III - RETAIL AND SERVICE BANKING

Summary

Some international banks have branches abroad that compete with the local banks for the traditional retail banking business. Thus, we can find the large British banks in South Africa and Kenya; Canadian banks are in the Caribbean; banks from England and Japan are in California; U.S. and French banks are in some Latin American and Caribbean countries.

These banks often introduced modern banking to these countries at an early stage of economic development. Since the end of World War II and the growth of economic nationalism, these banks have been on the retreat. In some cases they were forced to close down by legislative actions. In others more subtle tax measures were used to encourage the development of a competitive, domestically owned and operated banking industry, which reduced or ultimately drove out these foreign banks.

All this history has a simple analytical explanation. At an early stage of economic development local entrepreneurs did not have the technical know-how or human capital to establish and operate modern banks. The banks in the developed countries brought this know-how and human capital from their home operations, using well established and proven managerial, marketing, accounting and other procedures. However, these sources of comparative advantage eventually became accessible to domestic entrepreneurs in the developing countries, either through education abroad, the imitation of foreign banks or purchase from consultants. At such a point, the innate advantages accruing to local entrepreneurs became dominant, and it was natural that they should eventually come to dominate the industry. In the case of some British banks, their continued operations in countries like South Africa and Kenya are British only in name. They have almost complete local autonomy and are run dominantly by local people with very limited perspectives on the global maximization of the parents' profits.

The growth of foreign retail banking in California in recent years has a slightly different explanation. Its origin stems from the ability of banks to offer differentiated packages of services appealing to specialized segments of consumers. Thus, Japanese banks in California appeal to Americans with Japanese backgrounds and others with similar tastes.