CHAPTER 1

The Financial Services

Environment

INTRODUCTION
The financial services sector has recently undergone
changes unprecedented in its history.
These changes have had an impact on both the
structure of the industry and the nature of competition.
A number of external forces have exerted influence on
the sector which are:
(i) socio-economic
(ii) regulatory
(iii) technological factors
iv) Socio-demographic

INTRODUCTION
Within a rapidly changing
environment, financial institutions
have been forced to change the way
in which they respond to the market
place, becoming less focused on
products and more focused on
customers and relationships, less
focused on the short term and more
focused on the longer term

THE SOCIO ECONOMIC

ENVIRONMENT
Changes to the socio-economic
environment have an impact on the
general demand for financial services.
Personal Income:
(i) Income is one of the key factors
influencing demand for financial services.
(ii) In relation to financial services, it has
an impact on the amount people save,
their ability to raise and pay credit and
loans as well as their attitudes towards
risk and investment

ECONOMIC CONDITIONS
Industry Structure
Gross Domestic Product (GDP)
National Rate of Inflation & Money
Supply
Foreign Exchange Rates
Interest Rates
Unemployment Levels

SOCIAL AND
DEMOGRAPHICS

National birth rate

Population Size
Age Distribution
Socio-economic distribution
Geographic population distribution
Education/ skill distribution
Trend in lifestyle
Public opinion and attitudes towards
financial services providers and
Trend in banking usage

Competitive Issues in
Banking
Current trends in financial services:
(i) International banking (the
multinational banking)
(ii) trade in international banking
services (the international payment
system. E.g. Euromarket, Asia
market, Japanese banks.

Competitive Issues in
Banking
Scale & scope of economies
Competition in banking
Characteristics in banking
Technology environment (e-banking)
Current evolution of financial service
sector

THE REGULATORY
ENVIRONMENT
Changes to the regulatory environment
arguably have had the greatest impact on
the financial services sector.
Regulation of local banks
Regulation of foreign banks
Regulation of investment bank
Regulation of non-banks
Regulation of bank products
Taxation laws, foreign exchange control

THE RATIONALE FOR

FINANCIAL REGULATION
To sustain systemic stability
To maintain the safety and
soundness of financial institutions
To protect the consumer
Financial sectors in Malaysia:
supervised by BNM under BAFIA
1989.

THE TECHNOLOGICAL
ENVIRONMENT
Traditionally, financial institutions
used paper-based systems for
recording customer account details.
The advent of computer technology
provided institutions with the ability
to automate many of the back office
tasks and essentially become more
efficient

THE TECHNOLOGICAL
ENVIRONMENT
Computerisation allow costs to be
reduced, but it also reduced the degree of
human error.
Computerisation also made it possible for
financial institutions to offer more products
and to reach more customers.
Technology has also enabled financial
institutions to widen their access to
customers, providing greater convenience.

THE TECHNOLOGICAL
ENVIRONMENT
e.g. ATM were first introduced in an attempt
to increase the restricted branch opening
times and enable customers to have
access to cash withdrawals outwith baking
hours.
Telephone banking
PC banking
Internet banking

THE TECHNOLOGICAL
ENVIRONMENT
As well as providing increased access
to financial services, technology has
also contributed to increasing
customer service.
Customers now have a range of
methods by which they can access
their financial services provider and
conduct transactions.

THE TECHNOLOGICAL
ENVIRONMENT
Technology has also enabled marketing
efforts to be used to greater effect and
efficiency through database management.
The institution can identify individual
customers (or groups of customers) and
describe what products they buy and how
they use them.
It is argued that the long term success of
financial institutions lies in the effective
use of customer databases.

STRATEGY RESPONSES TO THE

CHALLENGES OF THE FINANCIAL
SERVICES ENVIRONMENT
The banking industry around the world has
been changing very rapidly since the early
1970s.
The industry has experienced a substantial
change in competitive conditions as a
result of a number of factors:
(i) the industry tended to go international,
led by the leading US commercial banks.

STRATEGIES RESPONSES TO THE

CHALLENGES OF THE FINANCIAL
SERVICES ENVIRONMENT
(ii) New competitors entering the financial
services market new approaches to
servicing corporate clients
(iii) New capital markets emerged- as a
result transformed traditional funding of
banks.
(iv) A wide range of sophisticated products
were introduced under packaged sales.

STRATEGIES RESPONSES TO THE

CHALLENGES OF THE FINANCIAL
SERVICES ENVIRONMENT
In response to competition, banks reacted
and began to build up their own multinational presence through their own brand
name.
Banks began to channel their marketing
resources towards diversification.
By the end of 1970s, banks operations
had become more complex with the range
of services on offer.

STRATEGIES RESPONSES TO THE

CHALLENGES OF THE FINANCIAL
SERVICES ENVIRONMENT
Margins on lending were eroded through
competition, fee based services were
increasing.
Non bank financial institutions were also
providing financial services-hence, more
competition.
New information technology (IT) impacted
on the operations of the banks and
became one of the key drivers (eg: back
office became automated)

STRATEGIES RESPONSES TO THE

CHALLENGES OF THE FINANCIAL
SERVICES ENVIRONMENT
Savings and loans associations
initiated interest-bearing transaction
accounts and brought direct
competition to commercial banks and
Professionals like accountants,
lawyers, real estate agents, financial
brokers, asset management also
offered financial services.

CHANGES IN BANKS
STRATEGY IN THE 1980s
In the 1980s the banking industry
experienced an acceleration in the
pace of change in both:
(a) Retail Banking
(b) Wholesale Banking

Retail Banking
Increased segmentation of consumer
groups and provided specialist private
banking services (e.g. rich individuals,
high-net-worth customers)
Stratified accounts (e.g. personal loans,
credit finance, insurance products, 1st and
2nd line mortgages, deposits FD & s/term)
Replacement of paper based accounting
systems
Increased competition for loans and
deposits

Wholesales Banking
Competition intensified- banks
continued to strive for competitive
advantage and in doing so cancel out
one anothers efforts.
Multinational Companies became
stronger in their demands by
negotiating their own interest rates
and cost of services from banks.

Wholesales Banking
Japanese banks took the first 5 top
positions in the international banking
league.
New development in IT change the
banks approach to the consumer,
wholesale and corporate markets.
Increase competition from non-bank
institutions.

New Approach to Banks

Marketing Style
Banks portray themselves as a One Stop
Financial Services Centre.
Banks no longer remain in their traditional
service market. They are now more
aggressive in providing a full menu of
services that will cater for its customers
needs.
The competition is so fierce that they can
offer any type of service provided their
customers are satisfied with the speed
efficiency and costs involved.

New Approach to Banks

Marketing Style
Banks in certain industrial countries
are now mobile in such a manner,
that they will visit you at your
doorsteps.
Technology is one considered as one
of the key drivers that enables banks
to cope with the intensity of
competition.