The wholesale side of the lending and financial services industry (mergers and acquisitions advice, trading and underwriting of bonds, derivatives and equities and foreign exchange) has been among the most global industries. Take the case of First Bangkok City Bank which got into trouble in 1998. Capital to bail it out came from the other side of the globe, from Citibank in the USA.

On the other hand, retail banking worldwide has for a long time remained a local industry. Strong dominance by local players having personal contact with customers has created entry barriers hard to surmount. The personal touch and local branding has developed a kind of customer loyalty.

But, this is fast changing today. Increasingly players from across the borders are emerging on the scene. For instance, Merrill Lynch has acquired non-banking institutions around the world. Or for that matter even the Dutch ABN Amro Bank was considering to acquire Banca Di Roma, Italy’s largest bank. This is apart from its substantial interests in US and Latin America.

Looking at trouble
The financial crisis in the South Asian region created opportunities for the global players there. Relaxation of regulations like in Thailand, has meant that the foreigners can now own 100 per cent of a local bank’s capital as against the 25 per cent before the crisis. Furthermore, the number of branch licenses a foreign bank can hold there have also been increased to three from just one. Similarly, in Malaysia the limit for foreign ownership of financial institutions has been raised to 51 per cent.

But by far South Korea has been in the limelight in this region. This has largely been due to the stronger fundamentals of this country. Removal of the four per cent cap on foreign ownership of banks has also helped foreign entry in South Korea.

The latest such deal in South Korea was from HSBC Holdings, the London-based parent of Hongkong & Shanghai Bank. HSBC Holding had announced its intention to acquire a 70 per cent stake in the government-owned Seolbank. The terms included a deal of $900 million, including a $200 million fee payable to the government. In addition, HSBC would have received a call option to acquire the government’s remaining 30 per cent stake in the Bank. Unfortunately, the deal fell through.

Similarly, some banks have taken advantage of looser regulations in other countries as well to acquire and expand globally. For instance, Spanish banks, Grupo Satander and Banco Bilbao Vizcaya have expanded by acquiring 13 banks among themselves in Latin America.

The market makers
As markets get globalised, both in retail as well as in the wholesale segments, it has resulted in banks shedding their traditional role as middlemen, and in the process bringing to the fore new problems and challenges. As in any market, there are basically three types of players viz., regional, universal and niche players.

The first are typically banks with a strong presence in a geographical region. They have strong relationships with customers and are well-suited to understand their market place and take advantage of it.

However, lately, the protection available to the regional players, particularly in terms of governmental regulations and customer inhibitions against the foreign players is fast disappearing. As markets go global and become transparent, marketshares are coming under threat. This trend is exemplified in the South Asian financial industries.

The second type, the universal banks, are characterised by huge market capitalisation and a presence in more than one region. Citibank, Bank of America (BankAm), Amex, HSBC, etc., all fall under this category.

Often the leading operators in several regions usually strive to achieve all-round growth with presence in both the wholesale and retail markets. They aim at giving complete solutions even in the individual retail segment.

Brand image and service levels typically make them stand apart from the regional players. These banks grow mostly by acquiring or merging with similar companies in other regions, which helps them not only grow speedily but also eliminate their potential rivals.

BankAm has become the most profitable and the biggest bank in the US through its strategy of acquisitions and mergers. It is the product of the merger between NationsBank and Bank of America. NationsBank, in turn has been growing for the last 20 years through a series of domestic acquisitions. Today BankAm has a market capitalisation of over $130 billion and earnings is pegged at $18 per share.

Huge financial resources help these players in being a step ahead of the regional players in innovations and technology. However, there are some regional players who have bucked the trend. Banco Itau, Brazil’s third largest retail bank is one of them. In the face of competition, Bank Itau decided to expand its client base by purchasing three local banks.

It also established overseas joint ventures in asset management and investment banking. The limited distribution channels in Brazil helped Bank Itau sustain its market.

The niche players are basically specialists in a distinct segment of the industry. Many niche players have emerged in recent years. Fidelity, Charles Schwab, Intuit and Matrix-Direct are only some of the players. Fidelity, for one, concentrates on private investments such as mutual funds in various countries. Schwab concentrates on providing discount brokering services.

As compared to others Fidelity, Intuit or Schwab may be termed as very broad based. There are some narrowly focused players too like Matrix-Direct, which markets life insurance products through radio and television and over the telephone, and Quotesmith provides quotes from 375 insurance companies over the Internet. World Mae specialises in securitised mortgages around the world.