The upcoming annual Russell reconstitution is undoubtedly a frequent topic of conversation and concern for smaller public banks. For these institutions and potentially many others, recent regulatory updates provide a viable alternative.
On an annual basis, a team at FTSE Russell evaluates the composition of their indices and rebalances the portfolio of the top 3,000 companies. This “annual reconstitution” can produce an unfortunate side effect: smaller companies on the lower end of an index’s minimum market capitalization threshold may find that they no longer qualify for inclusion when the threshold increases. These firms can experience a semi-annual whipsaw — sometimes they make the cut, other times they don’t.
When a company is removed from “The Russell,” index fund managers no longer hold shares in that company. In fact, a Russell Index mutual fund manager would be in violation of several rules from the Securities and Exchange Commission if they trade in a ticker that no longer included in an index that they market themselves as tracking.
In simplest terms, when a company is bounced from the Russell, it’s bounced from the $11 trillion pool of index-fund portfolios. For smaller companies that tend to be otherwise thinly traded, this can be a major problem. Many banks that were removed from the Russell at the last re-balance saw a decrease of 30% in their stock, virtually overnight.
The One-Two Punch Russell indices have a long list of securities they exclude. It is probably easier for most people to think of the composition of Russell’s US-based indices as including only public securities that are “listed” on an exchange, like the New York Stock Exchange and Nasdaq.
Maintaining an exchange listing can be a major ongoing commitment of a firm’s time and money. U.S. exchange listing fees are based on a bank’s market capitalization and total shares outstanding; listing additional shares and corporate actions incur added costs for banks.
So what happens when a listed company gets bounced from the Russell? Share prices drop because index funds begin selling positions en masse, and liquidity dries up as index funds buyers disappear. But the firm remains listed on the exchange, footing the bill for the related ongoing compliance overhead or face a de-listing. In turn, the firm ends up incurring all of the costs and reaps none of the benefits.
Where to go from here? Some estimates suggest that the minimum qualification criteria for some of Russell’s most popular indices will increase the minimum market cap from $250 million to about $299 million. For banks, this generally means over $2 billion in assets. This is an unfortunate fate for listed banks that may find themselves in the crosshairs; for dozens of others, it may mean further postponing plans for an IPO.
But an alternative does exist that smaller banks can uniquely benefit from. Recent overhauling of SEC Rule 15c2-11 positions the OTCQX Market as a regulated public market solution for U.S. regional and community banks. The market provides a cost-effective alternative that leverages bank regulatory reporting standards and can save banks around $500,000 a year compared to listing on an exchange.
Many of the banks that trade on OTCQX are under $350 million in market cap and can choose to provide liquidity for their shareholders through a network of recognized broker-dealers and market makers.
One key takeaway for management teams is that unless an institution can qualify for inclusion in the Russell and grow rapidly enough to keep up with annual reconstitutions, it may be time for them to re-evaluate the value of trading on listed exchanges.
The community bank space is consolidating at a blistering pace, but buyers may be overlooking a key consideration when thinking about mergers and acquisitions. Prospective buyers should consider how other footprints complement growth opportunities against their own, lest they make critical and expensive mistakes. In this video, Kamal Mustafa, chairman of the Invictus Group, explains why bank buyers should assess a target’s footprint, and how to value the industries and lending opportunities within a new market.
As investors increase their focus on environmental, social and governance matters — otherwise known as ESG — the acronym is also making waves when it comes to M&A due diligence, according to Bank Director’s 2022 Bank M&A Survey, sponsored by Crowe LLP. But while the ESG acronym may be a newer one to the industry, many of the issues under the broad ESG umbrella are familiar to bankers.
Numerous areas fall under ESG. These include climate risk, energy and water use, and green-focused products and investments (environmental); organizational diversity, and employee and community engagement (social); and board composition and independence, shareholder rights, and ethics and compliance (governance). Cybersecurity and data privacy are also key elements, sometimes classified as social and sometimes as governance.
A typical bank M&A announcement tends to mention cultural alignment, and many ESG elements — particularly under the social and governance umbrellas — are strongly informed by an entity’s culture. Culture frequently comes up in the annual survey; this year, 64% of responding directors and executives identify a complementary culture as a top-five attribute in a seller. When asked about assessing the strategic fit of a target, 89% of respondents overall say they’d evaluate cultural alignment.
“Anytime you talk about an acquisition from the acquirer’s perspective, culture’s a big concern,” says Patrick Vernon, a senior manager at Crowe. “Culture [and] social and governance [factors] go hand in hand.”
For the acquirer, these considerations include cultural fit, employee integration and appropriate compensation to retain talent. For example, a seller where lenders work only on commission might not be a good fit for a buyer that where commission pay may be lower or nonexistent. Understanding those elements often calls for a qualitative assessment.
“If it’s a public company, I’d want to look at the human capital management disclosure in the 10K,” says Gayle Appelbaum, a partner in the regional and community banking consulting practice at McLagan. “What are some of the highlights, features, programs, results [and] areas for focus that the seller has been involved in?”
Effective Nov. 9, 2020, the Securities and Exchange Commission requires companies to disclose “any human capital measures or objectives that the registrant focuses on in managing the business,” which would include attracting, developing and retaining talent. The SEC didn’t provide further specific guidance, and an analysis conducted by the law firm Gibson Dunn finds a lack of uniformity in disclosures by S&P 500 companies. Most of these firms include diversity & inclusion statements in the disclosure, but fewer provide hard metrics about the company’s efforts. Most disclose talent development efforts, and more than half provide general statements around recruiting and retaining talent. Less than half disclose employee engagement efforts.
Human capital management disclosures can yield clues about the quality of talent as well as their expectations around compensation, benefits and development. Can the acquiring bank effectively support the acquired employees? Can the acquirer adopt some attributes from the seller to better manage talent in their own organization?
Companies that value diversity, equity and inclusion (DE&I) may also look at the target’s progress in these areas. Bank Director’s 2021 Compensation Survey, conducted earlier this year, found 37% of respondents reporting that their banks focused more on DE&I initiatives in 2020 compared to 2019. However, 42% lack a formal program — especially banks below $1 billion in assets. Those that do track progress primarily focus on the percentage of women and minorities at different levels of the organization.
Daniela Arias, a senior audit manager at Crowe, leads the firm’s ESG services in the U.S. and has been consulting banks on these issues; she also works with private equity firms. She’s increasingly seeing ESG considered in due diligence, along with operational and financial matters. That includes DE&I. “What policies are there in place for diversity?” she says. “What are they doing to track the data of who’s making it to leadership? Do they have development programs in place to help move the needle on diversity?”
Governance —including board composition and practices — is also critically important, says Appelbaum. “Are there problems?” she asks. Is governance strong at the target? What are the weaknesses? For sellers, she suggests asking, “Do you want to align with a company that doesn’t do things well?”
Compliance gaps can help acquirers identify red flags in a target, adds Arias. “If an organization does not have the critical, basic compliance issues down, that is already indicative that there are so many other areas that are not being thought about.”
Vernon points out that there are still a lot of unknowns in the ESG space, especially relative to examining climate risk. “It’s been a lot of wait and see,” says Vernon. “We’re not quite sure, from a regulatory standpoint, what requirements are actually going to be there in the banking space.”
Acquisitions can add strength to an organization, from new business lines and markets to talent. From an ESG perspective, the post-deal bank could emerge stronger. “For some, combining two organizations enhances the ESG picture,” says Appelbaum. One organization may have strengths when it comes to data security; the other may have a great training program.
While ESG won’t drive the selection of a target, an acquirer should understand the progress the seller has made — and whether there will be any issues. Appelbaum recommends starting with the target’s ESG policy and determining whether it’s aligned with the buyer. Also, look for feedback the seller has received from large investors and other stakeholders on ESG. “What’s been done to make headway with those institutional investors?” she says.
Arias helps companies consider their ESG roadmap, identifying where they are and where they want to go. “There are so many existing processes [and] operations that are ESG-related and … need to be brought together into one cohesive structure,” she says. Companies need to understand where they’re strong on ESG and where they need to improve. Once they have that picture, they can then ask, “Where do we need to be for organizations of our size within our industry?”
The banking industry may be in the early stages on ESG, but a strong program could become a competitive advantage. “From a seller’s perspective, in my opinion, the best way to execute a good deal and get that good price is to figure out what your competitive advantage is,” says Vernon. A seller could also be swayed by an acquirer with a strong ESG reputation that will have a positive impact on the seller’s community and employees. “On a go-forward basis, you could have a competitive advantage in ESG,” he adds.
And Arias advises that banks shouldn’t focus on specific metrics. “Presenting your value from an ESG perspective is not about hitting the metrics,” she says. “It’s about showing progress, transparency, showing where you are, where you intend to go, and what are the steps that you’re going to take to get there.”
Bank Director’s 2022 Bank M&A Survey, sponsored by Crowe LLP, surveyed 229 independent directors, CEOs, CFOs and other senior executives of U.S. banks below $600 billion in assets to understand current growth strategies, particularly M&A. The survey was conducted in September 2021.
Bank Director’s 2021 Compensation Survey, sponsored by Newcleus Compensation Advisors, surveyed 282 independent directors, chief executive officers, human resources officers and other senior executives of U.S. banks below $50 billion in assets to understand talent trends, cultural shifts, CEO performance and pay, and director compensation. The survey was conducted in March and April 2021.
Bank Director’s 2021 Risk Survey, sponsored by Moss Adams LLP, received responses from 188 independent directors, chief executive officers, chief risk officers and other senior executives of U.S. banks below $50 billion in assets. The survey was conducted in January 2021, and focuses on the key risks facing the industry today and how banks will emerge from the pandemic environment.
The pace of bank M&A approached pre-pandemic levels in 2021 — a trend that Dory Wiley of Commerce Street Capital expects to accelerate in 2022. In this video, he shares the factors that will fuel this activity, the top attributes acquirers seek in a target and why it’s a buyer’s market. He also believes sellers prefer a good deal over a high price.
Any thoughts of a lingering impact on mergers and acquisitions as a result of the 2020 economic downturn caused by Covid-19 should be long gone: 2021 bank transaction value exceeded $50 billion for the first time since 2007.
Continued low interest rates on loans and related compression of net interest margin, coupled with limited avenues to park excess liquidity have made many banks consider whether they can provide sustainable returns in the future. Sustainability will become increasingly difficult in the face of continued waves of change: declining branch transactions, increasing cryptocurrency activity and competition from fintechs. Additionally, the fintech role in M&A activity in 2021 cannot be ignored, as its impact is only expected to increase.
Reviewing 2021 M&A transactions, one could argue that the market for bank-to-bank transactions parallels the current residential home market: a finite amount of supply for a large amount of demand. While more houses are being built as quickly as possible, the ability for banks to organically grow loans and deposits is a much slower process; sluggish economic growth has only compounded the problem. Everyone is chasing the same dollars.
As a result, much like the housing market, there are multiple buyers vying for the same institutions and paying multiples that, just a few years ago, would have seemed outlandish. For sellers, while the multiples are high, there is a limit to the amount a buyer is willing to pay. They must consider known short-term gains in exchange for potential long-term returns.
For banks that are not considering an outright sale, this year has also seen a significant uptick in divestures of certain lines of business that were long considered part of the community bank approach to be a “one-stop shop” for customer needs. Banks are piecemeal selling wealth management, trust and insurance services in an attempt to right-size themselves and focus on the growth of core products. However, this approach does not come without its own trade-offs: fee income from these lines of business has been one of the largest components of valuable non-interest income supporting bank profitability recently.
Faced with limited ability to grow their core business, banks must decide if they are willing to stay the course to overcome the waves of change, or accept the favorable multiples they’re offered. Staying the course does not mean putting down an anchor and hoping for calmer waters. Rather, banks must focus on what plans to implement and confront the waves as they come. These plans may include cost cutting measures with a direct financial impact, such as branch closures and workforce reductions, but should entail investments in technology, cybersecurity and other areas where returns may not be quantifiable.
So with the looming changes and significant multiples being offered, one might wonder why haven’t every bank that has been approached by a buyer decides to sell? For one, as much as technology continues to increasingly affect our everyday lives, there is a significant portion of the population that still finds value in areas where technology cannot supplant personal contact. They may no longer go to a branch, but appreciate knowing they have a single point of contact who will pick up the phone when they call with questions. Additionally, many banks have spent years as the backbone of economic development and sustainability in their communities, and feel a sense of pride and responsibility to provide ongoing support.
In the current record-setting pace of M&A activity, you will be hard pressed to not find willing buyers and sellers. The landscape for banks will continue to change. Some banks will attack the change head-on and succeed; some will decide their definition of success is capitalizing on the current returns offered for the brand they have built and exit the market. Both are success stories.
A common maxim in the mergers and acquisitions industry is that very small banks have a tough time finding buyers. But last week, we learned there’s an exception. And it comes from financial technology companies, one of which announced plans to buy a $154 million bank in Seattle called First Sound Bank for $23 million.
The acquirer is BM Technologies, the Radnor, Pennsylvania-based technology company that was spun off from Customers Bancorp earlier this year and trades on the New York Stock Exchange. The price translates to a premium of 166.4% for the bank, which trades on the pink sheets, according to investment bank Hovde Group.
“Fintechs are getting more aggressive in buying small bank charters,” says Curtis Carpenter, senior managing director for the investment bank Hovde Group, which was not involved in the deal. Fintechs may also be willing to pay more for a small bank than another bank will. For a large fintech company, getting access to a bank charter may be critical for their business plan going forward; paying an extra $1 million or $2 million may not be a lot of money for the fintech, but might be meaningful for the small bank.
It’s tough to see what kinds of premiums fintechs are paying for banks, because most fintechs are privately owned or the deals are so small, the financials sometimes aren’t disclosed. Granted, there are not a lot of U.S. financial technology companies buying banks. This year, there were six such announced deals. They included San Francisco-based SoFi Technologies’ planned purchase in March of $150 million Golden Pacific Bancorp in Sacramento, California, according to an analysis by Piper Sandler & Co. using S&P Global Market Intelligence data.
U.S. Financial Technology Companies Buying Banks
Nov. 15, 2021
First Sound Bank
Aug. 2, 2021
Newtek Business Services Corp.
National Bank of New York City
June 15, 2021
June 14, 2021
Cornerstone Home Lending
The Roscoe State Bank
March 9, 2021
Golden Pacific Bancorp
Jan. 1, 2021
DXC Technology Co.
AXA Bank AG
Feb. 18, 2020
Nov. 18, 2019
SOURCE: Piper Sandler & Co. using data from S&P Global Market Intelligence
There’s not a lot of banks buying fintechs either, as Bank Director Vice President of Research Emily McCormick explored recently. Banks aren’t as interested in buying fintechs as they are interested in buying other banks, mostly because of cultural hurdles and lack of comfort with valuations, according to Bank Director’s 2021 M&A Survey. Fintechs, on the other hand, have started to get really drawn to bank charters, as Bank Director Managing Editor Kiah Haslett showed in her second quarter 2021 magazine story, “The Latest, Oldest Thing in Banking” (available with a subscription).
“I think there’s a phenomenon out there; what you want is a bank charter,” says Chris Donat, a managing director and senior equity research analyst at Piper Sandler & Co. “If you go back to the financial crisis, when Ally Financial created its bank, having a bank as a source of deposits to fund loans is generally one of your cheaper ways to fund loans and is also more stable.” Fintechs also get access to the national payment rail networks and the Federal Reserve’s discount window for liquidity purposes.
As fintechs grow their businesses, a stable source of low-cost deposits is incredibly useful. “They’re interested in the paperwork if you will, the charter, and not the deposit franchise of having branches and the loan officers,” Donat says.
BM Technologies will leverage the charter to grow its national digitally focused banking services, which include student loan disbursement services to 725 colleges and universities as well as banking services to about 2 million students, plus a flagship banking program with T-Mobile US, according to an analyst note from Michael Diana, managing director of Maxim Group. But BM Technologies will keep the community bank at First Sound Bank focused on the Seattle area. First Sound Bank CEO Marty Steele will lead the community bank division and serve as COO of the newly formed BMTX Bank, the two companies announced. BM Technologies’ CEO Luvleen Sidhu will serve as chair and CEO of BMTX Bank.
“Together we are looking forward to this partnership to create a nationwide deposit gathering and lending platform with the power to deliver an integrated customer experience at the highest level,” Steele said in a release about the deal.
Diana says First Sound is a successful community bank. Plus, BM Technologies’ acquisition means it avoids having to pay bank partners to hold insured deposits. When online marketplace LendingClub Corp. bought Radius Bancorp last year for about $185 million in cash and stock, it was for a similar reason.
“It’s all about deposits,” Diana says. “You don’t have to pay anyone else for holding and servicing.”
The topic of data and analytics at financial institutions typically focuses on how data can be used to enhance the consumer experience. As the volume of M&A in the banking industry intensifies to 180 deals this year, first-party data is a critical asset that can be leveraged to model and optimize M&A decisions.
There are more than 10,000 financial institutions in the U.S., split in half between banks and credit unions. That’s a lot of targets for potential acquirers to sift through, and it can be difficult to determine the right potential targets. That’s where a bank’s own first-party data can come in handy. Sean Ryan, principal content manager for banking and specialty finance at FactSet, notes that “calculating overlap among branch networks is simple, but calculating overlap among customer bases is more valuable — though it requires much more data and analysis.” Here are two examples of how that data can be used to model and select the right targets:
Geographic footprint. There are two primary camps for considering footprint from an M&A perspective: grabbing new territory or doubling down on existing serving areas. Banks can use customer data to help determine the optimal targets for both of these objectives, like using spend data to understand where consumers work and shop to indicate where they should locate new branches and ATMs.
Customer segmentation. Banks often look to capturing market share from consumer segments they are not currently serving, or acquire more consumers similar to their existing base. They should use data to help drive decision-making, whether their focus is on finding competitive or synergistic customer bases. Analyzing first-party transaction data from a core processor can indicate the volume of consumers making payments or transfers to a competitor bank, providing insights into which might be the best targets for acquisition. If the strategy is to gain market share by going after direct competitors, a competitive insight report can provide the details on exactly how many payments are being made to a competitor and who is making them.
The work isn’t done when a bank identifies the right M&A target and signs a deal. “When companies merge, they embark on seemingly minor changes that can make a big difference to customers, causing even the most loyal to reevaluate their relationship with the company,” writes Laura Miles and Ted Rouse of Bain & Co. With the right data, it is possible that the newly merged institution minimizes those challenges and creates a path to success. Some examples include:
Product rationalization. After a bank completes a merger, executives should analyze specific product utilization at an individual consumer or household level, but understanding consumer behavior at a more granular level will provide even greater insights. For example, knowing that a certain threshold of consumers are making competitive mortgage payments could determine which mortgage products the bank should offer and which it should sunset. Understanding which business customers are using Square for merchant processing can identify how the bank can make merchant solutions more competitive and which to retain post-merger. Additionally, modeling the take rate, product profitability and potential adoption of the examples above can provide executives with the final details to help them make the right product decisions.
Customer retention. Merger analysis often indicates that customer communication and retention was either not enough of a focus or was not properly managed, resulting in significant attrition for the proforma bank. FactSet’s Ryan points out that “too frequently, banks have been so focused on hitting their cost save targets that they took actions that drove up customer attrition, so that in the end, while the buyer hit the mark on cost reductions, they missed on actual earnings.” Executives must understand the demographic profiles of their consumers, like the home improver or an outdoor enthusiast, along with the life events they are experiencing, like a new baby, kids headed off to college or in the market for a loan, to drive communications. The focus must be on retaining accountholders. Banks can use predictive attrition models to identify customers at greatest risk of leaving and deploy cross-sell models for relationships that could benefit from additional products and services.
M&A can be risky business in the best of circumstances — too often, a transaction results in the loss of customers, damaged reputations and a failure to deliver shareholder value. Using first-party data effectively to help drive better outcomes can ensure a win-win for all parties and customers being served.
Pent-up deal demand will define 2022, continuing this year’s momentum as pandemic-related credit concerns recede. Stinson LLP Partner Adam Maier believes banks can expect to see a high volume of deals in the space but anticipate approval slowdowns from regulatory scrutiny. He also shares his top advice for directors as their banks prepare for growth next year. Topics include:
As bank M&A activity continues to pick up, it is crucial that buyers and sellers understand the implications of any transaction on bank-owned life insurance portfolios, as well as any associated nonqualified deferred compensation (NQDC) programs, to mitigate potential negative tax consequences.
Identify and Review Target Bank’s BOLI Holdings The first step is for buyers to identify the total cash surrender value of sellers’ BOLI portfolio and its percentage of regulatory capital. The buyer should identify the types of products held and the amount held in each of the three common BOLI product types:
Hybrid separate account
Separate account (registered or private placement)
In addition to evaluating historical and current policy performance, the buyer should also obtain and evaluate carrier financial and credit rating information for all products, as well as underlying investment fund information for any separate account products.
Accounting and Tax Considerations From an accounting standpoint, the buyer should ensure that the BOLI has been both properly accounted for in accordance with GAAP (ASC 325-30) and reported in the call reports, with related disclosures of product types and risk weighting. Further, if the policies are associated with a post-retirement split-dollar or survivor income plan, the buyer should ensure that the liabilities have been properly accrued for.
The structure of the transaction as a stock sale or asset sale is critical when assessing the tax implications. In general, with a stock sale, there is no taxable transaction with regard to BOLI — assets and liabilities “carry over” to the buyer. With an asset sale (or a stock sale with election to treat as asset sale), the seller will recognize the accumulated gain in the policies and the buyer will assume the policies with a stepped-up basis.
Regardless of the type of transaction, the buyer needs to evaluate and address the Transfer for Value (TFV) and Reportable Policy Sale (RPS) issues. Policies deemed “transferred for value” or a “reportable policy sale” will result in taxable death benefits. Prior to the Tax Cuts and Jobs Act, the transfer for value analysis was fairly simple: In a stock transaction, the “carryover basis” exception applies to all policies, whether or not the insured individual remained actively employed. In an asset sale, policies on insureds who will be officers or shareholders of the acquiring bank will meet an exception.
The Jobs Act enacted the notion of “reportable policy sales,” which complicated the tax analysis, especially for stock-based transactions now requiring much more detailed analysis of the type of transaction and entity types (C Corp vs S Corp). It is important to note that the RPS rules are in addition to the TFV rule.
Review Risk Management of BOLI The Interagency Statement on the Purchase and Risk Management of BOLI (OCC 2004-56) establishes requirements for banks to properly document both their pre-purchase due diligence, as well as an annual review of their BOLI programs. The buyer will want to ensure this documentation is in good order. Significant risk considerations include carrier credit quality, policy performance, employment status of insureds, 1035 exchange restrictions or fees and the tax impact of any policy surrenders. Banks should pay particular attention to ensuring that policies are performing efficiently as well as the availability of opportunities to improve policy performance.
Identify and Review NQDC plans Nonqualified deferred compensation plans can take several forms, including:
Voluntary deferred compensation programs
Defined benefit plans
Defined contributions plans
Director deferral or retirement plans
All plans should be formally documented via plan documents and agreements. Buyers should ascertain that the plans comply with the requirements of Internal Revenue Code Section 409A and that the appropriate “top hat” filings have been made with the U.S. Department of Labor.
General Accounting and Tax Considerations Liabilities associated with NQDC programs should be accounted for properly on the balance sheet. In evaluating the liabilities, banks should give consideration to the accounting method and the discount rates.
Reviewing historical payroll tax reporting related to the NQDC plans is critical to ensuring there are no hidden liabilities in the plan. Remediating improperly reported payroll taxes for NQDC plans can be both time consuming and expensive. Seek to resolve any reporting issues prior to the deal closure.
Change in Control Accounting and Tax Considerations More often than not, NQDC plans provide for benefit acceleration in the event of a change in control (CIC), including benefit vesting and/or payments CIC. The trigger may be the CIC itself or a secondary “trigger,” such as termination of employment within a certain time period following a CIC. It is imperative that the buyer understand the financial statement impact of the CIC provisions within the programs.
Insurance services provided through NFP Executive Benefits, LLC. (NFP EB), a subsidiary of NFP Corp. (NFP). Doing business in California as NFP Executive Benefits & Insurance Agency, LLC. (License #OH86767). Securities offered through Kestra Investment Services, LLC, member FINRA/SIPC. Kestra Investment Services, LLC is not affiliated with NFP or NFP EB. Investor Disclosures: https://bit.ly/KF-Disclosures
After a year of formidable industry change, bank merger and acquisition activity is beginning to bounce back.
July’s 19 announced transactions brings this year’s total to 116 deal announcements so far, compared with 111 overall in 2020, according to data from S&P Global Market Intelligence. Financial institutions are looking to make strategic investments; post-pandemic, that means building seamless digital experiences at a lower cost remains a top priority.
This is a prime opportunity for banks to revisit the outdated traditional playbook of converting newly acquired customers. The conventional model of post-M&A communication is packed with marketing jargon like “commitment” and “service,” followed by a barrage of letters that make it difficult for customers to know what to expect from their new financial partner.
The goal of this approach has always been to reduce churn. But it has led to stagnant or low growth in wallet share and overlooked chances to build stronger relationships. One in four customers surveyed by BankingExchange took some form of action due to an acquisition: 5% closed their account, and an additional 22% eventually opened an account with another financial entity. Customers are increasingly willing to bank elsewhere if their financial needs are not being met.
Financial institutions need a new conversion playbook to keep old customers happy and new customers engaged. Banks should look beyond generic tactics and think like brands to make the M&A process smoother. This approach means the institution isn’t thinking about messaging as a box to check, focusing instead on the customer experience and brainstorming fresh and creative ways to communicate. Brand identity and emotion play a critical role in customer retention. According to a Deloitte study, over 35% of respondents who switched banks cited emotional reasons — they felt their bank was too large to care about their financial needs anymore.
Embracing a new acquisition model requires a proactive approach to post-merger communications and strategy. Framing a compelling story, integrating complex technology and bringing together multiple teams is achievable — but takes time and attention to detail.
A Fresh Approach to the M&A Playbook Post-deal communications require a fresh approach to connecting emotionally and digitally with new customers. Forming deeper connections and reaching new opportunities for growth requires starting with an innovative model that leverages niche-focused products and services to create a greater affinity with the growing customer base.
Although a niche strategy isn’t an entirely new concept, it’s one of the most undervalued assets used by banks today. “Superior customer value occurs when a company can offer either a unique bundle of value, a comparable value at a lower cost than the competition or a combination of differentiated value and low cost,”research shows. Delivering tailored financial products to niche customer segments allows banks to build a brand that appeals to a new category of customers, creating a lasting connection and brand affinity.
Engaging a niche audience doesn’t mean your bank changes its foundation; it means focusing more deeply on an underserved segment of your newly acquired customer base to deliver a more robust and connected experience. Start by identifying these underserved markets with data to determine what opportunities exist. Maybe there’s a high concentration of gig workers who could benefit from new or newly combined digital bank offerings. As the acquiring bank, you could build an experience that meets these needs and the needs of other gig workers in your current customer base and communities.
This is a prime opportunity to jumpstart research, initiate conversations and craft meaningful marketing strategies that will delight your new audience. The standard welcome letter will not generate the same excitement as a bespoke campaign inviting gig workers to take part in building innovative products that will empower them to manage and grow their finances. This proactive approach demonstrates your dedication to providing top-notch customer services and solidifies your commitment to investing in each individual member.
Banks that take advantage of the new growth opportunities in today’s M&A landscape can move to a truly innovative approach that leverages data analytics to identify, differentiate and deliver value, leading to greater affinity and sustainable growth. Banks are poised to foster deeper trust in their new customers by building brands that deliver focused financial services for specific needs, ultimately creating lifetime value.