Finance essay sample
There has been an increased level of competition among financial intermediaries since the late 1990’s and it will continue into the new millennium. The large players in this increased competition are the nonbank financial intermediaries. Our text explains that nonbanks are “other intermediaries and non-financial companies that have taken an increasing share of intermediation” (Burton & Lombra, 311). The text continues that these banks face much less regulation than traditional banks, which translates to significantly lower costs. This factor is allowing nonbank intermediaries to create a stronghold on the market, which is at its highest profit rates in history (312). What, exactly, are these intermediaries doing to banking?
Nonbanks play an important dual role in the financial system. They complement the role of commercial banks by filling gaps in their range of services. But they also compete with commercial banks and force them to be more efficient and responsive to the needs of their customers. Most nonbanks are also actively involved in the securities markets and in the mobilization and allocation of long-term financial resources. Pension funds and other institutional investors that move large long-term financial resources, act as intense opposition to the once dominant commercial banks. Nonbank financial intermediaries include various institutions, such as leasing, factoring, and venture capital companies to various types of contractual savings and institutional investors (pension funds, insurance companies, and mutual funds). The common characteristic of these institutions is that they mobilize savings and facilitate the financing of different activities, but they do not accept deposits from the public. The lack of public deposit capabilities is beginning to change, however, with the institution of on-line banking. Since on-line banking is the most prominent of the nonbank financial intermediaries, it will be our main focus.
Many on-line banking customers, today, wonder why people would still be members of a traditional bank where there are lines and ignorant customer service representatives. By using online banking, bank customers are able to avoid writing checks and balancing checkbooks. The customer must only post the company names and addresses of those that monthly bills are paid, one time. Once he/she does this, however, there will be no need to write a check, which will cut bill-paying time in half. The customer has instant access to account information and check clearance is reported immediately. These benefits must be attractive to the public, according to International Data Corp., who tells us that 6.6 million households did their banking on-line last year. They predict that, in less than five years, 33 million will participate. Most of these on-line banking sites have minimal system requirements, which include either Netscape Navigator 4.06 web browser or Microsoft Internet Explorer 4.0 or newer browser. These browsers provide encryption of information, which makes on-line banking at least as secure as the traditional method, and possibly more secure (Hutheesing).
Traditional banks are receiving a lot of pressure from traditionally monoline credit card companies. These highly focused firms have been able to establish quite a reputation in the credit card market over the past decade. With the introduction of the Internet to the world over the past few years, these companies have been able to successfully market their closely related certificates of deposit and money market accounts. With improvements in Internet technology, these credit card companies have been able to assimilate to the more traditional, full service system. This movement in the banking industry is causing a scare among traditional banks. Michael Auriemma, president of Auriemma Consulting Group in Westbury, NY, explains in Miriam Souccar’s article that, “everybody in the financial services industry is talking about customer relationship management and how to maximize the profit of each individual customer, and credit card issuers have a leg up when it comes to managing relationships” (1). These issuers seriously market noncard benefits and use them as a major solution in maintaining customer relationships.
As an employee of American Express Tax and Business Services, I am very familiar with their brand awareness that the corporate offices are using as a major marketing tool. With this and the Internet, American Express has been able to come to the forefront of nonbank on-line banking competition. American Express’ on-line bank offers money market and checking accounts, CD’s, bill payments, personal loans, and debit cards. To make up for its lack of banking offices, American Express offers rebates of up to $72 per year for automated teller machine surcharges. Other incentives include money market accounts with 5% yields and interest-bearing checking (Souccar, 3). Although individual customers are a large target market for on-line banking institutions, small businesses are another important area of marketing exploration.
The assortment of products and services offered by nonbanks seem to be much more attractive to small businesses than many of the traditional banking alternatives. “A survey conducted by Mentis Corp. has found non-bank organizations generally are doing a better job than banks at targeting the needs of small companies” (“Banks losing small clients”, 1). Nonbanks seem to have a better, overall, understanding of the small business market and these businesses are responding accordingly. The computer awareness of small business owners is allowing nonbank organizations to aggressively develop advanced Web pages to support the marketing and communication needs of these businesses. These on-line solutions usually provide transactions capabilities. Kristen Min, research manager for Mentis Corp., explains that part of the nonbank attraction is that, ‘unlike banks, these organizations do not have regulatory barriers prohibiting or limiting interest on checking accounts, which has allowed them to offer their small business clients interest-bearing accounts for a number of years’ (“Banks losing small clients”, 1). Min continues, however, that the small business market is not closed to traditional banks because they already have their proven branch networks and staff interaction, which gives them an inside advantage in understanding small-business clients and selling them other related banking products and services. Also, since nonbanks are new to the business, traditional banks already have existing relationships with these owners. These relationships will greatly improve with the addition of insurance, loan and investment services that banks are beginning to offer (“Banks losing small clients”, 2). Many companies are exploring the possibilities of becoming involved in “nonbanking”.
Jim Henry of Automotive News explains that many automakers are being drawn by the potential to expand into new, non-auto financial services. General Motors, Ford Motor Co., and BMW of North America are currently involved in creating their own banks. BMW has already been granted a state-charter in Utah to operate as a type of nonbank. These carmakers plan to market services, such as credit cards, checking, and savings accounts and investment services. There are many benefits that the automakers considered when planning the institution of these banks. By offering these non-auto services, the companies will be able to market a fuller range of financial services than their finance sectors can. These services will also promote customer brand loyalty and increased auto-related spending. Despite hopeful aspirations in the banking industry, Chritophe Germain, a credit a credit card analyst for Moody’s Investors Service in New York, is quite skeptical about the success of these automakers in the credit card business. He explains that Ford had killed an earlier credit card effort in 1997, while GM still continues its program, however, with a much lower benefit than originally contracted. Germain agrees that these auto brands have impressive loyalty and leverage measures, but he doesn’t believe that their competition in the market will be great (Henry, 4). Ford Motor Credit Co., Ford’s current finance sector, however, has launched the first corporate debt offering ever to be conducted only on the Internet. This offering, as explained by Jim Bosscher, Ford Credit assistant treasurer, was issued because, ‘we want our customers to be investors and our investors to be customers’ (“Ford offer debt on Net”, 40). This type of financial involvement will be helpful in establishing Ford’s nonbank.
Nonbank financial intermediaries have come a long way in the last decade, and for reasons aforementioned, they have become an extremely competitive part of the personal and business banking arenas. Although there are many types of nonbanks in the world, on-line banking agencies have become most prevalent. We must keep an eye on the automakers, however, because they may be storming the nonbank front faster than analysts expect. Traditional banks have had a long-lived history; could it be their end or will they stay strong?