Mergers of equals are gaining in popularity, judging by the flurry of recently announced deals, but a number of tough decisions about technology have to be made during the post-merger integration phase to set up the new bank for success.
After every deal, management teams are under a great deal of pressure to realize the deal’s projected expense savings as quickly as possible. While the average industry timeline to select and negotiate a core processing contract is nine months, a bank merger team has about a third of that time—the Cornerstone framework estimates 100 days—to choose not just the core, but all software as well, and to renegotiate pricing and contract terms for the most critical systems so that integration efforts can begin.
Start with the Core
A comparison of core systems is often the first order of business. These five factors are the most relevant in determining which solution will provide the best fit for the post-merger institution:
- Products and services to be offered by the continuing bank. If one institution has a huge mortgage servicing portfolio or a deeper mix of commercial lending, complex credits and treasury management, the core system will need to support those products.
- Compatibility and integration with preferred digital banking solutions. If one or both merger partners rely on the delivery channel systems offered by their core providers, the integration team should evaluate the core, online and mobile solutions as a bundled package. On the other hand, if the selection process favors a best-of-breed digital channel solution with more-sophisticated service offerings, that decision emphasizes the need for a core system that supports third-party integration.
- Input from system users. The merger team must work closely with other departments to evaluate the functionality of the competing core systems for their operations and interfacing systems.
- Contractual considerations. The costs of early contract termination with a core, loan origination, digital channel or other technology provider can be significant, to the point of taking priority over functionality considerations. If it is going to cost $4 million to get out of a digital banking contract, the continuing organization may be better off keeping that system, at least in the near-term.
- Market trends. Post-merger, the combined bank will be operating at a new scale, so it may be instructive to look at what core systems other like-size financial institutions have chosen to run their operations.
A lot of factors come into play when the continuing bank is finalizing what that solution set looks like, but at the end of the day, it is about functionality, integration, cost and breadth of services.
Focus on the Top 20
The integration team should use a similar process to select the full complement of technology required to run a modern financial institution. Cornerstone suggests ranking the systems currently in operation at both banks by annual costs, based on accounts payable data sorted by vendor in descending order. Next, identify contract lifecycle details to compare the likely costs of continuing or ending each vendor relationship, including liquidated damages, deconversion fees and other expenses.
That analysis lays the groundwork to assess the features, functionality and pricing of like systems and rank which options would be most closely aligned with customer service strategies, system capabilities and cost efficiencies. It might seem that an objective, side-by-side comparison of technology systems should be a straightforward exercise, but emotions can get in the way.
A lot of people are highly passionate and have built their bank on being successful in the market. That passion may come shining through in these discussions—which is not necessarily a bad thing.
Working with an expert third party through the processes of system selection and contract negotiations can help provide an objective perspective and an insider’s view of market pricing. An experienced business partner can help technology integration teams and executives set up effective decision-making processes and navigate the novel challenges that may arise in realizing a central promise in a merger of equals—to create value through vendor cost reductions.
Toward that end, the due diligence process should identify about 20 contracts—for the core, online and mobile banking, treasury management, card processing and telecom systems, to name a few—to target for renegotiation in advance of the official merger date. A bank has hundreds of vendors to help run the enterprise, but it should focus most of the attention on the top 20. The bank can drive down costs through creative economies of scale by focusing on those contracts that are the most negotiable.
With its choice of two solutions for most systems and the promise of doubling volume for the selected vendors, the new bank can negotiate from an advantageous position. But its integration team must work quickly and efficiently to deliver on market expectations to assemble an optimal, cost-effective technology infrastructure—without cutting corners in the selection process and contract negotiations.
Think of this challenge like a dance. It is possible to speed up the tempo, but it is not possible to skip steps and expect to end up in the right place. The key components—the proper due diligence, financial reviews and evaluations—all still need to happen.
Download the free white paper, “Successfully Executing a Merger of Equals,” here.