BANCO SANTANDER EXPANDING TO ROMANIA
Posted: January 5th, 2023
BANCO SANTANDER EXPANDING TO ROMANIA
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Banco Santander Expanding to Romania
Banco Santander, S.A (Santander) is a multinational company based in Madrid, Spain, operating in the financial services sector. Since its founding back in 1857, Santander has grown into the largest full-service bank in Spain with a presence in 15 countries in Europe, North America, and South America, and China. It provides retail and commercial banking services. In 2020, the company earned €44.279 billion, down from €49.229 billion in 2019. Similarly, its profits plummeted from €8.252 billion in 2019 to €5.081 billion in 2020, largely due to the effects of the on-going Covid-19 pandemic. In 2018, Banco Santander’s market share in Spain was 17%, while in 2019, it controlled 50% of the Spanish ICO financing market by processing €1.023 billion worth of loans (Aguado, 2018; Santander, 2019).
Banco Santander’s mission is “to help people and businesses prosper”, while its mission is “to be the best open financial services platform, by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities. Its values are simplicity, personalisation and fairness and its motto is All-Together-Now (Santander, 2021). The company employs 191,000 people (Santander, 2021). However, although the company has sustained a focused and aggressive expansion and internationalisation strategy, it has not ventured into Africa and the Middle East, and has insignificant presence in Eastern Europe and Asia Pacific, excepts in Poland and China, respectively (Santander, 2021). Therefore, plans to enter into the Romanian market would help Banco Santander consolidate its presence in Europe. This report analyses the prospects of Banco Santander entering Romania. It begins by justifying Banco Santander’s reasons for internationalisation into the Romanian market, followed by the strategies it would use. After that, a country analysis of Romania is conducted and a mode of entry selected. This will be followed by discussing the three problems Banco Santander is likely to face in Romania and suggested solutions for overcoming them.
Table of Content
Contents Page
Reasons for Internationalisation. 4
Strategies to Internationalise. 5
Porter’s Five Forces Analysis. 8
Threat of Substitute Products and Services. 9
Bargaining power of banking institutions (suppliers) 9
Bargaining power of banking customers (buyers) 9
Potential Managerial and Organisational Problems. 12
Organisational Coordination. 12
Suggested Solutions to Potential Problems. 14
Organisational Coordination. 14
Reasons for Internationalisation
Banco Santander’s internationalisation is driven by several reasons. Firstly, the company is experiencing intense competition from HSBC, Banco Bilbao Vizcaya Argentario (BBVA), UBS, Barclays, and Bank of China. Secondly, Spain and Western Europe, Banco Santander’s primary markets, are saturated, with 196 and 5963 banks, respectively (Norrestad, 2020). Thirdly, the company profits plummeted significantly in 2020, from 8.252 billion in 2019 to 5.081 billion, as illustrated in figure 1 (Norrestad, 2021).
Figure 1. Profitability of Banco Santander for the last 2 decades
Source: Norrestad (2021)
These profits have not risen to or above their highest amount in 2007, indicating that the bank was operating in a stagnating or mature market. This indicates that despite the bank’s responsiveness to customer trends and preferences in banking, no significant growth has been realised. Fourthly, the banking sector in Spain is highly integrated with locally owned banks operating alongside foreign ones. These banks share similar regulatory environments, tax regimes, human capital, and banking infrastructure due to their operations in the European Union. Fifthly, many banks in Spain and the European Union that adopted the cost focus strategy, realised that it may not yield the competitive advantage desired in a highly-competitive environment and have opted for the differentiation strategy.
However, according to the Porter diamond theory of national advantage, Spain possesses several comparative competitive advantages in the financial services sector (Kharub & Sharma, 2017). Specifically, regarding firm strategy, structure and rivalry, the banks in Spain undertake continuous talent development to match the high innovation and technological advancement environment. Similarly, the high population (over 19 million) and a dynamic consumer market with unique drive demand conditions in the country. Besides, the supporting industries related to the banking sector in Spain include high speed and affordable internet, and vibrant and thriving media (Gonnet, et al., 2018). Lastly, the factor conditions favouring Spain include its highly-skilled labour force, well-developed banking infrastructure, huge capital reserves and a well-developed technological innovation environment (Goerlich & Reig, 2021). These sources of comparative advantage can be utilised by Banco Santander to enter into foreign markets. In this regard, Eastern Europe remains largely untapped since the collapse of the Soviet Union and Romania presents several business opportunities to Banco Santander.
Strategies to Internationalise
Common internationalisation strategies include transnational strategy, multi-domestic strategy, global strategy and international strategy. Table 1 summarises the advantages and weaknesses of each strategy.
Table 1. Strengths and weaknesses of strategies to internationalise
| Strategy | Strengths | Weaknesses |
| Transnational | Balances efficiency and local preferences | Challenging to implement |
| Multi-domestic | Emphasizes responsiveness to local demands | Sacrifices efficiency |
| Global | Highly efficient in delivering economies of scale | Lacks responsiveness to local demands |
| International | Maintain control | Lacks responsiveness and global integration |
The transnational strategy of internationalisation is recommended for Banco Santander as it considers entry into Romania. This strategy maximizes global integration and local responsiveness. Banco Santander operates in 15 counters across 4 continents and therefore has developed a global banking network with unique domestic characteristics that makes the bank responsive to domestic demands. The bank employs a combination of international joint ventures and mergers and acquisitions to create subsidiaries abroad.
The transnational strategy can be justified using the resource-based view and strategic balancing theory. According to the resource-based view, firms should endeavour to fit their internal capabilities to the external market conditions (Tehseen & Sajilan, 2016). Therefore, the core competencies of a firm are invaluable sources of competitive advantage and should be employed as strategic assets in strategic decision-making. Banco Santander should strive for synergy between its inherent social and human capital, and exploitation of the Romanian market (Treapăt & Ivan, 2015). Similarly, according to the strategic balancing theory, organisations should seek competitive advantage by being as different as legitimately possible. Strategic differentiation minimizes competition in a new market while strategic differentiation promotes legitimacy, which is critical in a foreign market (Bundi, 2017). Therefore, Banco Santander can access high-quality resources at more favourable terms, which would lower operational risks and costs. Besides, the company already employs this strategy in other markets, and can use it to decide on the perfect timing and speed of entry into Romania (Kabongo & Okpara, 2019).
Country Analysis
The PESL and Porter’s 5 forces analysis helped gauge the attractiveness and lucrativeness of Romania to Banco Santender.
PESL Analysis
PESL framework is used to gauge the macro-environment of an industry. It addresses the external factors within a market or a country, which a firm has no control over. In this case, the PESL framework analyses the political, economic, social, and legal factors that would influence the operations of Banco Santander in Romania.
Political Factors
The two most significant political factors affecting business in Romania are political instability and institutionalised corruption. Firstly, Romanian politics are characterised by uncertainty due to the coalition government involving large and small parties. Besides, corruption is rampant, with cases of extortion, fraud, embezzlement, and bribery being regular occurrences. The distrust in and dissatisfaction with the political system play out in the public as frequent mass protests, scaring away investors. However, the gradual loss of power by the dominant Social Democratic Party (PSL) is expected to level out its political dominance, hopefully easing the political tensions in the country. Besides, Romania has forged robust relations with the international community, which should instil confidence in foreign investors. Romania is an active member of the World Trade Organisation (WTO), European Union (EU), and United Nations (UN) (ICAEW, 2021).
Economic factors
Romania is a fast-growing high-income economy boosted by foreign direct investments ($6 million in 2019), industrial exports, and private consumption. Its gross domestic product (GDP) stood at $245.4 billion and GDP per capita at $12,757.5 in 2020, despite the economy shrinking by 3.9% (The World Bank, 2021). It is considered the 43rd and 26th freest economy globally and in the European region, respectively, having risen consistently over the last decade (The Heritage Foundation, 2021). However, despite the impressive economic growth, Romania is bedevilled by high interest rates (6.8% in 2018) and high inflation (3.8% in 2019), which discourage investors and entrepreneurs from borrowing from banks (Baicu, 2019).
Social factors
Romania population stands at just over 19 million with most of them (46.11%) being aged between 25 and 54 years. In addition, the country has a high human development index (0.828 in 2019), which is higher than the global average (0.737) and has been rising consistently since the 1990s. This means that the country’s citizens enjoy high living standards and are highly educated. However, despite over two-thirds of the population living in urban areas, only a tenth of Romanian adults profess to possess good computer skills. Consequently, the country has the lowest internet penetration in the region, although mobile phone penetration stood at 52.26% in 2020. In addition, the high emigration rates of highly-skilled young Romanians out of the country, is tripping the country of its valuable labour force and shrinking the population. However, the government is investing heavily in information technology to bring the country to European standards.
Legal factors
Romania has a favourable legal environment for businesses, characterised by no restrictions on foreign investments, low and flat-rate taxation (19% and 16%. Respectively) (The Heritage Foundation, 2021). Therefore, foreign investors are treated as the local ones, enjoying equal access to resources and funding, and being subjects to similar taxes, in addition to tax incentives and no restrictions for profit repatriation.
Porter’s Five Forces Analysis
The competitive intensity and attractiveness of the Romanian financial services industry can be gauged using Porter’s five forces analysis.
Threat of New Entrants
The threat of new entrants is high. Twenty three banks operate in the Romanian market, most of which are foreign-owned, derive their capital from foreign countries, or a Romanian branches of international banks. Only 6 banks are domestically-owned, with 2 of them being state-owned enterprises. The large number of foreign owned banks and small number of domestic banks indicates that the banking environment is conducive for international investors compared to local ones.
Threat of Substitute Products and Services
The threat of substitute banking products and services is moderate. Only 60% of adult Romanians have a bank account. Besides, the diversity of banking and non-banking services offered by non-banking institutions increased the portfolio variety for clients to select from, thus creating switching risks (Laurent, et al., 2018).
Bargaining power of banking institutions (suppliers)
Banks, especially the large ones, have high bargaining power because they can leverage their financial might, brand equity, and market share to influence the clients banking and investment decisions. Some of these banks have a longstanding history in the country and therefore have developed trust and loyalty among their clientele.
Bargaining power of banking customers (buyers)
Banking customers have moderate bargaining power. The customers are fragmented across different banks and cannot consolidate their needs into a cohesive voice. Besides, the moderate uptake of banking services indicates that many Bulgarians do not trust banking institutions, particularly those associated with the government, due to their reputation of corrupt practices. This situation makes customers fearful of speaking against large institutions.
Intensity of rivalry
Rivalry is fierce, especially among the large foreign-owned and domestic banks. The Romanian banking market is dominated by Banca Transilvania, Banca Comerciala Romana, and BRD-Groupe Societe Generale, with 17.72 %, 14.43, and 11.28 % market share, respectively. Similarly, the large number of banks with less than 5% market share indicates that they are competing fiercely to make their presence felt in the Romanian market, which is yet to be saturated (Bancherul, 2020). Digitisation is one arena of competitive rivalry, with banks seeking to leverage the internet infrastructure and mobile device penetration during the ongoing covid-19 pandemic to grow their market penetration and share (Cuevas, Martin-Acena, & Pons, 2019). Sava (2021) revealed that noted that about a third of Romanians expected banks to digitize their services to circumvent the covid-19 restrictions, as illustrated in figure 2.
Figure 2. Public expectation of digitization of banking services in Romania
Source: Sava (2021)
Attractiveness of Romania to Banco Santander
The country analysis revealed that Romania is an attractive destination for Banco Santander for the following reasons. First, the financial services market is not saturated as only 60 % of adult Romanians are banked. Besides, the Romanian customer profile suits tat targeted by Banco Santander, ambitious adults requiring simple and convenient banking solutions.
Mode of entry
Banco Santander should apply the joint venture mode of entry into Romania. This requires that the bank selects a suitable partner in Romania with whom to collaborate as a single entity in its Romanian operations. In this case, the joint venture would be an independent entity created by Banco Santander and the selected Romanian company to provide financial services in Romania (Setiawan, Putri,& Jafar, 2021). Banco Santander is already well-positioned to enter into a joint venture to enter the Romanian market by upscalling the memorandum of understanding (2019) it already has with the France-based Credit Agricole Group. According to a press release by Santander UK (2019), the MOU was to allow both financial institutions access each other’s networks in several European countries, including Romania.
This initial relationship with Credit Agricole Group would pave the way for a joint venture with Credit Agricole Bank Romania because it has availed time for both companies to learn and align their management structures and styles, corporate cultures, and strategies, which is critical for a functional joint venture (Jayachandran et al., 2020). Besides, Credit Agricole Bank Romania is more experienced in the Romanian market, thus providing valuable insights to Banco Santander and saving it the resources required for a market research (Setiawan, Putri, & Jafar, 2021). Indeed, Banco Santander would save more resources from the staff training, risk diversification through sharing of loses, and separation of the joint venture entity from that of the venture partners (Parameswar, Dhir & Ongsakul, 2018).
Potential Managerial and Organisational Problems
Organisational Coordination
The joint venture entity is expected to have its own managerial team, although its decisions will be influenced by the two parent companies, Banco Santander and Credit Agricole. However, the parent companies have different management styles, some of which could conflict with the operations of the joint venture if they are not well aligned. De Backer and Rinaudo (2019) and Minbaeva et al. (2018) revealed that the reasons why organisational coordination could be a cause of joint venture failure are the lack of alignment between the objectives of the joint venture and the parent companies, lack of effective internal communication, mistrust, lack of clearly defined incentives and key performance indicators, and not developing a restructuring and evolution plan for changing business circumstances.
Cultural Incompatibility
National culture dictated the conduct of business between people from different countries. The national and business cultures of the Romanians, Spaniards and French may be incompatible in some aspects, and could create a cultural conflict that could undermine the operations of the joint venture entity. According to the cultural dimensions theory by Hofstede, national culture has 6 dimensions; restraint vs. indulgence, short-term orientation vs. long term orientation, femininity vs. masculinity, collectivism vs. individuals, uncertainty avoidance index, and power distance index (Beugelsdijk, Kostova & Roth, 2017). Besides, Shenkar et al. (2020) argued that cultural exchanges occur during business interactions, evolve continuously, and yield positive and negative outcomes.
While the national cultures of Spain and France are similar, considering that the two countries are located closely in Western Europe, that between Romania and these two countries differs significantly in the dimensions of power distance, individualism vs. collectivism, and indulgence vs. restraint. The Spaniards and French are more liberal societies compared to the Romanians. Therefore, while Romanians exhibit a tight culture in which social norms are well defined and enforced, and deviant behaviour is not tolerated, the opposite applied to the Spanish and French cultures, which are termed as being loose cultures (Beugelsdijk, Kostova & Roth, 2017). Consequently, considering the power distance index, Romanians, who are used to authoritarian leaders, may feel uneasy with a Spanish or French manager who may be less considerate of the hierarchical structures in the joint venture entity, considering that the power distance in Romania is much higher than that in Spain, as illustrated in figure 3 (Hofstede Insights, 2021).
Figure 3. Comparison of national culture dimensions between Spain and Romania
Source: Hofstede Insights (2021)
Organisational Structure
The structure of the joint venture entity may be problematic if it complicates operations and is burdensome to the joint venture partners. In this case, the joint venture should be structured as a limited liability partnership, because it enables the entity to operate like a limited company, albeit with appreciable flexibility in its legislative framework and tax obligations. In the same vein, Romanians are more accustomed to centralisation, in which decisions are taken by leaders, often with consulting their subordinates, while the Spaniards and French may be averse to centralisation, based on their national business cultures (Hofstede Insights, 2021). Therefore, while the Spanish and French managers of the joint venture would expect greater employee participation in strategy formulation and decision making, the Romanians would prefer to execute orders from the management instead. The differences in expectations between a centralised and decentralised structure of the joint venture entity is likely to foment conflict between the management and employees.
Suggested Solutions to Potential Problems
Organisational Coordination
One way of staving off conflicts in organisational coordination is involving people from both companies, who will participate in the joint venture entity’s daily operations, to partake in the negotiations. This way, the operational style incompatibilities can be identified and addressed beforehand to facilitate an organisational fit between the Spanish and Romanian partners (Dao & Napier, 2016).
Cultural Incompatibility
Cultural awareness that should lead to cultural intelligence is critical in forestalling cultural conflicts in business operations. The Spaniards at Banco Santander and their Romanian counterparts must be willing to learn about each other’s business and national cultures (Barmeyer & Davoine, 2019). This way, the cultural differences between the Spaniards and the Romanians can be well understood by either party. That should be accompanied by a respect for the diverse cultural orientations exhibited by both parties, which would lead to cultural tolerance, while avoiding being culturally offensive. .
Organisational Structure
The conflict arising from centralised and decentralised organisational structure expected by the Romanians and Spaniards, respectively, can be resolved using a hybrid organisational structure (McMullen & Warnick, 2016). This requires meticulous organisational design and implementation. In this case, creativity and financial product innovation should be decentralised, while customer data security should be centralised (Du, Kim, & Aldrich, 2016). Besides, sufficient awareness building and stakeholder engagement in decision-making to promote buy-in, and continuous effective communication to keep stakeholders abreast of the change progress is critical (Zhao & Mills, 2019). Also, clear metrics to gauge the performance of the hybrid structure must be in place to facilitate future improvements.
Conclusion
Banco Santander’s intention of entering the Romanian market is well thought out and justifiable. The bank is operating in a mature and saturated Spanish market that justifies its internationalisation intentions. Besides, it has ventured across Europe with great success except in Eastern Europe, which presents numerous unexplored opportunities. Therefore, the international joint venture mode of entry that will employ the transnational internationalisation strategy is recommended for Banco Santander’s entry into Romania because they present the highest change of success, going by the company’s previous and longstanding experience in international markets.
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