19 August 2008
Regional differences exist in the accessibility of banking services, but municipal features affect service availability more than geographical location. There are clear bank group-related differences in the efficiency of local banks. This information emerges in Essays on technological development and competition in local bank markets, a doctoral thesis in the economics field by Aki Koponen, M.Sc. (Econ & business adm.). The doctoral thesis will be examined at Turku School of Economics on Tuesday, 26 August 2008.
The subjects of Aki Koponen’s doctoral study are the regional development of banking operations, relationship between competition and efficiency in the banking sector, and the competitive advantages of the banks.
The research is divided time-wise into two. Differences in branch office services-related accessibility and the concentration of banking operations were examined during the period 1995–2001, i.e., the interval during which the targeted reductions in the branch office networks occurred. Efficiency differences amongst local banks and competitiveness were studied during the period 2002–2006. The objects of the study were Finland’s municipalities and bank groups that functioned locally: OP Bank Group (OP-ryhmä), Local Cooperative Bank Group (Paikallisosuuspankit) and the Finnish Savings Bank Group (Säästöpankit).
OP Bank Group’s local banks enjoy competitive advantage
Competition creates efficiency, and the absence of competitors results in inefficiency in the banks’ activities. The banks located in the countryside were more inefficient than others. With respect to local banks, the study also noted bank group-related differences. The Finnish Savings Bank Group proved to be the most effective as a group, whereas the least effective local banks were part of the Local Cooperative Bank Group.
According to the study, OP Bank Group’s member banks encounter lighter competition than the other local banks.
“This may be affected by the banks’ various services. Interest yield income revenues are lower at the OP banks than at the local cooperative and savings banks. Due to geographical concentration, the operational areas of the OP banks are smaller and have, on average, fewer closely located competitors. Relative to the other local banks, the OP Bank Group indeed appears to enjoy a competitive advantage. Additional research is nevertheless on the way,” Aki Koponen vows.
Banking services more accessible in West and East Finland
The distribution of bank office services is uneven in Finland. Though the municipally based differences are taken into consideration in the numbers of residents, surface area of the municipality and taxable income, accessibility to bank branch services shows regional discrepancies. Branch offices in North and East Finland are fewer in number than in West and South Finland. Generally speaking, however, the features of the municipality affect service availability more than the geographical location.
”This study does not yet offer a final reason for the lower number of banks in North and East Finland. The market structure may be a result of stringent competition, as a result of which the market does not have any room for many actors. The lack of proximity is compensated in this case by more favourable prices for services and more advantageous interest rates for clients,” Mr Koponen reasons.
Reduction in bank branch networks ended
After the national bank crisis, the Finnish banking sector has developed rapidly. The utilization of information and communication technologies has increased explosively, which initially led to the contraction of branch office networks. The location of branch office services and the production of financing services have concentrated on regional centres. With regard to routine services, the new technologies and services based on its beneficial utilization resolve the location problem of bank offices.
On the other hand, it was noted in the study that branch office network reduction has ended, and the number of branch offices has even increased.
“These days, many kinds of services connected with investment and savings are offered in bank offices, and they again have a significant role in the competition going on between banks,” Aki Koponen points out.
This research is to be continued in a research project funded by the OP Bank Group Research Foundation.
Online version of the doctoral thesis (pdf)