Fifth Third Bancorp (FTB) is a diversified financial services company based in Ohio. It was organized in 1975; the company is the indirect owner of the Fifth Third Bank. The Bancorp, primarily through the bank, competes for deposits, loans, and other banking services in its principal geographic markets. In addition, Bancorp competes with investment banks, Mortgage dealers, and insurance companies. FTB’s significant business revolves around the Fifth Third Bank (FITB); it is the largest bank in the Midwestern US.
It is the thirteenth-largest commercial bank in the US (Federal Reserves, 2020). The bank firmly believes in equality and has a strong stance against it. It has committed $2.8 billion as a part of the Executive Diversity Leadership Council’s (EDLC) fund for the Accelerating Racial Equality, Equity, and Inclusion initiative (Fifth Third Bank, 2021). Porter’s five forces model is used to assess the business and financial risk Fifth Third Bancorp is exposed.
Competitive Rivalry in The Market
The financial services industry is highly competitive, and the same situation prevails in the US. The bank’s significant competitors are Bank of America (BOA), Wells Fargo (WF), and JP Morgan Chase. For the financial year 2020, it has reported a revenue of $8.4 billion and earned a profit of $1.4 billion, its shares price increase by 50% after post-COVID recovery in 2021. It is ranked at 358th place in Fortune global index (Fortune, 2021). BOA earned revenue $93.7 billion and a profit of $17.8 billion in 2020 (Fortune, 2021).
WF made a profit of $19.5 billion on revenue of $103.9 billion in the same year (Fortune, 2021). JP Morgan Chase was the highest-ranked US bank on the index at the 17 number; the bank has reported revenue of $142.4 billion and profit of $36.4 billion (Fortune, 2021). Therefore, the US financial services industry is highly competitive.
Threat of Substitutes
The threat is assessed to be low to moderate for the traditional institutes. The threat is perceived to be high in better alternatives, state of completion, and growth potential. The upcoming hybrid companies are challenging the financial services industry, those leveraging technology to compete with the existing banks. They have put the incumbents under serious pressure by proving a better alternative product. Fintech will bring a massive change in the banking industry and force traditional banks to adapt (Chen et al., 2017).
However, the only side for the fintech companies is that they offer one-off products, whereas traditional banks offer bundle services. However, their sudden implosion has put the industry under acute stress, and they are responding by either acquisition or generic growth. Therefore, in the short-term horizon threat of alternatives remains low to moderate for conventional financial services institutes.
The Threat of New Entrants
The financial services industry has its industry-specific limitation that discourages newcomers, thus decreasing the threat of new entrants. Major caveats include the stringent regulatory framework, high capital requirement, and established incumbents. After the 208, financial crisis the system has grown more stringent, and the compliance cost has increased enormously, affecting the industry. From an analysis, total noninterest expenses in the banking system increased after 2010 by an estimated $64.5 billion per year, ranging from a low-end estimated increase of $58.7 billion to a high end of $86.1 billion per year (Hogan, 2019).
The industry is capital intensive, and this factor has less impact on the breakout company as most companies entering the sphere are fintech companies, and there are many funding options through venture capital. Another discouraging aspect is the presence of mega entities operating in the industry. Therefore, the threat of new entrants is moderate.
Bargaining Power of Buyers
In the financial services industry, consumers have higher bargaining power. The buyers’ power mostly depends upon the state of competition, availability of better alternatives, switching cost, and buyers’ concentration. The buyers are not concentrated and therefore do not pose the risk of collective bargaining. However, the competitive state of the industry has provided consumers with more options. Fintech has immense growth potential with an annual growth rate of around 24.8% (Medium, 2020); this has increased user options.
The digital era has enabled companies to offer personalized services with improved customer services; fintech startups use that to their advantage, which has increased expectations, and consumers are negotiating for better services. Low switching costs and products are similar at the core with no real differentiation, and it allows the customer to switch among service providers quickly. Therefore, buyers have higher bargaining power.
Bargaining Power of Suppliers
The supplier’s risk is assessed to be moderate in the industry. It is directly proportional to the importance of supplies, the nature of supplies, suppliers, concentration, and the risk of forward integration. The vital sources of supplies are human resources, institutional investors, and retail investors. The risk of forward integration is low in the industry because it is difficult for the suppliers to move into the industry. The retail customers do not have high bargaining as they alone cannot affect the business.
The individuals aspire to work in the industry and usually do not have much leverage. The institutional investors bring large chunks of funds and have caveats associated with investments; they cover their risk by seeking higher risk premiums and therefore hold higher bargaining power. When suppliers know their importance, they can exercise higher bargaining power (Dess, 2006). Therefore, suppliers have moderate to high bargaining power.
References
Chen, Z., Li, Y., Wu, Y., & Luo, J. (2017). The transition from traditional banking to mobile internet finance: an organizational innovation perspective-a comparative study of Citibank and ICBC. Financial Innovation, 3(1), 1-16.
Dess, G. G., Lumpkin, G. T. and Eisher, A. B (2006). Strategic Management. Text and cases. International edition. London: McGraw-Hill.
Federal Reserves. (2020). Large Commercial Banks. Available at: https://www.federalreserve.gov/releases/lbr/current/
Fifth Third Bank. (2021). Diversity Statement. Available at: https://www.53.com/content/fifth-third/en/personal-banking/about/diversity-at-fifth-third/diversity-statement.html
Fortune. (2021). Bank of America. Available at: https://fortune.com/company/bank-of-america-corp/fortune500/
Fortune. (2021). Fifth Third Bancorp. Available at https://fortune.com/company/fifth-third-bancorp/fortune500/
Fortune. (2021). JPMorgan Chase. Available at https://fortune.com/company/jpmorgan-chase/fortune500/
Fortune. (2021). Wells Fargo. Available at: https://fortune.com/company/wells-fargo/fortune500/
Hogan, Thomas L. 2019. Costs of Compliance with the Dodd-Frank Act. Issue brief no. 09.06.19. Rice University’s Baker Institute for Public Policy, Houston, Texas.
kauflin., J. (2020). The 10 Biggest Fintech Companies In America 2020. Forbes. Available at: https://www.forbes.com/sites/jeffkauflin/2020/02/12/the-10-biggest-fintech-companies-in-america-2020/?sh=cb52e5a1259f
Medium. (2020) Fintech vs Traditional Banks: Cooperation or Competition?. Available at: https://medium.com/finwintech/fintech-vs-traditional-banks-cooperation-or-competition-93852e6a7d31