Analysing the marketing environment
4.3 The macro-environment
The macro-environment is concerned with broad general trends within the economy and society. The macro-environment is typically of much greater relevance when considering the development of broad strategies, while the market environ- ment is much more important when considering the development of specific business/product strategies. Traditionally, the analysis of the macro-environment was referred to as PEST or STEP analysis, where:
● PEST = Political, Economic, Social, Technological
● STEP = Social, Technological, Economic, Political.
More recently, these acronyms have been extended to include, for example:
● STEEP = Social, Technological, Economic, Environmental, Political
● SLEPT = Social, Legal, Economic, Political, Technological
● PESTLE = Political, Economic, Social, Technological, Legal, Environmental.
These different acronyms simply serve as an easy way of remembering which factors to cover. What is most important is that any analysis of the macro- environment is comprehensive and includes all the factors likely to affect an organization. The following discussion is structured around the PEST frame- work, for simplicity. This framework is shown in Figure 4.2 and discussed in more detail below.
Political
Economic The organization Technological
Social/cultural
Figure 4.2 The macro-environment.
4.3.1 The political environment
The term ‘political environment’ is used to cover a range of issues, including party politics, the political character of the government itself, and also the legal and regu- latory system. The financial services sector is, perhaps, one of the more politically sensitive sectors of any economy because of its role in the economic development and economic well-being of a country (explained in Chapter 1). The risks, complex- ities and importance associated with financial services also mean that it is one of the most heavily regulated sectors of an economy.
The political character of a government, and the potential for change, can have important implications for business both nationally and internationally. Some polit- ical parties may be more favourable to the business community than others, and this attitude is often reflected in legislation and regulation. The importance of govern- ment macro-economic policies is mentioned later, but there is a wide range of government activities that affect the financial sector, including sector-specific policy formulation, legislation, decisions on government spending, and partial privatiza- tion. For example, the policy of privatizing a range of previously state-owned indus- tries in the UK during the 1980s is widely credited with having changed public attitudes to share ownership and created demand for small-scale share-dealing services.
Two aspects of the political environment, defined in its broadest sense, are of particular relevance to financial services – namely, industry regulation and consumer protection. Regulation generally refers to a set of rules and legal require- ments that guide the operation of the industry and the conduct of firms within the industry. As such, it is specific to financial services. Financial regulation is typically concerned with licensing providers, guiding the conduct of business, enforcing relevant laws, protecting customers, and preventing fraud and misconduct.
Consumer protection refers to a regulatory system which focuses specifically on the rights and interests of consumers in their interactions with businesses and other entities. Typically, consumer protection legislation applies across all sectors of the economy and, consequently, there will be some overlap between industry-specific regulation and economy-wide consumer protection systems.
Some aspects of financial services regulation were discussed in Chapter 1. In the UK, for example, the Financial Services Authority is the highest single financial services regulator with responsibility for building market confidence and public awareness, providing consumer protection and reducing financial crime across the sector.
Its rule books and directives provide detailed guidance on all aspects of the conduct of business, and including product design and marketing. It is responsible for the regulation of deposit-taking, mortgage lending, insurance, investments and financial advice. However, Britain is also a member of the European Union, and financial services providers must also be aware of, and understand, the regulations relating to the single European market in financial services.
In contrast, in the US the responsibility for regulation is effectively split between the Securities and Exchange Commission (SEC), which regulates all aspects of the securities industry, and both the Federal Reserve System (FRS) and the Federal Deposit Insurance Commission (FDIC), which regulate most of the banking sector.
(The term ‘security’ is usually used to refer to any readily transferable investment and includes company stocks and shares, corporate bonds, government (sovereign)
bonds, mutual funds and a range of other financial instruments. Typically, such products are represented by some form of certificate.) The SEC has as its mission ‘to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation’ (SEC, undated). It places particular emphasis on informed decision- making, and requires all public companies to disclosure any meaningful information so that that all investors have access to the same pool of knowledge on which to base purchase decisions. The Federal Reserve is the central bank of the US and has, as one of its responsibilities, the supervision and regulation of the banking and financial system. It has particular responsibility for domestic banks that choose to become members of the Federal Reserve, and for foreign banks. The FDIC is the primary regulator of banks that are chartered by individual states but which choose not to be members of the Federal Reserve. Its primary function is to promote public confidence in the financial system of the USA, and one of its best-known policy instruments is deposit insurance (to a maximum of ($100 000). A similar split arrangement operates in Australia, where the Australian Prudential Regulation Authority (APRA) is responsible for the supervision of banks, insurers, credit unions, building societies, friendly societies and superannuation funds. The APRA seeks to establish and enforce appropriate standards to create an efficient, stable and competitive financial system and, as with the FSA, relies on an approach which is essentially self-regulation – i.e. senior management in regulated institutions is responsible for compliance with APRA requirements. The Australian Securities and Investments Commission (ASIC) is responsible for regulating financial markets, securities, futures and corporations in order to protect customers, investors and creditors.
Regulations relating to consumer protection cover a wide range of topics, including (but not necessarily limited to), information provision (particularly adver- tising), product liability, privacy rights, unfair business practices, fraud, misrepre- sentation, and other forms of interaction between businesses and consumers.
Regulations for consumer protection vary considerably across countries. In the UK, national priorities regarding consumer protection are set by the Office of Fair Trading (OFT) and enforced locally by Trading Standards offices throughout the country. The OFT is also responsible for regulating one major area of financial services that is not covered by the FSA – namely consumer credit. All businesses offering credit or lending to customers have to be licensed by the OFT and are required to make certain specified types of information available to consumers to aid with decision-making and to clarify their roles and responsibilities. Similar systems operate in many other countries. For example, in the US, the Federal Trade commis- sion and the US Department of Justice have responsibility for enforcing federal legislation, and there are parallel organizations at state level. In Australia, the Trade Practices Act 1974 and related consumer protection legislation is enforced by the Australian Competition and Consumer Commission (ACCC), and its work is supplemented by equivalent state level agencies. In Singapore, the Consumer Protection (Fair Trading) Act of 2004 is a major component of the consumer protection regime. Its aim was to create a much fairer trading environment by identifying a series of unfair trading practices where consumers would have recourse to the law.
With growing economic integration, the analysis of the political environment must also consider the role of supra-national organizations such as ASEAN
(the Association of South East Asian Nations), APEC (the Asia Pacific Economic Community), NAFTA (the North American Free Trade Area) and the EU (European Union). As Case study 6.2 in Chapter 6 outlines, the EU has been active in trying to create a single market for financial services in Europe with a view to increasing competition in enhancing consumer choice. Similarly, the moves by ASEAN and the General Agreement on Trade in Service (GATS) to liberalize the financial sectors of South East Asian economies is often cited as one of the factors that contributed to the need for much greater consolidation in the domestic banking and insurance sectors.
Specifically in the banking sector, the Basel Committee on Banking Supervision, which comprises central bankers from thirteen countries, has developed interna- tional standards for measuring the adequacy of a bank’s capital with a view to creating greater consistency in the management of risk across banking systems.
The resulting standards, enshrined in the Basel II Accord, can have important impli- cations for lending decisions.
Of course, when thinking about the political and legal environment we should also recognize other more general provisions that might affect the operation of financial services organizations, including health and safety legislation and employ- ment legislation. Not all aspects of work-related legislation and regulation will directly affect marketing, but good environmental analysis will at least allow aware- ness of their existence and their potential impact.
4.3.2 The economic environment
The economic environment covers all aspects of economic behaviour at an aggre- gate level, and includes consideration of factors such as growth in income, interest rates, inflation, unemployment, investment and exchange rates. Government economic policy (both actual and intended) is typically a central component of the macro-environment because of its impact on economic performance. The nature of consumer demand for financial services will inevitably be affected by economic performance; higher levels of economic growth will result in higher levels of demand for existing financial services, as well as creating demand for new ones. The growth in equity investments by private consumers and the increased demand for mutual funds is one aspect of this change in patterns of demand. In addition to the level of income and rate of growth, the proportion of income that is saved is likely to be another key consideration. For example, the US is currently reporting a national savings rate of less than 14 per cent, with household savings at less than 1 per cent of income. In contrast, national savings rates are estimated at around 20 per cent in Europe, 25 per cent in Japan and close to 50 per cent in China (www.businessweek.com/magazine, accessed 27 February 2006). As well as affect- ing overall economic performance, the savings rate provides an indicator of the potential size of the market for savings and investment products.
Equally important macro-economic influences will be interest rates and inflation.
High real interest rates (based on the difference between inflation and nominal interest rates) may encourage savings; low real interest rates will tend to encourage borrowing. Equally, the current low interest rate and low inflation environment in the UK and the US constrains the extent to which cost increases can be passed on to consumers in the form of higher prices.
Often it is not sufficient to consider individual economic variables by themselves, as the interaction between variables can be important. It would be easy to assume that a fall in interest rates will increase demand for mortgages, but if those low inter- est rates are accompanied by either rising unemployment or falling average incomes then the expected change in demand may not materialize. Conversely, just because aggregate income rises we cannot assume that aggregate savings will also rise, because the savings decision will also be affected by other factors – including prevailing interest rates and taxation.
4.3.3 The social environment
The social environment is extremely broad and covers all relevant aspects of a society, including demographics, culture, values, attitudes, lifestyles, etc. The following discussion will highlight those aspects that may be of particular significance in rela- tion to the financial services sector.
Demographics
The demographic environment encompasses all factors relating to the size, structure and distribution of the population. The potential market for any product is affected not only by the number of individuals within the population but also by the age structure and regional distribution of that population. Although world population is growing, the pace of change in many Western economies is slow, and in some cases virtually zero. Population changes depend on both birth and death rates, and while death rates have been falling worldwide, the fall in birth rates in many economies has largely counteracted this effect. For example, the birth rate (number of births per 1000 people) in the UK was estimated at 7.80 for 2005; for Hong Kong SAR the figure was 7.26 and for the United States, 14.14 (CIA World Fact Book, accessed on-line at www.cia.gov/cia/publications, March 2006). Countries with low birth rates typically have ageing populations – a feature that may have important implications for pension products, health insurance and long-term care insurance.
In contrast, other countries are experiencing rapid growth in population, largely as a consequence of high birth rates and falling death rates. For example, Oman has a birth rate of 36.73, Pakistan has a birth rate of 30.42 and Paraguay has a birth rate of 29.43. Even allowing for falling death rates, such countries will have a very young population and potentially a very different profile of demand for financial services.
There are several other aspects of population structure that might be relevant to financial services. The regional distribution of the population, and particularly the balance between urban and rural areas, may be important – particularly so in relation to retail banking and the distribution of branches. Household structure is also relevant; in many Western economies such as the UK there has been a tendency towards a declining household size and an increase in the number of single- person households as individuals leave home but delay marriage. This trend will have implications for mortgage products and life insurance products – single mortgage-holders may feel less need for life insurance cover if they have no dependants to worry about. Of course, the decline of the extended family in many parts of the world also creates greater demand for products that provide financial
support in retirement, including pensions, care insurance and equity release products.
Culture
Understanding consumer needs is central to any marketing activity, and those needs will often be heavily influenced by cultural factors. Culture is a complex idea, and is difficult to define. As a general rule, it can be thought of as a term that defines
‘how we do things here’ – it relates to how people behave, what they believe, what they value, their customs and traditions, and what is considered acceptable and unacceptable. Any type of marketing must recognize the significance of culture, and financial services are no exception. In principle, the biggest challenge that culture presents is in relation to international markets, where an ability to understand the prevailing culture and adjust and adapt to it are essential. However, an understand- ing of culture and cultural changes is also relevant in domestic markets. The nature of marketing communications, the use of colour and particular symbols can all touch on cultural sensitivities. Some countries may have a relatively homogeneous culture, while others can be very diverse. In the US, for example, marketers must be sensitive to the different heritage and cultures of the Hispanic, African and white communities. In the UK there is also considerable diversity, with significant propor- tions of the population being of south Asian or Caribbean heritage. Different cultural backgrounds may be reflected in different response to marketing commu- nications, different decision-making processes and different product preferences.
One of the strongest elements of culture is religion, and this provides a very clear example of the way in which culture can affect marketing. Paying or receiving inter- est (riba) is against the teaching of Islam, and is thus haram (unlawful). Islam forbids all forms of economic activity that are morally or socially injurious. Riba is harmful because it is seen as wealth generated purely by the ownership of money rather than by genuine economic activity. The prohibition of interest in Islamic law (Shari’ah) presents a major challenge for traditional banks, whose business revolves around interest margins, but equally presents a major opportunity for the growing number of specialist Islamic banks. Further detail about Islamic financial services is pro- vided in Chapter 10.
Other social influences
A range of other issues relating to social structures and social values may also be important for financial services providers, including changing patterns of work, changing social structures and changing values. These factors may affect the ways in which people may wish to access financial services – for example, people who are working longer hours may place greater importance on being able to access their bank accounts through ATMs, telephone banking and Internet banking. Social influ- ences may also affect the types of financial services demanded. Thus, for example, with an increasing value being placed on education, prospective parents may seek financial services that allow them to save for their children’s education. With more people travelling internationally, demand for internationally recognized debit and credit cards will continue to increase. Where consumers are concerned about environmental or ethical issues, there may be a demand for financial services that
are provided in a way that is consistent with these values. This trend has been touched on in reference to the earlier discussion on Islamic finance, but its impact may be broader still if consumers seek to invest in stocks or mutual funds which have a ‘green’ (environmentally friendly) dimension.
4.3.4 The technological environment
Technology essentially refers to our level of knowledge about ‘how things are done’.
That is to say, understanding this aspect of the marketing environment is much more than simply being familiar with the latest hi-tech innovations. Technology affects not only the type of products available, but also the ways in which people organize their lives and the ways in which goods and services can be marketed. In the financial services sector, the single most important aspect of technology has been ICT – infor- mation and communications technology. ICT has had a dramatic impact on the delivery of financial services, the types of financial services that can be offered and the ways in which those services are marketed.
Financial services may now be delivered via ATMs, by telephone and via the Internet (by either PC or Wap phone). ATMs were first introduced in the US in the 1970s, and at that stage their main function was to dispense cash. As technology developed and consumer acceptance of ATMs increased, machines were developed with a much wider range of functions which allow individuals to undertake an exten- sive range of banking activities. Customers of many banks, including ABN-AMRO, Standard Chartered and HSBC, can undertake most standard banking transactions 24 hours per day, including withdrawal, deposit, balance updates, balance transfers, and bill payment and passbook updates. The ICICI Bank in India is one of a grow- ing number of banks with an even wider range of services offered via their ATMs, including top-ups to pre-paid mobile phones, charity donations, calling cards, mutual fund transactions and even donations for blessings at selected temples. The development of ATMs has certainly provided much greater flexibility for consumers in terms of their access to bank services; it has also served as an additional market- ing tool, as banks use the ATM transaction to promote other services.
The telephone has a long history of use in the purchase and management of finan- cial services, supporting interpersonal interactions and paper-based transactions (for example, customers telephoning to obtain an insurance quotation). Phone banking was probably the next major initiative in service delivery, with the first systems appearing in the mid-1980s. Most financial services providers now offer or are developing phone banking systems using a mixture of automated voice recognition outside of reasonable working hours, and personal contact during reasonable work- ing hours. In the UK, First Direct was launched in 1989 as the country’s first purely phone bank, and rapidly became one of its most successful. In another innovation, First Direct launched text-messaging banking and is currently the UK’s largest provider of this service.
A growing number of financial services are now available on-line. The develop- ment of the worldwide web provided a major impetus for the development of computer-based banking. Until this point in time, and with a few notable excep- tions, computer-based banking was largely restricted to corporate markets. In the mid-1990s the early adopters launched their Internet-banking services in the