Pros and Cons of International Expansion of the Banking Industry

Introduction

The banking industry is the economic activities carried by financial institutions using deposits or saving from customers. Banks that capable to provide cross border financial services due to deregulations, technological improvements, increase of trading and foreign investments achieved international expansion for the banking industry as well as gaining comparative advantage. As a result of globalisation, more customers have businesses abroad, larger banks are more likely to value customer centricity, in addition to the regulation, taxation advantages of other countries3 and technology advances.

Advantages

Banking industry moved from highly centralized domestic market to disseminative worldwide market. As the advantages of global banking, there are two perspectives to evaluate it. From the perspective of international banks, to extend the growth of the efficacy of international fund by improving their flowage. This means that, the efficacy of allocation of the funds bring in economic links lenders and borrowers from different countries. The research of 2000 banks in 80 countries found that the local banks were less profitable and reported flat total costs compared with the international banks. Therefore, international expansion of the banking industry can explore more markets and potential clients.

From the perspective of consumer, trading is significantly important. International bank can help them to gain the trade chance of external finance for exporting companies and help to surmount of information dissymmetry. Consumers want to export as they typically have a higher need for capital from international banks. In other words, international banks move funds into exporting country from their parent banks or global financial markets. In emerging markets, companies prefer highly export when foreign banks are present, peculiarly that headquartered of parent bank is in the importing country. In developed countries, the financial market is more advanced and information is more easily available which caused the presence of international banks does not play such a role.

There are many sectors naturally experience from information asymmetries, by extend the portion of products in division has a quote price which are traded on structured exchanged or the trade publication which has a price list. If a bank presents locally in the exporting country, this can promote the flow of information for the both sides of transaction risks of importer and exporter. This cut down the risk of finance and information asymmetries. International banks are more readily to undertake contracts on both sides of the transaction and raise authenticity of the payment guarantees.

Disadvantages

There are also significant disadvantages to be set against. From the perspective of international banks, regulation hurdle represents the key challenge when an international bank wants to expand because regulatory framework will differ from one country to another. Nowadays, these foreign-funded banks have suffered tighter restrictions. For example, since March 2018, the net asset value requirement for global investment banks attempting to control their joint ventures in China is at least 15. 9 billion dollars, which is relatively difficult to be achieved for most banks. In addition, with the increasingly improvement of managerial regulatory independence of subsidiary in different countries, it may induce the decentralization trend for the global bank, which is the massive challenges in the process of international management.

With the international expansion of banking industry, traditional financial institutions have been experienced the process of developing financial technology, such as the growing FinTech ecosystem and online banking. Hence, consumers become familiar with conducting financial services provided by financial technology companies through network and mobile phone. For instance, since the start of 2016, HSBC has announced that it would close 340 branches and cut 25, 000 jobs globally due to the rise of online banking. Furthermore, the result from the bank’s perspective is that consumers’ engagement with their bank would be weaken, thus reducing the consumers retention and cross selling. Meanwhile, as FinTech gives rise to intensive uses of data that leads to security concern for consumers. Widely dissemination of personal details could create more data breaches and attacks from cybercriminals. As the following diagram shows that, the number of recorded data breaches keep rising to 668 million from 2008, which represents nearly a third of exposed records of the United State in 2018.

Also, according to the official figure in UK, internet fraud represents more than 50% of the 3 million cases of bank fraud9. Data security has to be played an essential consideration for consumer trust. Conclusion Banks encounter many difficulties when expanding internationally, a very significant barrier is the regulation in foreign regions, not always by governments but by banks as well, such as the Basel III regime. These regulatory mandates affect dramatically the bank strategies, aims and goals if they are not aligned. As well as the technology in which connects the international banking industry with lower barriers at a notable decreased cost which reduces the competitive advantage. However, it is clear that banks expansion abroad is one of the most effective method to achieve long term sustainable growth. This strategy will bring many benefits to the bank because primarily acquiring more customers, banks are able to access more capital, thus, it facilitates the trading system, increasing information flow to help achieve organisational agility. Therefore, international expansion for the banking industry is essential for the businesses to grow, and with the access of new technologies, the banking system can expand more effectively. For instance, Goldman Sachs launched an online lending platform Marcus and it lends up $30, 000 unsecured personal loans11, but in this expansion banks need to make sure that their strategy is aligned with the regulatory compliance so there will be no collapse.