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The globalization of monetary providers


The globalization of monetary providers


In the age of globalization, the key to survival and success for many financial institutions is to cultivate strategic partnerships that enable them to be competitive and provide a diverse range of services to consumers. When studying the barriers and effects of mergers, acquisitions, and diversification in the financial services industry, it is important to consider the keys to surviving in this industry:

  1. Understand the needs and expectations of each customer
  2. Providing customer service tailored to customers’ needs and expectations

In 2008 there were very high levels of mergers and acquisitions (M&A) in the financial services sector. Let’s take a look at some of the regulatory history that contributed to the changes in the financial services landscape and what that means for the new landscape investors are now facing.

Diversification promoted through deregulationBecause large, international mergers tend to affect the structure of entire domestic industries, national governments often develop and implement prevention strategies aimed at reducing domestic competition between firms. Starting in the early 1980s, the Deregulation and Currency Control Act of 1980 and the Garn-St. Germaine Depository Act of 1982 were passed.

By giving the Federal Reserve greater control over non-member banks, these two laws are designed to allow banks to merge and savings institutions (credit unions, savings banks, and mutual savings banks) to offer auditable deposits. These changes also became the catalysts for the dramatic transformation of US financial services markets in 2008 and the emergence of new players, as well as new players and service channels.

Almost a decade later, the implementation of the Second Banking Directive in 1993 deregulated the markets of the countries of the European Union. In 1994, European insurance markets saw similar changes as a result of the third generation Insurance Directive of 1994. These two directives put the financial services industries of the United States and Europe in a keenly competitive position and resulted in a vigorous global scramble to attract customers who were previously unreachable or untouchable.

The ability for companies to use the Internet to provide financial services to their customers also impacted product and geographic diversification in the financial services sector.

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Asian markets joined the expansion movement in 1996 when “Big Bang” financial reforms deregulated Japan. Relatively far-reaching financial systems in this country have become competitive in a global environment that is rapidly expanding and changing. By 1999, almost all remaining restrictions on foreign exchange transactions between Japan and other countries were lifted. (For background information on Japan, see The Lost Decade: Lessons From Japan’s Real Estate Crisis and Crashes: The Asian Crisis.)

After the changes in the Asian financial market, the United States implemented several additional levels of deregulation, which were completed with the Gramm-Leach-Bliley Act of 1999. That bill allowed for the consolidation of key financial players, boosting US-based financial institutions to boost service companies involved in M&A transactions to a total of $ 221 billion in 2000. According to a study by Joseph Teplitz, Gary Apanaschik, and Elizabeth Harper Briglia in Bank Accounting & Finance from 2001, expansion of this magnitude through trade liberalization, bank privatization in many emerging markets, and technological advancement has become a fairly common trend. (For more insights, see State Economies: From Public to Private.)

The immediate effects of deregulation have been increased competition, market efficiency and greater consumer choice. Deregulation sparked unprecedented changes that turned customers from passive consumers to powerful and demanding gamers. Studies suggest that additional, multifaceted regulatory efforts make the running and administration of financial institutions even more difficult by increasing bureaucracy and the number of regulations. (For more information on this, see Free Markets: What Does It Cost?)

At the same time, the technological revolution of the Internet changed the nature, scope, and competitive landscape of the financial services industry. After deregulation, in the new reality, each financial institution will essentially operate in its own market and target its audience with narrower services that meet the needs of a unique mix of customer segments. This deregulation forced financial institutions to prioritize their goals by shifting their focus from interest rate setting and transaction processing to more customer orientation.

Challenges and disadvantages of financial partnershipsSince 1998, the financial services industry has experienced rapid geographic expansion in affluent countries and the United States; Customers who were previously served by local financial institutions are now addressed on a global level. In addition, according to Alen Berger and Robert DeYoung in their article “Technological Progress and the Geographic Expansion of the Banking Industry” (Journal of Money, Credit and Banking, September 2006), between 1985 and 1998 the average distance between a major bank and its subsidiaries was within American multibank holding companies increased more than 50% from 123.4 miles to 188.9 miles. This suggests that banks’ increased ability to lend to small businesses over greater distances enabled them to experience fewer size penalties and to be more productive. (For more information, see Number of Competitive Advantages.)

Deregulation was also the main driver of this geographic diversification, and a series of policy changes in the early 1980s resulted in gradual reductions in domestic and interstate banking restrictions.

In the European Union, a similar counterpart to policy changes allowed banking organizations and certain other financial institutions to expand their operations to include member states. Latin America, the transitional economies of Eastern Europe and other parts of the world also began to reduce or eliminate foreign entry restrictions, allowing multinational financial institutions domiciled in other countries to gain significant market shares.

Transactions without borders, bordersRecent innovations in communications and information technology have reduced the economies of scale associated with business costs faced by financial institutions considering geographic expansion. ATM networks and banking websites have enabled efficient remote interactions between institutions and their customers, and consumers have become so dependent on their newfound ability to continuously conduct limitless financial transactions that companies lose all competitiveness unless they are technologically connected.

Another driving force behind the geographic diversification of financial services firms has been the proliferation of business combination strategies such as mergers, acquisitions, strategic alliances, and outsourcing. Such consolidation strategies can improve efficiency within the industry, which can lead to mergers and acquisitions, voluntary exits, or forced withdrawal of poorly performing companies.

Consolidation strategies also enable companies to benefit from economies of scale and focus on reducing their unit cost of production. Companies often publicly declare that their mergers are motivated by a desire to grow sales, increase the product base and increase shareholder value through staff consolidation, reducing overheads and offering a wider range of products. However, the main reason and value of such strategy combinations is often related to internal cost reduction and increased productivity. (For more information, see What are economies of scale?)

Unfavorable facts about the pros and cons of the major strategies used as a tool for geographic expansion within the financial services sector were revealed in 2008 by the very high M&A rates between, for example, Nations Bank and Bank of America (NYSE: BAC) superimposed. , Travelers Group and Citicorp (NYSE: C), JP Morgan Chase (NYSE: JPM) and Bank One. Their dilemma was finding a balance that would maximize overall profit.

ConclusionThe conclusion on the effects, advantages and disadvantages of national and international geographic diversification and expansion on the financial services industry is the fact that the survival and success of many financial services companies in the wake of globalization lies in understanding the needs, wants and expectations of companies and meet their customers.

The single most important and evolving factor for financial companies to thrive in vast global markets is their ability to efficiently serve demanding, sophisticated, better educated, and better performing consumers who depend on the simplicity and speed of technology. Financial firms that fail to recognize the importance of customer focus are wasting their resources and will eventually perish. Companies that fail to see the effects of these consumer-centric transformations will struggle to survive or cease to exist in a newly emerging global financial services community that has been forever changed by deregulation. (To learn more about this industry, read The Evolution of Banking.)


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