Corporate Strategy of Halifax and the Bank of Scotland - Essay Example

Corporate Strategy of HBOS The past ten years Prior to the 2001 merger, Halifax and the Bank of Scotland were two companies operating mainly in different market segments - in retail financial lending and commercial banking, respectively. Both however carried long and strong histories, with their brand names having strong recall in the UK. Halifax before the creation of HBOS had a market share of 19% in the mortgage market and 14% market share in the savings accounts market (Halifax: Moody's Investor Service 1996). Its strategy focused on being known as a consumer champion in the UK and continually expanding its mass customer base by merging and acquiring other companies in similar markets. From a building society with a long history of lending to local working people who build their homes, Halifax demutualized in 1997 officially becoming Halifax plc. Shortly before, it merged with the Leeds Permanent Building Society and acquired Clerical Medical Fund Managers, a British life insurance company. When Halifax was listed at the London Stock Exchange in June 1997, more than 7.5 million customers became stockholders of the new bank, and it became the fifth largest company in the UK in terms of market capitalization. The new publicly-listed company continued to expand its consumer base with the acquisition of Birmingham Midshires Building Society in 1999. The Bank of Scotland (BoS) has been one of the two largest banks in Scotland, in competition primarily with the Royal Bank of Scotland. It is considered the oldest surviving bank in the UK. Prior to merging with Halifax in 2001, the BoS had little presence in Wales and England. Its strength was limited in the corporate and business sectors. Prior to the 2001 merger with Halifax, its strategy of trying to reach out to markets outside the UK and to establish a retail or mass consumer presence was at times, erratic. Riding the spate of consolidation and mergers in the late 1990s, the BoS made a bold move to take over National Westminster Bank (NatWest), a much larger bank in from late 1999 to early 2000, but was defeated in the final bid by the Royal Bank of Scotland. The BoS also made forays into the markets outside UK - establishing a presence in Australia, with its purchase of Perth-based Bank of Western Australia, in addition to its presence in the United States, Moscow and Singapore. It however sold its New Zealand bank asset, the Countrywide Bank of New Zealand to Lloyds TBS in 1998. The Bank of Scotland's attempt to establish a wide presence in retail banking in the United States was characterized by controversy. The deal with Christian preacher Pat Robertson folded after the evangelist's racist and sexist comments about Scotland were scored by civil rights groups. In 2001, the 10.8 billion-pound merger between Halifax and the Bank of Scotland, resulting in Halifax Bank of Scotland (HBOS) was called by the company executives as "the new force in banking" (Burt & Crosby n.y.). As a result, HBOS has now 22 million customers across the UK or two out of five households. Halifax, the consumer champion brought into the table, financial strength and scale, new products and channels and innovation. The Bank of Scotland, the old hand at commercial lending, allowed Halifax shareholders to fulfill its diversification strategies, and offered its lending capability and culture, opportunities in the small-and-medium and corporate markets, enhanced retail opportunities and partnership expertise. The strategic directives of the new company rested in its business balance (retail and commercial lending), leading brands (18 in all), market power (UK's number four financial service company) and management strength. Two strategies underpin HBOS drive to become UK's fastest growing financial services company: one is through diversification of its services across all markets, and two, offering low rates and fees to ramp up volumes and to further achieve competitive pricing. The diversified strategy of the newly formed HBOS was reflected in five main banking divisions: (1) Retail banking and Intelligent Finance (a stand-alone Internet bank); (2) Insurance & investments made up of Clerical Medical, Halifax Financial Services, Halifax Equitable, St. James Place Capital plc, general insurance, esure (an Internet-based insurer, formed in 2001 with focus on motor insurance sales), and Insight Investment; (3) Business banking; (4) Corporate banking, focusing on construction and property; (5) Treasury. In business banking, HBOS set sights on strengthening the bank's SME operations in England and Wales by investing heavily in manpower. In June 2002, HBOS' Treasury group arranged the largest UK-based mortgage-backed securities transaction in the world at 3.5 billion pounds. It has also adopted a "consumer champion strategy" by offering affordable lending rates and low fees to drive up volume ( Wettenhall, Morel & Rutstein 2002). As a result, the bank is ramping up scale and lowering unit costs and appealing to UK consumers who seek both mortgage and deposit accounts. Furthermore, while HBOS took swift advantage of the growth of internet-enabled financial transactions through its pure Internet brands, it announced in 2006 that will expand its branch network to 50 more - with HBOS chief executive stating that "branches are at the very root of UK retail banking" (The Independent, 02 March 2006). HBOS remains focused on the UK market, taking advantage of the scale, synergies and cost-efficiency as a result of the merger. Its overseas expansion is limited to New Zealand and Australia. Competitive environment While UK banks generate a lot of profits (in 2006, HBOS earned more than 5.46 billion pounds), competition is very high across many segments of the markets, especially in retail and business banking. Retail banking produces the highest profit per customer in the UK that can be attributed to structural changes resulting in economies of scale, for example in the form of centralized contact centres (Financial Services Technology website). More than two decades ago, a third of all adults in UK had no account of any type and only 38% had current accounts (British Bankers Association n. d.). But now, according to the British Bankers Association, about 93% of all adults have an account of any kind. It also reported that out of the 5.3 million accounts in existence, over 1.7 are being accessed at the Post Office. Moreover, since the launch of the Universal Bank in April 2003, some 830,000 new accounts were opened. And yet, based on a study of the Financial Services Technology in 2005, customer defection rates hovered at 17.5% a year, compared to below 10% a few years back. This clearly points to the fact that with many more services to choose from, customers are getting choosy, even trying out services of different banks. To maintain profits, banks such as HBOS should focus on giving quality service and anticipate the possible needs of customers across a wide range of services, from traditional accounts to insurance and investments options. In business banking, the industry is experiencing increased lending to small firms where there are a total of 27 banks servicing this market segment. A key aspect that could be addressed by HBOs and other banks is to provide more information to small businesses which are not aware of alternative sources of finance such as factoring, leasing and discounting (British Bankers Association n. d.). In mortgage lending, where HBOS holds 26% of UK's total mortgage assets, the market has also been very competitive with the rise of the new entrants pushing down prices, introducing innovation and using technologies to drive down costs (Flanagan 2002). Among the new entrants in the markets, the life insurance companies such as Standard Life and Egg competed on price, with their use of telephone customer service and Internet-based advertising promos. Profit margins of UK banks thus have been pushed down with the intense competition. With more improvements in technologies in the future pushing down prices, banks such as HBOS will have to introduce more than competitive pricing to maintain and attract customers (Flanagan 2002). It could be product differentiation which would allow customers to see which products stand out based on their needs or packaged options that would for example bundle mortgage lending with other personal financial services. Financial services customers in the UK continues to lean towards cash-less transactions, with continuous growth in the value of transactions using credit, debit and charge cards while the use of personal cheques is on a downward trend (Euromonitor 2006). However, one of the outgrowths of this trend is the record number of consumer indebtedness in terms in personal bankruptcies, with estimates of unsecured loans reaching 168 billion pounds. In addition, the Enterprise Act of 2004 made the bankruptcy route a legal option for those who are experiencing financial difficulties. Thus, banks such as HBOS have no choice but to watch out by lending more responsibly so that incomes and profits are not pulled down as more and more people default on their unsecured loans. Further, they should do so as consumer groups are taking on the high street banks for their billions in profits allegedly at the expense of credit card payment defaulters. The Halifax brand When the merger occurred in 2001, both the Halifax and Bank of Scotland brand names were retained. In Scotland however, Halifax branches were joined with the Bank of Scotland and the brand name of Halifax was used to brand savings and mortgage products. For the rest of the UK, Halifax branches used the Bank of Scotland for business banking. However, in November 2006, the Bank of Scotland of Ireland reverted to using the Halifax brand for its retail operations. Prior to this, the Bank of Scotland in Ireland opened three high street branches, targeting to add 46 more branches, in direct competition with the other big Irish banks. To differentiate its services, the branches opened longer than usual than most high street banks and more notably, became the first bank in Ireland to open during Saturdays as regular banking days. Recently, Halifax announced it would launch a personal account, paying 10% interest on credit balances up to 2,000 pounds for those customers maintaining at least 1,500 pounds a month. It also announced it would be offering to consumers a Visa Debit card, that can be outside Ireland, in contrast to the Laser debit card, offered by most Irish banks which can be used only within Ireland. According to BoS (Ireland) executives, Mark Duffy, chief executive and Maurice Pratt, chairman - the basis for retaining the Halifax brand name in Ireland was through their experience with Irish customers. "Irish consumers are clearly taken by our simple, value for money proposition. Our initial experience and consumer research confirms that we could do even better by adopting an identifiable retail brand that underscores these values. The natural choice for us is the Halifax" (Duffy 2006). In its brand research, the Bank of Scotland (Ireland) found that Halifax has three characteristics: (1) "strong brand and value recognition in Ireland, (2) friendly staff and (3) straightforward products". Moreover, the Halifax brand as a result of high profile advertising in UK TV has built a strong awareness in Ireland, with the company citing estimates by AGB Nielsen Media that 63% of the Irish people view UK TV stations at home (Bank of Scotland-Ireland website). Even as early as 2000, before the merger with the Bank of Scotland, Halifax pioneered a TV advertisement with its own personnel singing popular songs with the words changed to financial services products being offered by the bank. In particular, Halifax employee Howard Brown's crooning Halifax "gives you extra" to the tune of the Sex Bomb song produced a 150% increase in sales and a 43% increase in profit per current account customer (Thinkbox website, Why use TV/TV is versatile) within 12 months of its release. The practice has continued after the merger, with Bank of Scotland employees following suit in their appearances in TV advertisements. In a study published in February 2006, Halifax scored among the top three "most effective financial brands in the UK" (Brand Metrics: Consumer Awareness of and Attitudes towards Brands in UK Financial Services 2006). The study also found out that in terms of "brand strength", Halifax was among the top five brands in UK. On overall "aggregate brand effectiveness", Halifax scored highly among high street banks. Thus, the use of Halifax by HBOS is a recognition that the brand has been successful, partly due to its history as a working-class building society and its continued mass appeal and would thus be most at a position to reinforce the bank's retail positioning strategy. With Halifax successful with the mass markets, the Bank of Scotland's brand name on the other hand, banners the company's commercial lending thrust. Forward Strategy Within the competitive environment where it operates, HBOS faces a host of challenges from where it can come up with a forward strategy so that it will continue to enjoy robust earnings, maintain its competitive position and continuously grow its markets. Already, with strong brands at its stable, one of the challenges that it faces which nevertheless, offer a host of opportunities is its ability to cross-sell its service. Its diversified market positioning and its database of 22 million customers to date both in the lending and savings sectors allow it to push forward this strategy. Thus, personal services such as insurance, credit and debit cards could be offered to customers who are already in their mortgage portfolio. Furthermore, economies of scale will help HBOS to improve efficiency levels so that cost to income ratios would further be scaled down to their most manageable levels. With a host of new entrants to the field, including retailers offering financial services to customers and financial companies traditionally not into mortgages entering this market and further driven by technology's pressure to intermediate between traditional branch banking, HBOS face increasingly low profit margins. Aggressive pricing would only be one aspect as other competitors are also into the competitive pricing strategy. What would be a more effective long-term strategy is to further drive down messages to customers on what differentiates the HBOS banking experience. A host of lifestyle package to the customer, attendant and anticipatory of their needs from managing savings, to investment options, insurance needs and a host of other wealth-management advisory services could help HBOS differentiate its products from those of other competitors. Another challenge that HBO faces is maintaining a healthy capital ratio to fund its asset growth. The UK market for savings shows signs of overcrowding and HBOS might set a long-term strategic move to move into other markets, for example in Asia where savings rates are high. This geographic move could add to its presence in Australia and New Zealand. In addition these new markets could add more growth both in terms of new customers and thus, new sources of income. Another factor that needs to be addressed is the capability of banks such as HBOS to continuously upgrade their technology so that they can help firms maximize returns and rise efficiency levels. For example, financial companies in UK are at risk with the rise in consumer indebtedness. Computerized technology can help monitor a company's total risk exposure, before real damage occurs. Moreover, as more and more consumers are utilizing the Internet to do their financial transactions, HBOS would be wise to address concerns such as personal privacy security, where most customers are leery or extremely sensitive for any breach of security. Reference List: A UK RETAIL BANKING MANIFESTO: ADDRESSING THE CHALLENGEST THAT LIE AHEAD FOR THE INDUSTRY AND ITS STAKEHOLDERS n. d. British Bankers Association [Accessed 26 April 2007], n. p. Available from World Wide Web: . Brand Metrics: Consumer Awareness of and Attitudes towards Brands in UK Financial Services (EXECUTIVE SUMMARY) 2006. MarketResearch.com, February 1, 2006. [Accessed 26 April 2007], n.p.. Available from World Wide Web: .http BURT, P. & CROSBY, J. n. d. HBOS The New Force in Banking (power point presentation). Halifax Bank of Scotland. Accessed 27th April 2007]. Available from World Wide Web: . DUFFY, M. & PRATT, M. 2006. Comments on the use of Halifax brand in Ireland, in Retail banking to be branded Halifax. Bank of Scotland Ireland website. August 25, 2006 [Accessed 26 April 2007], n.p.. Available from World Wide Web: . Executive Summary: Financial Cards in the UK 2006. Euromonitor International, March 2006. [Accessed 26 April 2007], n.p. Available from World Wide Web: . FLANAGAN, C. 2002. UK Mortgages and the UK RMBS Market. JP Morgan, May 23, 2002. [Accessed 26 April 2007], p. 3. Available from World Wide Web: . MEASURING THE VALUE OF CUSTOMERS n. y.. Financial Services Technology website [Accessed 26 April 2007], n.p. Available from World Wide Web: . PARKINSON, G. HBOS bucks trend with plan to open 50 new bank branches. The Independent, 02 March 2006, [Accessed 26 April 2007], n.p. Available from World Wide Web: < http://findarticles.com/p/articles/mi_qn4158/is_20060302/ai_n16204554>. ://ww Retail banking to be branded Halifax 2006. Bank of Scotland Ireland website. August 25, 2006 [Accessed 26 April 2007], n.p.. Available from World Wide Web:.w.duct/display.aspproductid=1382861&xs=r&g=1&curr=USD&kw=&view=toc WETENHALL, P. MOREL, P. & RUTSTEIN, C. 2002. Opportunities for Action in Financial Services: The Untapped Power of Pricing. THE BOSTON CONSULTING GROUP [Accessed 27th April 2007], p. 4. Available from World Wide Web: . WHY USE TV/TV IS VERSATILE n. y. Thinkbox website. n.d. [Accessed 26 April 2007], n.p.. Available from World Wide Web: . Read More