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Critical Issues in Marketing and Strategy, Essay Example

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In the aftermath of the global financial meltdown of 2008, an ongoing issue affecting the marketing environment in which financial institutions such as HSBC operate is a lack of consumer trust. In the United States, a raft of new regulations under the Dodd-Frank Act may offer grounds for restored consumer confidence, if HSBC and other financial institutions can step up to the plate with the appropriate marketing responses to rebrand themselves. In order to bolster its position in the new strategic marketing environment, HSBC must appeal to its consumers’ most basic concern in the world of risky financial services: trust.

The financial crisis of 2008 was, fundamentally, the product of unscrupulous and risky behavior on the part of the major financial institutions, owing to a weak and lackluster regulatory environment (Ferguson & Johnson, 2009, pp. 4-5). As detailed by Ferguson and Johnson, U.S. Treasury secretary Henry Paulson and Federal Reserve chair Ben Bernanke “threw open the Federal Reserve’s discount window not only to commercial banks but also to investment banks that were primary dealers in government securities” (p. 4). Nonetheless, the two allowed Lehman Brothers to fail, which in turn precipitated a cascade of collapsing investor confidence that had terrible ramifications for American International Group (AIG), Washington Mutual, and Wachovia, as well as Morgan Stanley and Goldman Sachs (p. 4).

In this atmosphere of financial catastrophe, Paulson and Bernanke sold the American Congress on a $700 billion recovery program, the ‘bailout’ (Ferguson & Johnson, 2009, pp. 4-5). Worldwide, however, financial markets continued to dissolve and dissipate. It was left to Britain’s PM Gordon Brown to intervene with a new and quite distinct plan: rather than the bailout, with its “vague asset-buying proposal”, which he derided as “a clueless giveaway of taxpayer money”, Brown recapitalized British banks (p. 4). Brown’s plan was not without its shortcomings and limitations, but it met with a far better critical and popular reception than did Paulson’s. Ireland stepped in with similar measures, deciding to guarantee all deposits, and a new trend of government intervention to stave off financial collapse was well and truly underway (p. 5).

In the aftermath of the crisis, a new global financial order is emerging, one with precipitous ramifications for the marketing environment in which financial institutions operate. As Ferguson and Johnson (2009) explained, it is by now patently obvious that the previous model of global finance, based on investment banking, is a thing of the past: “All major American investment houses have either gone bankrupt or defensively transformed themselves into commercial bank holding companies” (p. 5). What is also abundantly clear is that state intervention through regulation and aid is more important than ever (p. 5). Moreover, the lending market has been slow to recover, thanks not only to the reluctance of the banks to lend but also of the consumers to borrow (p. 6).

The question, then, is a matter of trust: what will it take for financial institutions and consumers to begin to trust each other again? As Cox (2006) explained, trust is an essential currency for any financial institution to maintain, if it wants to be successful in the business of selling potentially risky financial services products: trust is important in situations wherein a consumer must assume some level of risk (pp. 77-78). In essence, trust is the foundation of any relationship between consumer and financial services provider: the consumer is trusting that the financial services provider will discharge its obligations to them in a manner consistent with the description of the services (p. 78). As such, if a customer perceives that a financial services provider is not trustworthy, they are more likely by far to take their business to a financial services provider that is trustworthy in their estimation (p. 78).

In the United States, the Dodd-Frank Act was created in response to the recession, with the aim of reforming the financial sector. According to Mulhern (2011), the reforms are profound indeed, and augur a great deal of change for all stakeholders in the financial industry: it will, in essence, establish better standards to ensure the protection of consumers and the U.S. economy (pp. 125-126). Under Title I of the Act, two new agencies, the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) are created and given the powers necessary to monitor the financial services market in such a way that they can advise the American Congress (p. 127). They will also be able to make recommendations to the Board of Governors of the Federal Reserve regarding “prudential standards for risk-based capital, leverage, liquidity, contingent capital, resolution plans and credit exposure reports, concentration limits, enhanced public disclosures”, etc. (p. 127).

Under Title III, federal supervision of savings and loan holding companies is assured; consumers will benefit from increased FDIC insuring of deposits, from US$100,000 to US$250,000 (Mulhern, 2011, p. 128). These measures have the potential to ensure a great deal of consumer protection, which may in turn precipitate a more favorable strategic marketing environment for financial institutions. On the other hand, the regulations are not without significant costs as well.

A SWOT analysis of HSBC Finance Corporation, a subsidiary of HSBC North America Holdings, amply demonstrates the essential problems that financial institutions face today. As Datamonitor (2011a) explained, HSBC Finance has been suffering a deteriorating position with respect to capital, notably equity capital (p. 7). From FY 2009 to FY 2010, HSBC Finance’s equity capital declined from $7,804 million to $6,145 million (p. 7). It has also recorded net losses on assets, with a 2.2% ROAA (Return On Average Assets) in FY2010 (p. 7). HSBC Finance has also discontinued all new customer originations for its consumer lending sector, even going so far as to close about 800 Consumer Lending branch offices (p. 7). Even as consumers’ trust in financial institutions remains poor in the aftermath of the recession and the bailout, so too does financial institutions’ trust in the consumers remain poor.

According to Datamonitor (2011a), the Dodd-Frank Act also poses significant ramifications for HSBC Finance. In particular, the creation of the Consumer Financial Protection Bureau (CFPB), one of the main provisos of the Act, poses many ramifications for the regulatory environment: this monitoring body will ensure compliance with federal consumer financial statues (p. 9). HSBC will also be affected by new FDIC rules for banks with assets of $10 billion or more, rules that “considerably change and modify deposit insurance assessment rates calculation” (p. 9). Debit card interchange fees are also limited by the Act, and there are a number of regulations on capital, notably the mandate that tier 1 capital must constitute at least half of total capital for the financial institution (p. 9).

The costs of higher regulations also affect HSBC Holdings as a whole, not only in the United States but also internationally (Datamonitor, 2011b, p. 8). Additionally, HSBC Holdings faces the prospect of competing for highly-valued retail and commercial deposit funding in a very competitive market, given the ongoing poor performance of the global wholesale market (p. 8). Complying with all of the aforementioned regulations imposes significant costs on HSBC Finance, costs which it must recoup: in practice, this means the costs will be recouped from the customers. The thing for HSBC Finance to do will be to sell its customers on the image of safety and security—trust, in other words, as seen from Cox (2006) above.

Of course, there are many positive aspects of the strategic marketing environment in which HSBC Finance operates as well. A good example is HSBC Finance’s own synergies with HSBC Holdings, as a result of being part of such a major financial group (Datamonitor, 2011a, p. 5). One key capacity that HSBC Finance gains from this association is the ability to obtain different, alternative sources of liquidity for its operations; another key advantage is “expertise in specialized corporate functions and services” (p. 5). And, too, the company’s credit card division shows important signs of significant improvement, with delinquency declining in FY 2010 (p. 6). The result was a decline in net outstanding from $28,243 million in FY 2008, to $13,183 million in FY 2009, to $10,415 million in FY 2010 (p. 6). And for HSBC Holdings overall, a raft of recent acquisitions, including 31 businesses and increased stakes in another 24 businesses, has resulted in “balance sheet growth, improved cohesion in strategy, overall brand perception, and enterprise value” (Datamonitor, 2011b, p. 7). Additionally, recovering financial markets in the Middle East provide encouraging signs of a favorable marketing environment ahead (p. 7). Moreover, HSBC has introduced low interest rate mortgages with low deposits, a new financial service aimed at increasing mortgage lending, “specifically for borrowers with small deposits” (p. 7). In fact, HSBC is now offering mortgages for as much as 90% of the total property value, a development with important and positive ramifications for its strategic positioning in the marketing environment of financial services (p. 7).

From a marketing perspective, it is abundantly clear that the recession and the regulations, such as the Dodd-Frank Act, that were formulated in response to it, have fundamentally and dramatically changed the strategic landscape. The macro-environment of economic and social trends has moved away from investment banking in an atmosphere of lax regulations, and towards commercial deposit funding in an environment of costlier, but also more watchful, regulation (Ennew & Waite, 2007, p. 72). Industry regulation and consumer protection are both stricter and more diligent in a climate still recovering from the shell-shock of the recession; ergo, HSBC must take all of this into account in its marketing (p. 73). As HSBC has itself said in the past, the most important and foundational thing is for the customer to have faith in the HSBC brand: financial services are often difficult for consumers to understand, such that even in the event of poor performance they may have trouble distinguishing between poor performance or failure of due diligence on the part of the company, or a run of bad luck or some other misfortune for which the company cannot be held responsible (p. 133).

What HSBC needs to do in order to succeed in this competitive landscape is to engage in a positioning strategy of product differentiation (Ehrlich & Fanelli, 2012, p. 33). The market for commercial deposits is competitive, and the credit card market is still on the mend: what HSBC needs to do is to distinguish itself by dint of the kind and quality of the financial services products that it offers (p. 33). HSBC needs to ensure that it is delivering the best value to its consumers for their time, money, and—above all else—trust. In the competition for consumer trust, customer service matters, precisely because it gives the institution a more human face. By way of example, consumer banking was itself transformed by a customer service revolution: from a marketing landscape where only small banks had friendly, personal customer service, while large banks were impersonal, to a landscape where large-scale chain banks flourished by differentiating themselves from the competition with their small-bank-style friendly customer service (p. 33).

In the competition for customers, HSBC and other financial institutions cannot afford to ignore customer service (Ehrlich & Fanelli, 2012, p. 33). Better customer service and better financial services products will enable HSBC to differentiate itself effectively from the competition (pp. 33-35). As Nagdeman (2009) explained, customer service is part of the fundamental change of approach taking place in the financial services industry: away from a rather undisciplined approach to a multidisciplinary, ecumenical, visionary approach, one that incorporates customer service as well as a strong vision of the organization’s mission and functions (pp. 13-14). Responding to the needs of the marketplace is becoming, more than ever, about understanding what customers want and how best to deliver it to them (p. 25).

Assignment #3: Dear (Editor), For your consideration I present my paper (title), which examines the strategic marketing environment of the banking industry. I have focused on industry titan HSBC, drawing on Datamonitor SWOT analyses for both HSBC Finance and HSBC Holdings. The case of HSBC demonstrates both the opportunities and the threats that today’s financial institutions face, in an environment wherein the old paradigm of investment banking has effectively collapsed, to be replaced by an emphasis on commercial deposit funding. Fundamentally, the argument of the paper is that to succeed in this new marketing environment, HSBC and other financial institutions must regain the trust of consumers, which necessitates a focus on customer service and quality financial services products. Such a focus will enable HSBC to succeed in this new competitive landscape of finance. I thank you for your time.

References

Cox, P. (2006). Should a financial service provider care about trust? An empirical study of retail saving and investment allocations. Journal of Financial Services Marketing, 12(1), pp. 75-87. DOI: 10.1057/palgrave.fsm.4760055

Datamonitor. (2011a). DATAMONITOR: HSBC Finance. Household International, Inc., pp. 1-9. Retrieved from http://www.search.ebscohost.com/

Datamonitor. (2011b). DATAMONITOR: HSBC Holdings, Plc. HSBC Holdings, PLC SWOT Analysis, pp. 1-8. Retrieved from http://www.search.ebscohost.com/

Ehrlich, E., & Fanelli, D. (2012). The financial services marketing handbook (2^nd ed.). Hoboken, NJ: John Wiley & Sons.

Ennew, C., & Waite, N. (2007). Financial services marketing. Burlington, MA: Elsevier, Ltd.

Ferguson, T., & Johnson, R. (2009). Too big to bail: The ‘Paulson Put,’ presidential politics, and the global financial meltdown: Part I: From shadow financial system to shadow bailout. International Journal of Political Economy, 38(1), pp. 3-34. DOI: 10.2753/IJP0891-1916380101

Mulhern, R. (2011). The Dodd-Frank Act: Its implications for change in the banking industry. Journal of Payments Strategy & Systems, 5(2), pp. 125-133. Retrieved from http://www.search.ebscohost.com/

Nagdeman, J. (2009). The professional’s guide to financial services marketing. Hoboken, NJ: John Wiley & Sons.

Appendices:

Appendix I:

HSBC Holdings Plc:

-Total revenues $80,014 million FY 2010 (increase of 1.8% over FY 2009).

-Operating profit $16,520 million FY 2010, compared to $5,298 million in FY 2009.

-Net profit $13,159 million during FY 2010, compared to $5,834 million in FY 2009.

Staff: 295,061 (Datamonitor, 2011b, p. 4).

HSBC Finance:

-Revenues of $6,752 million FY 2010 (increase of 17% over FY 2009).

-Operating loss: $2,906 million in FY2010, compared with $10,098 million in FY 2009.

Competitors: Barclays Plc, Citigroup, Inc., and The Royal Bank of Scotland Group