Acquiring a bank? Six key things you’ll need to focus on

A wave of consolidation is sweeping the banking industry. In the last few months, JP Morgan bought First Republic. UBS purchased Europe’s Credit Suisse. And HSBC purchased the UK arm of SVB.

Acquisition is a great way for banks who want additional punching power to ride out current market turbulence. And it gives all banks the opportunity to diversify revenue streams (which mitigates risk), elevate strengths, compensate for weaknesses, expand into new segments or geographies, deliver against business growth objectives, and leapfrog the competition.

But in a rapidly evolving industry marked by high-interest rates, a tight labor market, and widespread jitters, today’s acquisitions need to happen quickly, run smoothly, and deliver clear and immediate value. Otherwise, investors may wince at the decision and divest, and customers might get fed up and jump ship. The right strategy and operating model underpinned by advanced digital technologies can help the transition go smoothly.

Manu Aggarwal, a partner in Everest Group’s business process services practice, agrees. “Heightened volatility in the industry demands quick action amongst the banking community,” Aggarwal says. “As financial institutions move quickly with M&A decisions, their technology and operations teams need to match the pace to deliver against the stated outcomes.” Here are six key things that acquiring banks need to do:

1. Pay early attention to customer retention

Polling done for a Wall Street Journal article suggests that, after a deal, half of the acquired bank’s customers take some action to lower their engagement with their new bank. This could mean reducing their balances held, closing certain products, or even leaving the bank entirely. Because deposits are the first source of liquidity, this could mean real trouble for the bank.

So early and sustained customer engagement is essential. To achieve this, acquiring banks need a clear understanding of the channel, product, and engagement preferences of their new customers.

Advanced digital technologies can help banks to obtain this critical customer insight. For example, cloud-based journey optimizers — especially those with built-in, real-time journey mapping and analytics capabilities — enable banks to pull together information about each customer from multiple internal and external data sources and consolidate it into a single customer record. This empowers banks to create customer personas, obtain insights into customer needs, behaviors, and preferences, and get a full view of the customer journey across bank touchpoints. Likewise, customer data management solutions that break down data silos can help banks run marketing campaigns that are relevant, contextual, and personalized.

Conversely, if banks use a one-size-fits-all approach, customers who may already feel undervalued can begin to feel misunderstood too.

2. Use data to realize the value of the deal

Data is the lifeblood of modern banking, and that’s doubly true during the early stages of post-acquisition. At the start of a merger, the challenge of discovering data is acute. Meanwhile, failure in discovery leads to poor customer experience, significant inefficiencies, and inaccurate reporting. Acquiring banks should recognize that it takes time to create trust in data integrity. And they should start early.

First, build a unified data platform with an integrated data set. Then, automate the discoverability of data and analytics assets across both financial institutions, and perform a rationalization review to strip out extraneous data assets and tools. Next, train AI models early so that transition-focused chatbots and interactive voice-response systems are ready to hit the ground running on day one of cutover. It’s also worth setting up systems that enable traceability of data origin and consumption to improve your reporting accuracy from the word “go.”

3. Hold onto talent to hold onto knowledge

A Massachusetts Institute of Technology study shows that one-third of acquired employees leave within their first year at the new company. Current market conditions are likely to make this exodus even worse as inflationary pressures lead employees to seek higher-paying jobs to keep up with the heightened cost of living. When talent leaves for greener pastures, there is an outflow of critical institutional knowledge. This could be devastating to the new bank’s understanding of its purchased customer base and have a knock-on effect on customer retention. And in a tight labor market, the already expensive process of replacing staff is even costlier.

So what are some of the most critical things you can do to retain talent?

• Enhance the employee experience. It’s important to keep employees happy, especially during a transition. One way banks can do this is by applying advanced digital technologies in new and creative ways. For example, most banks have customer-facing chatbots by now. But few realize they can use the same, underlying cloud-based technology — conversational artificial intelligence — behind the scenes to improve the agent experience in their call centers. And a recent study from the National Bureau of Economic Research finds that generative AI boosts worker productivity and retention among call center agents by providing suggestions for empathetic responses and input on problem-solving in real time.
• Upskill employees. Training is also important, particularly when it comes to upskilling newly acquired employees. Banks should take advantage of readily available resources. For example, Genpact has opened to the public parts of its highly successful continuous learning platform, Genome, developed in partnership with EdCast, which provides access to more than 1,500 hours of free courses.
• Communicate well. The importance of setting expectations for all new and existing employees cannot be overstated. Be transparent: tell them what your goals are for the merger and explain how it might have an impact on them.

4. Simplify business operations and processes immediately

Integrating operations and processes between the acquired and the acquirer is a job of rationalization. But this must be done thoroughly and quickly. Otherwise, there will be an overlap between the two institutions, which creates a drag on the business until full assimilation completes.

Historically, banking M&A has followed a “lift and shift” model, where the effort to simplify has been downstream. But with inflation creating immediate cost pressures, there is a compelling case to begin simplification of the broader business immediately.

Take Santander as an example. After entering the UK through a series of acquisitions of high-street banks, the bank implemented a new operating model and automated many of its processes. In just one year, Santander UK boosted customer satisfaction by 5% , increased the number of mortgage applications it processed by 20%, accelerated account closures in its business banking division by 30–35%, drove a 25% increase in productivity, and lowered its cost-to-income ratio by 10%.

“In turbulent environments, banks are best served by prioritizing the processes that have been pre-standardized,” says Aggarwal. “Such processes can help drive immediate business value and usually there are numerous such contenders that have a strong set of best practices that can be quick and easy to execute against.”

5. Use the tech integration effort to modernize

Getting the infrastructure and technology of the new entity sorted out very likely presents the greatest threat to meeting transition timelines and budgets. There are lots of decisions to make here, many of them critical, and virtually all of them eventually connected to customer or employee experiences. Tech stack, core banking systems, data strategy, and more are all in play. The typical approach is to quickly move the acquired firm onto the acquirer’s systems, but thinking more deeply about it may have benefits. After all, the transition represents a golden opportunity to modernize the entire entity by kicking off much-needed transformation or adopting best practices from either bank, regardless of its position in the deal.

Aggarwal adds, “Historically, banks have implemented technologies with limited line of sight into the final outcomes. M&A offer a great opportunity to look at the tech investments of both entities and translate them into well-defined levers that can help achieve business value.”

6. Overshoot your obligations and controls for a while

There’s no grace period for acquiring banks to get their new house in order. They need to ensure that the transitioning book meets their stringent standards, including relevant know-your-customer and anti-money laundering obligations.

Remaining in your regulator’s and auditor’s good graces is essential, and M&A efforts should come with a temporarily heightened focus on governance and oversight to ensure the integrity and completeness of all regulatory considerations. There’s no such thing as too compliant, so meet with the regulator more frequently throughout the process and set up a major incident response team to manage unforeseen issues that might crop up.

If the collapse of SVB has taught our industry anything, it might just be that — while it’s essential that banks remain compliant (and SVB was) — compliance is clearly not enough. The introduction of new regulations (and a tightening of existing ones) is likely on the horizon, so it’s important to be prepared. To boost confidence among investors and customers, acquiring banks must go beyond regulatory requirements and fulfill the spirit, not just the letter of the law.

Time for a new perspective

Acquiring banks are always looking to hold onto customers and partners, achieve cost synergies, and make sure the transition period isn’t too lengthy or expensive. But they should be adding another objective to this list: using the transition period as an opportunity to improve across the board. This is a chance to take a second look from a different vantage point at the way the bank’s been working. For example, banks could use their combined data differently to keep customers happy with more targeted and tailored products, introduce intelligent automation to reduce rote work and encourage employees to stay, or simplify processes that have long been too knotty. M&A deals aren’t just about porting people and processes over to your old way of working – they’re a time to gain fresh perspective and offer something new.

For more practical tips on M&A, listen to our Banking on Change podcast series entitled Managing banking consolidation effectively. Listen now .

By Anu Sachdeva , global head of banking services and solutions, Genpact