This instrument has been widely used by researchers, but still, there are some controversies in its applicability across different service industries. In some studies the five dimensions of the instrument (determinants) have been found to be unstable across different types of services. Therefore, the tool should be applied very carefully and the set of determinants and attributes used should be adapted to the specific situation. • Chi-Square test of independence The test is applied when there are two categorical variables from a single population.
It is used to determine whether there is a significant association between the two variables. For example, in an election survey, voters might be classified by gender (male or female) and voting preference (Democrat, Republican, or Independent). We could use a chi-square test for independence to determine whether gender is related to voting preference. This approach consists of four steps: (1) state the hypotheses, (2) formulate an analysis plan, (3) analyze sample data, and (4) interpret results. 1. Hypothesis: A chi- square test for independence has been conducted for knowing the relation between the age group and the preference towards the two types of banks.
Preference towards public/private sector banks and age group are independent of each other. ? H1: Preference towards public/private sector banks and age group are dependent of each other. 1. 8 Limitations of the Study: ? Respondents may give biased answers for the required data. Some of the respondents did not like to respond. In our study we have included 50 customers of each bank because of time limit.
The world of commercial banking is undergoing a deep transformation as a result of marketable instruments competing with loans and demand deposits. Because of this strong competition, commercial banks are struggling to make acceptable margins from their traditional business entering into investment banking. Increasing competition has forced banks to search for more income at the expense of more risk.
Banks that lent heavily to Asia in search of better returns than those available in Western markets are now being blamed for bad credit decisions. The Asian crisis has renewed interest on credit risk management casting doubts on the effectiveness of current credit regulations. Technological changes have also heightened competition by making it easier to imitate bank services. The traditional advantage of physical proximity to clients given by extended networks of branches has vanished.
Banks have to compete with money market mutual funds for deposit business, commercial papers, and medium-term notes for bank loans. As margins are squeezed, commercial banks in the United States and Europe have been forced to cut costs and branches while diversifying into pensions, insurance, asset management, and investment banking. In the United States, many banks call themselves financial service companies even in their reported financial statements. Diversification, however, has not always proved to be an effective strategy, and many banks have had to revert to a concentrated business.
These examples illustrate how commercial banks are reinventing themselves, not just once but many times. All these changes are creating an identity crisis for old-fashioned bankers, leading to the key question, “What is a bank today? ” The question is difficult, but evidence suggests that the concept of banking is being modified and the traditional barriers among financial service Sub industries (retail banking, private banking, investment banking, asset management, insurance, etc. ) are vanishing. Illustrating what an entity does or serves for often is a useful way to define it.
The identity crisis of banks—especially commercial banks—stems from the deep and rapid changes in their traditional body of activities (particularly retail and corporate banking). On the other hand, investment banking, private banking, and banc assurance are the most profitable and fastest growing segments of the financial service industry. As banks undertake new activities, they also incur new risks. Since boundaries among sub industries are weakening, if not vanishing, banks—like all other financial service companies—must redefine themselves in terms of the products they offer and the customers they serve.
The way banks pursue this redefinition is through a strategic repositioning in the financial service industry. All these factors represent a new challenge for commercial banks, provided this definition still has a unique meaning. Increased competition, diversification, new products, and new geographic markets mean that both the spectrum of risks and the risk profile for banks are dramatically changing. Defining a Bank in 2010 The scenario commercial banks face today differs greatly from that of the past.
Diversification among sub industries is defining an environment where banks compete with other financial-service companies to provide mutually exclusive products and services to the same customers. Traditional branch banking is under the threat of new competitors and technological innovation, leading some analysts to wonder whether banks are dying. Most likely what is dying is the old-fashioned concept of the bank and a new scenario is emerging. Banks are changing as economic markets integrate, providing opportunities for diversification. Only 15 to 20 years ago, most Western banks generated 90% of revenue from interest income.
Now this percentage has fallen to 60%, sometimes as low as 40%. New sources of income, such as fee-based income from investment services and derivatives, are becoming increasingly relevant for the income statements of commercial banks. During the same period, the pattern of banking activities has changed through interactions with the developing security markets. The well-known phenomenon of disintermediation that has taken place in all Western countries since the 1970s has progressively reduced the monopoly of banks over the collection of savings from customers.
This has created much tougher competition among financial service companies and has forced banks to find new and diversified sources of income. The traditional core business of commercial banks has been retail and corporate banking. As retail and corporate banking become less and less profitable, banks are diversifying into new businesses to stop the decline of profits. Investment banking, for example, is estimated to be worth US$14 million, with an annual growth rate of about 14% up to 2010. Derivative based earnings for larger commercial banks now account for about 15 to 20% of the total earnings.
The drawback is that volatility of earnings has dramatically increased. The management of these new types of risk—typically, market risk and credit risk on traded assets—requires competence and expertise. Hence, the risk profile of commercial banks is changing as a consequence of diversification. Capital markets are playing a key role in defining the bank of the twenty-first century, but they are also making banks riskier. In fact, with a few exceptions, AAA ratings for banks have disappeared and consequently the importance of market risk management is being emphasized.
Future competition will not be played in the classic retail banking industry that, at least in continental Europe (but not in the United Kingdom), is only slightly profitable. Global competition will take place in asset management and investment banking. Not casually, huge U. S. investment banks are merging among themselves and with asset management firms. Alliances and takeovers are occurring also on a transatlantic basis, confirming the global characters of these two sub industries (the most related to global capital markets).
The following trends are affecting the banking industry and most likely will shape the competition in the next several years: • The market share for financial services that banks hold is declining, while securities firms, mutual funds, and finance companies are getting a growing share of available customers. In the United States, the share of total assets held by banks and other depository institutions relative to all financial intermediaries fell from 56% in 1982 to 42% in 1991, and this downward tendency is likely to continue.
Banks will face growing competition from financial service companies and nonbank firms. • Disintermediation is making traditional banking less and less necessary, leading to consolidation. The natural shrinkage of the market share held by commercial banks started this process in the past decade, but it has dramatically accelerated in the past few years because of global competition. • To remain competitive, commercial banks will have to exploit new sources of income: Offering new services (selling mutual funds or insurance policies). Charging customers with noninterest fees.
Offering new services through the phone and the web, Entering into joint ventures with independent companies, Entering new geographic markets yielding higher returns. • Banks will need more expertise to manage new sources of risk. Market risk management models must become an integral part of a bank’s risk management culture. RETAIL BANKING [pic] The two main forces changing the competitive environment in retail banking are technological change and aggressive new competitors: 1. Technological change is creating huge problems for traditional banks with extended and costly branch networks.
The major technological issues affecting the retail banking business are the rise of telephone banking and the impressive diffusion of the Web-based banking. These innovations make branch networks less important and national boundaries irrelevant. Computer banking, either through the Internet or proprietary networks, is gaining a growing and growing importance. 2. New unrelated competitors are entering the retail banking market. In the United Kingdom, the country’s two biggest retailers, Sainsbury’s and Tesco, have gone into partnership with the Bank of Scotland and the Royal Bank of Scotland, respectively.
Sainsbury’s Bank offers a savings account, two credit cards, and personal loans and mortgages, with more services to follow. Tesco Personal Finance offers only a savings account and a credit card, but aims to expand its range. These trends do not indicate that traditional branch banking is going to die, but that the competitive scenario is changing. High-street banks have expensive branch networks and relatively outdated procedures, with far greater operating costs than their new, more flexible rivals.