History of Banking in the United States

In the United States the first bank was the Bank of North America, established (1781) in

Philadelphia. Congress chartered the first Bank of the United States in 1791 to engage in general

commercial banking and to act as the fiscal agent of the government, but did not renew its

charter in 1811. A similar fate occur the second Bank of the United States, chartered in 1816 and

closed in 1836 (Infoplease, 2010).

Prior to 1838 a bank charter could be obtained only by a specific legislative act, but in

that year New York adopted the Free Banking Act, which permitted anyone to engage in

banking, upon compliance with certain charter conditions. Free banking spread rapidly to other

states, and from 1840 to 1863 all banking business was done by state-chartered institutions. To

correct such conditions, Congress passed (1863) the National Bank Act, which provided for a

system of banks to be chartered by the federal government (Infoplease, 2010).

In 1865, by granting national banks the authority to issue bank notes and by placing a

prohibitive tax on state bank notes, an amendment to the act brought all banks under federal

supervision. Most banks in existence did take out national charters, but some, being banks of

deposit, were unaffected by the tax and continued under their state charters, thus giving rise to

what is generally known as the “dual banking system.” The number of state banks expanded

rapidly with the increasing use of bank checks (Infoplease, 2010).

Since the establishment of the Federal Reserve System, federal banking legislation has

been limited largely to detailed amendments to the National Bank and Federal Reserve acts. The

Glass-Steagall Act of 1932 and the Banking Act of 1933 together formed an extensive reform
measure designed to correct the abuses that had led to numerous bank crises in the years

following the stock market crash of 1929 (Infoplease, 2010).

Several deregulatory moves made by the federal government in the 1980s diminished the

distinctions among various financial institutions in the United States. Two major changes were

the Depository Institutions Deregulation and Monetary Control Act (1980) and the Depository

Institutions Act (1982), which allowed savings and loan associations to engage in often-risky

commercial loans and real estate investments, and to receive checking deposits. By 1984, banks

had federal support in buying discount brokerage firms, and commercial banks were beginning to

acquire failed savings banks; in 1985 interstate banking was declared constitutional (Infoplease,

2010).

Such deregulation was blamed for the unprecedented number of bank failures among

savings and loan associations, with over 500 such institutions closing between 1980 and 1988.

The Federal Savings and Loan Insurance Corporation (FSLIC), until it became insolvent in 1989,

insured deposits in all federally chartered and in many state-chartered savings and loan

associations (Infoplease, 2010).

In the 1990s interstate banking was finally allowed, creating nationwide banks of

unprecedented size. But Congress's attempt to force banks to make home loans to people who

had limited creditworthiness, while encouraging Fannie Mae and Freddie Mac to take these

dubious loans off their hands so that the banks could make still more of them, created another

crisis in the banking system that is now playing out (Wsj, 2008).
 Further deregulation occurred in 1999, when Congress overhauled the entire U.S.

financial system. Among other actions, the legislation cancelled officially the Glass-Steagall Act,

thus allowing banks to enter the insurance and securities businesses. Supporters predicted that

the measure would permit U.S. banks to diversify and compete more effectively on an

international scale. Opponents warned that this deregulation could lead to failures of many

financial institutions, as had occurred with the savings and loans (Infoplease, 2010).

In the last decades of the 20th century, computer technology transformed the banking

industry. The wide distribution of automated teller machines (ATMs) by the mid-1980s gave

customers 24-hour access to cash and account information (Infoplease, 2010).

Nature of the Industry

Banks safeguard money and provide loans, credit, and payment services such as checking

accounts, debit cards, and cashier's checks. Banks also may offer investment and insurance

products. The variety of models for cooperation and integration among finance industries has

diminished some of the traditional distinctions between banks, insurance companies, and

securities firms. But then also the banks continue to maintain and perform their primary role that

is accepting deposits and lending money (Bls.gov, 2010).

Driving forces for the Industry and the Impact of Technology on the Banking Industry

The developments in information collection, storage, processing and transmission and

distribution technology and changing interest rates have influenced all aspects of banking

activity and regarded as the main driving forces for the changes in banking industry and among
all these driving forces technology is the main driving force of Banking Industries these days

(Oppapers, 2010).

Technology impact the banking industry in the following ways.

• Technology is influencing competition and the degree of contestability in banking.

Due to the development of technology, bank’s superiority in information is dropped.

Entry barrier have been declining, new competitor have emerged. Some financial

products and services have become more transparent and commodities, customer show

willing to unbundled the demand for financial products and services, all these lead to a

more competitive market environment. Due to lowered entry and exist and

deconstruction, for some sub-financial markets, banking industry is becoming more

challenging these days.

• Technology influences economies of scale as Competitive pressure force banks to lower

their cost. Bank seeks to get economy of scale in bank procession instead of being a big

bank. Bank seeks to secure the optimal business structure, and secure the competitive

imperative of economy of scale. There are other options to get economy of scale,

including joint venture and confederation of financial firms. Small firms also can get

economy of scale by outsourcing, i.e. buy in economy of scale (Oppapers, 2010).

Value Chain in the Banking Industry

The banking and finance value chain is unique because it is based entirely around the

production of services. In this industry, the "raw materials" are lenders and borrowers

(individuals and corporations) that appear at both the beginning and the end of the chain. The
products provided by this industry are divided between credit intermediaries (both depository

and non-depository) and financial intermediaries.

The value chain is used to identify activities that are core capabilities and sources of

competitive advantage as well as activities that are non-core activities (Lamarque, 1999). The

process view of the value chain enables on the one side the allocation of resources. On the other

side the chain view mitigates to identify how different activities interact with each other, i.e.

what outcomes one activity delivers to another activity and what transaction costs would result

from in sourcing, outsourcing etc. This process view also seems to support that the value chain is

better capable to analyze activities with regard to sourcing decisions than a listing of value

activities or a Strategic Business Unit analysis (Lamarque, 1999).

The banking business is customer driven and therefore the banking value chain starts

from the market side. The value process starts with advertising a newly developed product or

service to the market. Secondly, the product/service is sold to customers, e.g. the credit contract

will be signed by the customer. In a third step the product will be provided to the customer, e.g.

the credit amount is paid to the account of the customer. Finally the corresponding transactions,

like payments, clearing & settlement transactions etc. will be processed.

Value chain for the Banking Industry is divided into the two main activities that include

primary activities and the supporting activities. Primary activities include marketing, sales,

product, and transaction. Supporting activities include risk management, technology

development, human resources and firm infrastructure.

 The value activities from products include the product development process as well as the

provision of the product itself, e.g. the payment of the credit amount to the client. All products of

a bank can be included under the terms funding, investment and services. The financial

intermediation business is reflected in the “funding” and “investment” parts of the product

activities. The transactions part of the value chain is processing products and services offered by

the banking industry. The transaction activities include

• payment transactions for national and international payments.

• clearing and settlement transaction for securities, derivatives and credits,

• trading transactions for the exchange and price determination of securities and

derivatives.

• custody transactions including infrastructure, e.g. custody of securities and deposit box

facilities.

These primary activities are enabled by the supporting activities infrastructure,

technology and human resources (Canals, 1993, 199; Porter, 1985). Additionally to these three

supporting activities, risk management plays a vital role in banking and has to be added

(Lamarque, 1999).

Porter’s 5 Forces in the Banking Industry

Threat of New Entrants

The average person can't come along and start up a bank as it requires a lot of

Government regulations, but there are services, such as internet bill payment, on which

entrepreneurs can invest their money. Banks are fearful of being forced out of the payments
business, because it is a good source of fee-based revenue. Another trend that poses a threat is

companies offering other financial services. What would it take for an insurance company to

start offering mortgage and loan services? Not much. Also, when analyzing a regional bank,

remember that there is possibility of a real threat when a mega bank enters into the market

(Porter, 2008).

Power of Suppliers

The suppliers of capital might not pose a big threat, but the threat of suppliers tempting

away human capital does. If a talented individual is working in a smaller regional bank, there is

the chance that person will be lured away by bigger banks, investment firms, etc (Investopedia,

2010).

Power of Buyers

The individual doesn't pose much of a threat to the banking industry, high switching costs

is one of the major factors that affect the power of buyers. If a person has a mortgage, car loan,

credit card, checking account and mutual funds with one particular bank, it can be extremely

tough for that person to switch to another bank. In an attempt to lure in customers, banks try to

lower the price of switching, but many people would still rather stick with their current bank. On

the other hand, large corporate clients have banks wrapped around their little fingers. Financial

institutions by offering better exchange rates, more services, and exposure to foreign capital

markets- work extremely hard to get high-margin corporate clients (Porter, 2008).

Availability of Substitutes

As we know that there are plenty of substitutes in the banking industry. Banks offer a

suite of services over and above taking deposits and lending money, but whether it is insurance,
mutual funds or fixed income securities, chances are that there is non-banking financial services

company that can offer similar services. On the lending side of the business, banks are seeing

competition rise from unconventional companies for example Sony, General Motors, and

Microsoft If car companies are offering 0% financing, why would anyone want to get a car loan

from the bank and pay 5-10% interest? (Investopedia, 2010).

Competitive Rivalry

The banking industry is highly competitive. The financial services industry has been

around for hundreds of years and just about everyone who needs banking services already has

them. Because of this, banks must attempt to lure clients away from competitor banks. They do

this by offering lower financing, preferred rates and investment services. The banking sector is in

a race to see who can offer both the best and fastest services, but this also causes banks to

experience a lower return on investment. They then have an incentive to take on high-risk

projects. Larger banks would prefer to take over or merge with another bank rather than spend

the money to market and advertise to people (Investopedia, 2010).

Bank of America

Bank of America is a bank holding company based in Charlotte, North Carolina. As of

December 31, 2008, the company had almost $2.5 trillion in assets and $240 billion in

shareholders' equity pro forma for the Merrill Lynch acquisition and preferred stock issuance,

with 6,139 banking centers in 30 states servicing approximately 54 million consumer and small

business relationships. Global Consumer & Small Business (including Card Services) comprises

about 50% of earnings, Global Corporate & Investment Banking comprises about 30% of

earnings (including 10% from Capital Markets & Advisory Services, 8% from Business Lending,
and 12% from Treasury Services), and Global Wealth Management comprises about 15% of

earnings (Bank of America, 2010).

Bank of America’s mission is to direct funds to the people who not only are served by

their institution, but who also are positioned to serve themselves by contributing their energy and

expertise in the areas most critical to community health (Bank of America, 2010).

Bank of America has different goals for different set of people. For customers and clients,

Bank’s goal is to increase satisfaction and loyalty by providing the best value and service. For

associates, Bank’s Goal is to create a workplace in which all associates can excel and rewards

are based on results. For shareholders, Banks goal is to produce strong and consistent financial

returns by attracting and retaining customers and clients and by deepening relationships in all our

businesses and lastly for communities, Bank’s goal is to strengthen the communities through

community development banking and environmental initiatives.

Long term objectives at Bank of America includes increase market share, increase

customer base, increase profitability, reduce overhead expenses and reduce the service fee to the

minimum. Reducing the service fee helps bank to attract more and more customers which in turn

reduce the overhead expenses and helps in increasing profitability as well as the market share of

the company (Bank of America, 2010).

Bank of America’s Dominant Economic Features

Bank of America Corporation is a financial services company, the largest bank holding in

the United States, by assets and the second largest bank by market capitalization. Bank of

America serves clients in more than 150 countries and has relationship with 99 percent of the

U.S fortune 500 companies. There are so many rivals of Bank of America. There are so many
competitors like Wells Fargo Company, Wachovia Corporation and Citigroup financial services.

Bank of America is dominated greatly by product innovation. Technology is the main factor that

is dominating the industry. Bank also provides wide variety of products and services. Various

types of accounts and credit cards are provided by Bank of America. The Bank is also affected

by demand and the supply conditions prevailing in the industry. Bank of America also enjoys

economies of scale due to its strong learning and experience effects.

Bank of America’s Driving Forces

Bank of America’s driving forces includes increasing globalization, emerging new

internet capabilities and applications, product innovation, marketing innovation, diffusion of

technical know-how across more companies and more countries and regulatory influences and

Government policy changes. Every country is favoring Globalization these days and because of

this competition is increasing day by day. The internet capabilities and applications are also

increasing day by day. Though the company has been succeeded in doing banking online but still

the bank needs to do the same for attracting more and more customers. The Bank has to do

aggressive marketing and also have to provide various promotional schemes to cater the needs of

the people.

Bank of America is affected directly by market conditions. For example, changes in

interest rates could adversely affect net interest margin - the difference between the yield the

bank earns on assets and the interest rate it pays for deposits and other sources of funding -

which could in turn affect earnings. Market risks include fluctuations in interest and currency

exchange rates, and equity and futures prices. Such risks affect loans, deposits, securities, short-

term borrowings, long-term debt, trading account assets and liabilities, and derivatives.

Key Success Factors

 Key success factors for Bank of America includes effective communication, maintaining

customer loyalty, internet banking education, constant customer service monitoring and various

other promotional schemes. Bank of America provides knowledge to the customers regarding

internet banking. The ability to maintain the customer service is very strong at Bank of America.

Providing promotional schemes to existing as well as to the new customers is also one of the Key

success factors for the company.

Five Forces Model

As demonstrated through Michael Porter’s Five Forces Model, Bank of America is

currently facing its greatest amount of competition in the domestic consumer market from Wells

Fargo Corporation. Wells Fargo Corporation is expanding day by day and poses the greatest

threat to Bank of America’s attempt to penetrate U.S. consumer market. There are several small

competitors in the market also like Washington Mutual and many others. These smaller

institutions are competing for market share held by Bank of America. This is significant because

the U.S. consumer banking market is already heavily saturated, and there is no room for new

growth. Any increase in market share seen by one company will be due to a decrease in market

share held by another company. As such, the more competitors in the market place, the more

difficult it will be for Bank of America to secure the greatest portion in the domestic consumer

banking market.

Product Life Cycle

In examining the position of Bank of America in the product life cycle, it is important to

analyze its location from two different viewpoints. First and foremost, analyzing Bank of

America from a domestic standpoint, Bank of America is currently operating in the maturity

stage of the product life cycle. This assessment has been reached through analyzing the three
main components of Bank of America’s consumer banking: Personal Banking, Credit Card

services, and Loans and Mortgages. With competitive pricing, Bank is able to target a large

potential audience for their products. Offering the credit card services with significant product

line depths, Bank of America is able to actively market their credit card services to a wide target

audience, and in doing so capture a highly diversified market composed of consumers with a

wide array of preferences. Bank of America’s branches and its wide location of ATM’s allover is

the major factor for its domestic growth. Talking from the international viewpoint about Bank of

America, Bank of America products and services are at the growth stage of the product life

cycle. Although the bank has presence in more than 20 countries, still the bank can expand its

operations in some of countries.

Industry Rankings

Below mentioned are the Top 10 U.S. banking companies in earnings in which Bank of

America ranked number 1 and had earnings of $5233 millions in 2009 followed by Wells Fargo

earnings of $4959 millions and also mentioned the Top 10 U.S Banking Companies in equity

ending June 30, 2009.

TOP 10 U.S. BANKING Top 10 U.S. Banking Companies

Companies
(09 EARNINGS*)
$ in Millions
1. Bank of America ($5233)
2. Wells Fargo ($4959)
3. Goldman Sachs ($4377)
4. JPMorgan Chase ($2591)
5. Citigroup ($2034)
6. U. S. Bancorp ($640)
7. PNC ($525)
8. Bank of NY Mellon ($498)
9. BB&T ($392)
10. M&T Bank ($95)
(in equity @6/30/09)
$ in Millions
1. Bank of America ($255,162)
2. JP Morgan Chase ($ 154,766)
3. Citigroup ($154,168)
4. Wells Fargo ($121,382)
5. Goldman Sachs ($62,813)
6. Morgan Stanley ($46,586)
7. PNC ($29,467)
8. Bank of NY Mellon ($27,304)
9. Capital One ($25,323)
10. U.S. Bancorp ($24886)
 Bank of America also ranked number 1 in assets ending June 30, 2009 and ranked

number 2 while comparing the market capitalization ending June 30, 2009.

TOP 10 U.S. BANKING TOP 10 U.S. BANKING

Companies
(IN ASSETS @ 6/30/09)
$ in Billions
1. Bank of America ($2,254)
2 JPMorgan Chase ($2 027)
3. Citigroup ($1,847)
4. Wells Fargo ($1,284)
5. Goldman Sachs ($890)
6. Morgan Stanley ($677)
7. PNC ($280)
8 U S Bancorp ($266)
9. Bank of NY Mellon ($203)
10. SunTrust ($177)
Companies
(IN MARKET CAP @ 6/30/09)
$ in Billions
1. JP Morgan Chase ($134)
2 Bank of America ($114)
3. Wells Fargo ($113)
4. Goldman Sachs ($77)
5. Morgan Stanley ($39)
6. Bank of NY Mellon ($35)
7. U.S. Bancorp ($34)
8. State Street ($23)
9. PNC ($18)
10. Citigroup ($16)

Competition

Bank of America competes across each of its three main business segments, and is the

largest company in the U.S.-focused Global Consumer and Small Business Banking segment.

The company continues to be the leading issuer of credit cards through endorsed marketing and

largest holder of deposits nationwide. Internationally, Bank of America has significant room for

improvement, with its US market share being 6 times greater than its non-US market share

(Wikinvest, 2010).

2009 data Assets ($B) Revenue ($B)

Bank of America $2,300 $113
J P Morgan Chase (JPM) $2,000 $101
Citigroup (C) $1,800 $106
Wells Fargo (WFC) $1,200 $51.7

Bank of America is the largest deposit holder in the U.S. by market share, a position that

the firm has held for years. Its merger with Countrywide Financial (CFC) has allowed it maintain

its dominance over the Wells Fargo - Wachovia (WB) merger (Wikinvest, 2010).
 Domestic Deposit Market Share (%)
2004 2005 2006 2007 2008
Bank of 10.07 10.36 9.54 10 11.33
America
Wells Fargo 4.90 4.64 5.20 4.2 10.33
J P Morgan 4.18 7.07 7.47 7.4 9.85
Chase

In first half of 2009, there was total lending $995 billion in which Bank of America got

20.5% share. Bank of America was ranked number two and Wells Fargo was ranked number one

with a share of 23.5%. Lending of $995 billion includes the major lending in the retail sector that

was 47%, wholesale include 16%, and Correspondent include 37%.

Strengths

Bank of America’s size, scale and global presence enable it to provide customers and

clients with a full range of world-class products and services, delivered with convenience and

efficiency. Bank of America’s businesses have leading market shares in every major sector of the

industry, creating the opportunity to build broad, deep relationships and to generate strong,

balanced earnings. Innovation in products and services give it a major strength in attracting more

and more customers. Bank of America has a culture of service excellence and the skills,

technology and infrastructure to back it up. Bank of America boasts the country's most extensive

branch network; with more than 6,100 locations covering some 30 states from coast to coast

(Bank of America, 2010).

Weaknesses

The wholesale banking operations of the Bank of America are weak as compared to the

retail banking operations. Bank of America is not quick as compared to smaller and regional

operators. The bank takes time to enforce new functions and products and services in its banking.
Bank of America has lost the ability to compete head-to-head in an environment where it lacks a

size advantage.

Opportunities

Expanding internationally is a great opportunity for Bank of America. Through its

expansion in developing countries like India and China, helps in increasing revenue. Bank of

America is always working to improve satisfaction, reduce problems and create solutions. Bank

of America is attracting and retaining associates who can lead in a global organization, and is

building on leading staffing, training and leadership development programs. As Bank integrates

businesses, it means bringing together a wide spectrum of products and services for customers

and clients while improving quality, accuracy and efficiency and lowering costs. Investment in

technology and innovation to improve productivity and better meet associate, customer, client

and shareholder needs (Wikiswot, 2010).

Threats

Financial economic turmoil posed as great threat to Bank of America. Though the country

has overcome from recession, but still it has not been overcome up to the full extent. As we all

know that globalization is increasing and due to this more and more banks are entering the U.S

market. So the increased competition posed a major threat to the Bank of America. Increase in

restrictions in capital market and Government regulations also posed threat to Bank of America

(Wikiswot, 2010).

Financial Analysis

Earnings per Share

Earnings per share are the earning available to equity shareholders after paying dividends

and all other expenses. Earnings per share are calculated by the formulae: Net earnings available
to equity shareholders/number of shares. Bank of America has maximum earnings in 2006 and

minimum in 2008. The earnings have decreased substantially for the bank because of the

recession.

Diluteearningper share
$4.59
$4.04
$3.55 $3.64
$3.30
$3.05

$2.24 $2.28 $2.30

Return on Total Assets 2000

1999 2001 2002 2003 2004 2005 2006 2007 2
Return on total assets is how much penny a organization earn by investing a dollar in

asset. Return on assets is an indicator of how profitable a company is before leverage, and is

compared with companies in the same industry. Since the figure for total assets of the company

depends on the carrying value of the assets, some caution is required for companies whose

carrying value may not correspond to the actual market value. Return on assets is a common

figure used for comparing performance of financial institutions (such as banks), because the

majority of their assets will have a carrying value that is close to their actual market value. Bank

of America earns maximum return on total assets in 2002 which was 1.46 and minimum return

on total assets in 2008 which was 0.22.

 1.46 1.44 1.44
1.34 1.3
1.28
1.12 1.16

0.94

0.22

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Note– Resultsarein percentages

Future Expectations of the Banking Industry

As we all know that internet and online banking are buzzwords in the financial world

today, all over the country non-traditional financial institutions are popping up with virtual and

Internet banks. These financial institutions don’t have any physical location except in the cyber

universe. The banks must have to get into the cyber space and move away from traditional bricks

and mortar locations. By doing this, banks will get a presence on the internet and banks will also

make changes in order to compete in customer retention in response to the competition from

non- traditional companies.

Today and in the future, banks will be referred to as financial service companies.

Deregulation has allowed for banks to merge with other institutions and has erased the borders

that kept them apart. Typical savings and loan companies have already become obsolete and

movement into other financial areas is necessary. Banks will continue the trend set by CitiGroup,

Merrill Lynch and others to become “one stop” financial shopping.

 Technology will also be a major emphasis amongst financial service companies as it

provides a new outlet to consumers all across the globe. How effective the Internet will be

remains to be seen, but it is already causing major changes. Those corporations that can make e-

commerce succeed will be successful and those that cannot will face major obstacles. The credit

card industry alone will provide billions of dollars in income through the Internet for financial

companies and there will be a lot of competition

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