The trend of forming mergers in business has become very popular in the banking industry lately. In simple terms, a merger occurs when two different firms join their operations to firm one single organization (Braggion, Dwarkasing & Moorey, 2010). One of the fundamental effects of mergers is that it benefits the business more than the public. Through mergers, businesses, and in this case banks are able to increase their market share and to reduce competition. This only works to the advantage of the business other than the public. This paper seeks to discuss the effects of mergers in the banking industry on the public especially in the United Kingdom.
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Benefits of mergers to consumers
A fundamental benefit that consumers of banking products in the UK can get include the effects of economies of scale. Economies of scales is realized when large firms benefit from the cost advantages of large scale production (Ashton & Pham, 2007). Merging of banks in the UK has enabled them to create larger firms and this synergy has created immense advantages to the consumers. Due to the large scale production of a single bank consolidated from the merging of different banks, the new firm’s operation cost reduces.
As a result, the banks are able to pass on the advantage to its consumers by providing banking services at lower prices. Large banks are able to diversify their operations and therefore they can effectively provide banking services at a lower price and also deliver sustainable returns to its investors (Braggion, Dwarkasing & Moorey, 2010).
Consequences of banking merger in the UK
Bank mergers are beneficial to the corporate customers but to the small businesses which are the majority in the UK it has negative implications (Peachey 2010). Retail customers in the UK have raised several issues with regard to the rampant mergers and one of the most dominant complaints is the deteriorating services. Due to lack of competition as the number of banks is rapidly dropping, the quality services provided has also reduced. It is anticipated that as the mergers enjoy economies of scale, the cost of banking services would reduce significantly.
However, this has not been the case in the UK since higher fees are being charged even after mergers have been formed. Another disadvantage to consumers is that familiar branch staff members are no longer available to offer services (Partington 2014). There is always the rapport created among customers and the staff which makes trading cooperation easier. When mergers occur, this rapport is disrupted as new staff members are deployed from other branches.
Effects on small businesses
Mergers are affecting the ability for small businesses to access credit facilities. With the rampant growth of small banks into one big merger are gradually robbing the small scale businesses the avenues of growth. In the UK, small banks mostly serve individuals and small scale retailers while large banks are more focused on big firms. Consumers from the lowest levels of the financial food chain are therefore the most affected by the merging trend in the banking industry.
Financial analysts warn that the trend may create another economic crisis in future. As banks compete to create mergers, the middle class and the low level businesses are gradually loosing financial support. Ultimately, a sector in the economy will b greatly affected and this may cause economic crisis. Small businesses lending will highly be reduced as result of the current mergers in the banking industry (Peachey 2010). Due to the mergers, there has been a reduced share of credit to small business (Peachey 2010).
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There are dangers involved in the trend that the banking industry in the UK has adopted. One of the major characteristic or mergers is that it is followed by major layoffs. The rampant mergers in the banking industry in Europe have contributed to the unemployment in the region. When two banks operate separately, employment is created. When they join to become one, the number of employees required reduces and this may cause a major problem in the UK (Peachey 2010).
As the majority of the people in the society lose their jobs, economic activities will be affected as well as a reduction of the GDP. Growth in the banking sector and the market concentration has caused stakeholders to consider new ways of remaining profitable in the highly competitive market. However, when adopting survival strategies, it is imperative and prudent to consider their implications from all the angles. Bankers and investors seem to be only focusing on reducing operation cost and the markets throat cutting competition (Peachey 2010).
While mergers may be good for the economy and for the growth of the industry, the market gap that is left can cause economic problems. Small banks serve certain market niches which will be adversely affected if the current merging trend persists. The credit share to small business is a major boost to the economy but as banks grow to bigger firms, this class of business will be the major casualty. This paper has outlined the advantages and consequences of mergers in the banking industry with reference to the UK.
Ashton, J & Pham, K 2007, ‘Efficiency and Price Effects of Horizontal Bank Mergers’, Center for competition policy, vol. 1, no. 1, pp. 1-31.
Braggion, F, Dwarkasing, D & Moorey, L 2010, ‘Mergers and Acquisitions in British Banking: Forty Years of Evidence from 1885 until 1925’, Mergers, vol. 1, no. 2, pp. 4-50.
Peachey, K 2010, How banking mergers affect the safety of your savings, media release, Web.
Partington, R 2014, To Challenge Big Banks, U.K. Lenders Must Merge: Real M&A, media release, Web.