2008 financial crisis regulations have increased. The dilemma for regulators is that they have two partly conflicting objectives. First, to secure the stability of the financial system they need to increase capital requirements regulation for banks. The second aim is to deliver more efficiency and more services for customers through increased competition. To act on this second objective, regulators have started to encourage more entrants and assist them to find cracks in the barriers without totally breaking them. For example, Britain's Payment Systems Regulator has proposed that banks should cut their ownership stakes in the core payment systems as Managing Director Hannah Nixon confirms: *There needs to be a fundamental change in the industry to encourage new entrants to compete on service, price and innovation in an open and transparent way." The UK's financial regulators have even launched a start-up unit to help new players to enter as Andrew Bailey, former CEO of the Prudential Regulation Authority explained: *The New Bank Start-Up Unit builds on the work we have already done to reduce the barriers to entry for prospective banks, which has led to twelve new banks now authorised since April 2013." It remains to be seen if competition will increase, but adding to the regulators' aspirations is a new breed of potent rivals that may prove more powerful. Helped by new IT technologies, software and mobile banking there are over a hundred so-called "fintech' (finance and technology) start-ups as confirmed in a Deloitte report: *New, agile and hitherto unregulated players are emerging and are disintermediating the traditional incumbents. Even if incumbents also try to jump on this fintech bandwagon they may not be able to dominate it. In contrast to the flourishing fintech start-ups, they are not only behind the entry barriers, but bound by them as the report continued: *Regulation is making it harder to innovate and grow, whilst legacy strategy, infrastructure and thinking, are preventing the existing players from responding aggressively from this threat." Questions 1. Evaluate the strengths of the banking industry's entry barriers according to Porter's criteria. 2. How would you evaluate the ethical behaviour of banks trying to keep competition out?