The rules of business strategy: why Spanish retail banks are among the best in the world

<a href="http://www.ie.edu/eng/sobreie/sobreie_expertos_detalle.asp?id_exp=273">David Allen</a>. Professor. IE Business School

21 March 2007

With the recent acquisition of Compass Bank by BBVA, Spain continues to demonstrate that its retail banks are among the best in the world. But what are the factors that led to this superiority?

When Banco Bilbao Vizcaya Argentaria recently acquired Compass Bank of the US for $7.3 billion, it was just the latest move by a Spanish bank to expand in the Americas. And while BBVA was closing the deal in February, Banco Santander was proclaimed the most profitable bank in Europe.

Neither event is surprising. During the 1990s, when I was partner in a retail banking consultant, I marketed our company as a technology transfer firm responsible for taking Spain’s best practices and selling them to the rest of Europe. One service we offered was to bring bankers from other countries to Spain for study tours. A hot place to go was Barcelona, where La Caixa, Spain’s largest savings bank, would show off its state-of-the-art technology and its groundbreaking credit card products.

How did Spanish banks become the world’s best?

I was also invited to give talks on Spanish banking, where I would explain the latest sector trends. Inevitably, I would be asked how Spain, which is hardly an industrial superpower, could end up having such powerful retail banks. After all, Banco Popular has won several Euromoney Awards, while Caja Laboral was the first bank in Europe to have ATMs in all its branch offices, and medium-sized Bankinter offered a wide range of innovative products. And how, visitors wondered, could Spain have the lowest-priced mortgages in the world? How did all of this happen?

The answer, I told them, had little to do with luck, but rather was linked to what we in management call institutional theory. This theory seeks to explain how market and non-market forces in the environment create organizational structures that are copied by a wide range of companies. In the case of Spanish banking, it helps explain how so many outstanding retail banks could develop simultaneously in the same competitive environment. First, let´s set out the basics of what made--and what makes--Spanish retail banks so outstanding.

1. In the 1960s and the 1970s, as Spain rapidly improved its educational system, many well-trained young people entered the job market. They found an underdeveloped industrial sector with few outstanding companies and an emerging retail banking sector serving the growing demand for housing and personal financial services. Thus the increasingly buoyant retail banking sector attracted much of the country´s best and brightest business talent.

2. Throughout the 1980s, the laws regulating Spain’s real estate and fiscal system encouraged banks to open branch offices. Because of Spain’s high population density and mild weather, most of the residents of Spanish towns and cities were able to shop and run errands by foot. This routine included a stop at the bank on the way to the store. Having a bank office on every corner made the task all the more easier.

3. The structure of the retail-banking sector encouraged competition. In each of the 50 Spanish provinces, competition was intense between national private retail banks (Santander, Hispano, Central, BBVA, Banco Popular, etc.) and the local savings banks. The advantage for the local savings banks (owned by non-profit foundations) was that public employees were required to domicile all their paychecks with them. The advantage of the national retail banks was that they offered better prices and superior service to small and mid-sized businesses. In addition, a third network of rural cooperative banks competed with both retail and savings institutions for customers.

4. La Caixa and Caja Laboral, regional savings banks with a strong commitment to Catalan and Basque economic development, decided in the 1980´s that technology was the key to the future. This subsequent push forward was aimed, in large part, at taking better advantage of the paychecks being domiciled. In the 1990´s, customers became accustomed to paying income tax directly through the bank: Suddenly, Spain took a giant leap forward in technology.

5. Emilio Botín, the chairman of Santander, decided that the style of clubby banking was a hindrance to success. In 1989, he started what was then known as "The War of the High-Yield Account”. This interest-bearing account offered near money market rates on savings deposits, and its introduction brought an end to the era of cosy relations among the national banks. Other banks had no choice but to follow its example. Indeed, they needed to enhance efficiency and improve service if they wanted to survive. The lesson learned here was that one person can lead an entire sector. Perhaps the theory that best explains such events is Schumpeter´s "creative destruction". But a competitive environment enables--but it does not ensure-- individuals with such innovative ideas to appear on the scene.

6. Spain became the leader in South America. Not since the Medici have banks from one country effectively become leader in a market not their own (The case of the English in Asia is quite different). This is a remarkable feat, comparable to the U.S. conquest of the world film market. Tackling Latin America was a collective decision made within the sector and supported by the Spanish government. This decision has led Santander and BBVA to become leaders in the South American market.

The recent incursions of BBVA and Santander in the U.S. usher in a new era in Spanish retail banking. Both the risks, and the possible rewards, are great. BBVA´s shares declined 3.9% on news of its US acquisition, in large part because investors doubt the bank can add value to Compass, a well-managed retail bank. On the other hand, this analyst recommends a buy.

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