September 2019 Q30

[rlsrachaellouisesmith]

Hello again,
This question asks about structural and strategic barriers to entry. Do you think this would be an acceptable answer for a structural barrier?
A structural barrier in place for new retail banks entering the industry would be brand loyalty and trusted firms. If a new firm was able to set up, it is unlikely a consumer would place their money with a bank they had never heard of before.
Many thanks

 

[Richie Holway]

Hi Rachael,

Structural barriers to entry are those that exist naturally due to the characteristics of an industry. This means they would include things that banks are simply doing just to operate. For example, banks hold capital because of regulation, but not to make it harder for new banks to establish in the market, and so capital would be a structural barrier to entry. Similarly, banks have in place sophisticated and expensive IT software to enable them to process transactions and protect their customer's money, but not to make it harder for other banks to enter the market, so this would be another structural barrier.

Brand loyalty, on the other hand, is something that the bank would be actively trying to maintain/improve, in order to keep its customers and prevent them from wanting to change banks, and also to make it harder for new banks to enter the industry so that they face less competition. Brand loyalty might therefore better fit the description of a strategic barrier to entry.

Note that the textbook does mention that in reality, the distinction between the two types can be blurred, and it might be possible to argue this in a different way. But there are certainly some other structural barriers that are much less blurred. As well as the capital and IT infrastructure examples mentioned above, others include the need for regulatory approval and the need to put in place good data governance processes.

Thanks,
Richie