Porter Five Forces: Banking and Wells Fargo

Porter’s Five Forces model of analyzing any industry marketplace first assesses the overall level of competition of the industry actors, the threat of substitutes, the bargaining power of consumers, the bargaining power of suppliers, and the threat of new entrants into the marketplace (Maverick, 2020). Clearly, the banking industry at present is intensely competitive. Even the most casual observer of a typical city, suburban, or even rural area will see many banks making offers to potential customers, spanning from free checking accounts, to low interest rates on refinancing mortgages, or higher rates on CDs (Maverick, 2020). There are many small and regional banks. Wells Fargo is one of four major banks in the United States—JPMorgan, Citibank, Bank of America are the others—with a national presence (Maverick, 2020).
For these four banks, competition is intensive, and there is also the threat of some substitute products, including credit unions and other investment firms that permit consumers to engage in most basic banking functions. There is also often very low transaction cost switching from bank to bank, although switching one’s direct deposit paycheck from one bank to another, or IRA, may be a hassle, and some investment products such as mortgages or CDs can likewise force a consumer to remain with a bank for a specific duration.
The new online banking environment makes it possible for people to have banking accounts at branches that are not even a presence in their area. It also makes it easier for consumers to compare rates of different banks, and choose the best one that suits their needs. Wells Fargo, in other words, must constantly be competing for the trust and attention of its clients, and cannot assumed they are locked into a relationship with a particular bank. PayPal, Venmo, and other forms of electronic payment have significantly cut into the revenue derived from checking accounts, and for many consumers, done away with the need for traditional banking accounts entirely (Maverick, 2020). The lure of a free checking account, which used to compel many people to switch banks, is less likely to do so. GoFundMe and soliciting angel investors online have enabled many startups to eschew seeking a loan from the bank to begin a new business.
It is true that consumers have little power in the sense that one consumer shifting an account to another bank has minimal impact upon a large bank’s bottom line, particularly that of Wells Fargo (Maverick, 2020). On the other hand, corporate clients and high net worth clients can have a significant impact upon industry revenue. Most banks attempt to attract new clients with sign-up offers like free checking accounts and a promise of low transaction fees, although Wells Fargo was embroiled in a scandal involving creating fraudulent accounts for clients that significantly eroded many customers’ trust in the bank (Maverick, 2020).
The banking industry is unique in that consumers are effectively the suppliers of the bank in the form of revenue. Again, corporate clients and higher income investors can have a significant impact upon the bank’s future (Maverick, 2020). Employees would also be considered a supplier of necessary services to the bank. Although the economic environment may vary from location to location, bank employees can usually find work relatively easily at the locations of different rivals, at least at the lower levels of employment. Finally, in terms of the threat of new entrants, although this was considered relatively low, again, the presence of online money transfer firms substantially increases the likelihood of new actors entering the industry to challenge the four major firms, including Wells Fargo.
Reference
Maverick, J.B. (2020). Analyzing Porter’s Five Forces on JPMorgan. Investopedia. Retrieved from: https://www.investopedia.com/articles/markets/020916/analyzing-porters-five-forces-jpmorgan-chase-jpm.asp