Increasing the Deposit Business of Commercial Banks by Developing Strategic Alliances with the Funeral Services Industry
Chen, Miao-Sheng, Huang, Chuan-Hsing, International Journal of Management
The Statute of Funeral and Interment Management1 was passed in Taiwan on 14 June 2002. The statute establishes the legal basis for the sale of inter vivos contracts by funeral services providers and stipulates that 75% of the fees should be managed by trust agencies. As a corollary, available trust funds of banks are passively increased. This paper considers how, from the perspective of banks, strategic alliances with the funeral services industry may be actively pursued. By combining time deposit business and inter vivos contracts, a mutually interacting relationship between the bank, the funeral services provider and time deposit customer can be constructed. This practice may open up a new perspective for banks on how to stabilize time deposit business in the midst of over-competitiveness and successively declining deposit rates. Also explored in this paper is how banks may choose funeral services providers and customers as potential marketing targets. This paper also discusses how the acquisition of patent rights by funeral services providers may be enhanced to enable banks to obtain long-term returns. In contrast to the framework of discussion on strategic alliances in the U.S., Europe and Japan, which is centered on insurance companies, this paper considers from banks' point of view. This method may serve to provide a novel perspective and broaden the scope of strategic alliances.
Prior to 1989, most banks in Taiwan enjoyed excess profits due to the restriction on setting up new banks and government controlled interest rates. The 1989 amendment to the Banking Law lay open the road to the opening of a plethora of new banks and relinquished government controls of interest rates to market mechanisms. The fierce competition that ensued resulted in a marked drop in banks' return on assets (ROA). For the banking industry as a whole, ROA dropped sharply by 56.7%, from 0.60% in December 1989 to 0.26% in May 2002; while return on equity (ROE) also registered a precipitous reduction of 75.7%, from 18.5% in December 1989 to 4.5% in July 2002. In addition, due to the competition, the interest rate spread between deposits and loans was narrowed to 3.08%, according to the survey by the Central Bank of China in July 2002, a level below the U.S. or European standards. Faced with these challenges, it is imperative for banks to passively retain extant clients on the one hand and, on the other, to actively maintain stable growth of deposits by attracting fresh clients through nonprice competition. Hence, banks need to consider new strategies and perspectives with respect to ways of absorbing deposits. Strategic alliances with non-bank services then become one of the main options for banks to correct the faltering growth of deposits. The Statute of Funeral and Interment Management passed in June 2002 provides a legal basis for inter vivas contracts for funeral services. This unveils an unprecedented opportunity for diversified strategic alliances for banks in Taiwan. This paper focuses on how banks may combine inter vivos contracts with bank deposits, so as to compartmentalize and diversify the present bank deposits business.
II. Emerging opportunities for banks following legislature of the Statute of Funeral and Interment Management
The newly enacted Statute of Funeral and Interment Management is an effort to rectify an extemporaneous similar law enacted since 1983. In addition, the accession of Taiwan to the WTO in December 2001 also opened Taiwan to the impact of foreign funeral services. The main objective of the new regulation is aimed at enhancing the quality of funeral services as a whole. The statute takes into consideration contemporary needs, emphasizes both personal dignity and public concerns, and protects consumer rights. This is most exemplified in article 43 of the statute, which stipulates, "Services or commodities supplied by funeral services providers should be clearly stated in a written contract. …