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On barriers to entry

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Founder and director of financial and investment education website JustOneLap.com, Simon Brown.
Founder and director of financial and investment education website JustOneLap.com, Simon Brown.

I was hosting a webcast presented by Keith McLachlan of Integral Asset Management on an introduction to fundamentals and he reminded me of something I have written about before – barriers to entry for competitors. But he added some extra thoughts that are well worth repeating here.

Firstly, those traditional barriers to entry are often legal. This is when a license is required which the state doesn’t hand out all that often. Casinos are examples. We could have dozens of them in any city, but to make them profitable and hence attractive for operators, the state limits the number of casinos and new competition in the same geography is unlikely.

Banks are also an example as they require not only a large amount of start-up capital (which is a barrier itself), but also a rigorous approval process by the South African Reserve Bank.This protects customers, but also protects the existing banks. Now sure, we have seen several new entrants over the last few years, but it is not a mad gold rush situation where a new bank opens every other month.

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