Market share trap

During my banking career, few times I faced with the situation that market share as a primary business goal led to negative consequences on profitability and business growth (which is controversial). I call this phenomenon market share trap. If it repeats, it means that it deserves certain attention.

Basically, what is it? Market share trap in banking is unreasonable chase for (usually unrealistic) market share goal (volume, number of deals) which leads to margin erosion and/or risk charge increase and has negative implications on the profitability and business in the long run.

Being number one in any field, besides intention to win the market and pull-out competitors from the mind of customers also sounds good to management and investors. This “good” often becomes “too good”. Banking, especially Retail, is specific due to number of initiatives needed to improve market position by making sales processes more efficient, choosing the right pricing, service models & products, creating effective CRM campaigns, working on customer education, optimising reporting, pushing IT development. These processes require time and that may be one of the reasons why market share growth through “slightly” tinier margins and “slightly” higher risk cost have turn out to be so attractive.

Excessive discounting ruins bank’s reputation. Why? This phenomenon hinders the value of the brand and common people often read it as a kind of a weakness of the bank (underestimated power of word-of-mouth). Lifetime of the booked deal is another side of the story and margins booked now will remain in the portfolio for the time being. So consequently, profitability is suboptimal. Margin erosion is manifested through disbursed loans with lower prices, which defer from the list price, usually in unstructured way (high dispersion of pricing points), uncontrolled way (e.g Sales approves discounts + no profitability targets) and utilized above all reasonable levels (from personal experience, everything above 20% of the discounted volumes is hardly defendable).

In a situation with multiple players on the market, appetite for the fast growth often means that risk criteria for the acquired clients should be lower and it leads to higher risk charge. Usually, this process takes 6-12 months of intensive growth. Then, risk measures will become stricter for the next 1-2 years (name it) and where the bank stays today, some other bank will be soon. Recovery can take months and years.

To conclude; market share is legitimate business goal in banking, but it must be anchored with proper margin and risk charge levels. If it is anchored properly with these two barbells, then defining the desired market share level will be more realistic and without negative effect on the profit. It is a tiny line between shortcut and side-track.