Switching Cost Arise From The Asymmetry Information Between Firms And Banks

A customer is just as likely to switch financial institutions for convenient access to distribution channels as they are for product pricing or an incentive for opening a new account

Transparency is essential in a market based system, but is not necessarily a requirement for a bank-based system. In a bank based system, banks have long-standing working relationships with the companies seeking financing, and banks have on-going access to information about the firm. In a market based system, creditors and equity-holders require that financial information about companies seeking financing be available, sufficiently detailed and accurate if they are to participate in the market. This information, including audited financial statements, allows participants in the market to make

Market power in banking, for example, may, to a degree, be beneficial for access to financing. With too much competition, banks may be less inclined to invest in relationship lending .At the same time, because of hold-up problems, too little competition may tie borrowers too much to an individual institution, making the borrower less willing to enter a relationship (Claessens, 2009). More competition can then, even with relationship lending, lead to more access. Financial managers must be aware of its firm's competition and ensure a proper balance for financial

The banking industry builds and sustains Financial relationships with its consumers of all sizes to supply Financial products and services to stimulate economic growth. The industry participants produced a variety of services from savings accounts to home and business loans mortgages checking accounts and

The bank-lending channel underpins the role of banks as financial intermediaries, as their business structure is designed to serve certain type of borrowers, being small to mid-sized enterprises and households, where the problem of asymmetric information emerge \citep{stiglitz81}. According to the theory,

The banking industry has transformed in numerous ways through the ages. Financial institutions now offer a broader assortment of products and services than ever before. The banking industry’s principal purpose remains the same. Financial institutions put the public 's excess monies (deposits and investments) to work by loaning them to individuals to purchase dwellings and automobiles, to open and grow businesses, college funds for families with children, and for countless other reasons. Banks are essential to the wellbeing of our country 's economy. For millions of people residing in the United States, financial institutions are the primary election for saving, borrowing, and investing funds.

Experts point out that, ‘The pricing power of the four major banks reflects the strength of their brands and their dominant market positions. The big banks charge more for loans and less for deposits than smaller banks, hence their average interest margin is 2.2 per cent, compared with the 1.8 per cent margin of the regional banks.’

The asymmetric information theory is extended into principal-agent issues and credit rationing in the market. The theory of information asymmetry is the theoretical foundation of SME financing constraints in relation to finance providers. The critical restraint of SMEs when it comes to access to external finance is higher level of

Geographic distance between lender and borrower is another possible explanation for the effect of the banking network on small business lending. Distance acts as an obstacle for banks in assessing loan applications, and raises the opportunity cost for borrowers to negotiate for the best offers (Sussman \& Zeira, 1995, Sussman \& Zeira, 1995). Mortgage lending, although less dependent on ``soft information", benefits from banking networks as well. Ergungor (2010) finds access to physical branches promotes mortgage originations and lowers the mortgage spreads in low-to-moderate income (LMI) neighborhoods.

Compared to the deterioration of America and Europe economic situation due to the financial crisis in 2008, China’s

For this week’s case we take a look at the difficulties the company Desko is facing with its order process. Desko is an American company which produces office furniture. Desko does not only produce its products but also delivers them to their American and Canadian customers. After having received cancellations from a major customer Desko decided to further analyze its order process in order to improve this.

In the bank-firm relationship, switching cost arise from the asymmetry information between firms and banks, which gives the lock-in power for banks to gain extra rent from their customers, thus weaken the substitutability of loans offered by different banks (Shy, 2002; Vesala, 2007). In addition to the administrative costs of changing a bank account in the loan market, there are additional costs associated with information asymmetry that the current lender knows more about the quality of the firm than a potential new lender. Hence, this confidentiality allows banks to exploit their informational advantage over competitors and lock in their incumbent customers to earn higher profits on repeated lending. Switching costs in banking represents a source of rent that reduces the competiveness of the market.

Clients are more and more oriented to the more rentable channels like internet and ATMs. Virtual banks consequently deliver a lot of services but only through internet that allow to reduce costs in occupancy and salaries in order to offer better rates of interest (to 3 times better than averages). Virtual low-costs positioned banks compete against other virtual banks with good customer service, in-house costumer data and service center operations, strong management teams, a good mix of attractively priced products, and low marketing costs. It’s a price competition which includes lower margins directly.

Private banking industry has changed in a very basic way, driven by many key factors such as: free competition systems, modern developments in information technology (in particular, developments of the internet), and changing demographics. Private banks now operate in an environment shaped by increasing and shifting regulations, and in markets influenced by the uncontrolled situations of the world economy and geopolitical issues.

Intermediaries benefit from economies of scale and being able to find out information quickly and cheaply. They benefit from economies of scale because intermediaries are able to realise significant cost savings from working with a high number of customers therefore are researching about their borrowers and lenders on a wider scale. Due to the large numbers involved intermediaries can afford to employ researchers to carry out the specific job of finding out information about individual borrowers and lenders. It is deemed too expensive for individuals to monitor each other therefore it is easier to pay the bank to do it on their behalf; this is one of the main reasons why people lend and borrow via banks. Llewellyn (1999) and Heffernan (1996) explain that verification costs are also minimal as banks have access to privileged information about borrowers, especially where the bank holds the prospective borrower’s current account. Visibility of current accounts allows the bank to build up a picture of individuals owing to bank statements and specific account details. The bank will be able to identify income, spending behaviour, transactions: the car they drive, if they have a pension, if they have life insurance. This means that when transactions are completed via intermediaries the asymmetric information problems are easily solved.