Confronting M&A Headwinds & Tailwinds In 2022

Deal activity picked back up in 2021 — and 2022 promises a similar pace, including enhanced interest in scale-building mergers of equals, according to Bank Director’s 2022 Bank M&A Survey, sponsored by Crowe LLP. Rick Childs, a partner at the firm, explains what factors could drive and hinder deal volume. He also discusses external pressures on the banking space, and how potential buyers and sellers should incorporate environmental, social and governance (ESG) matters.

  • Expectations for Deals in 2022
  • What Buyers Want
  • Balancing the Regulatory Burden
  • Weaving ESG With M&A

The 2022 Bank M&A Survey examines current growth strategies, including expectations for acquirers and what might drive a bank to sell, and provides an outlook on economic and regulatory matters. The survey results are also explored in the 1st quarter 2022 issue of Bank Director magazine.

New Synergies in Risk Management for 2022

The past two years have created massive, life changing challenges for just about everyone on the planet — and bank managers and board members are certainly no exception. While the public has been dealing with the Covid-19 nightmare, remote work challenges, child and elder care woes, and concerns about family physical and mental health, bank leadership has had to deal with increased internal risks (operational, cyber, staffing) and external ones (rapid market changes, stressed industries, and a lack of traditional financial measurements, since many businesses did not produce audited financial statements during much of 2020).

As we enter 2022, no one knows for certain how, or if, all of those daunting issues will be resolved. In recent statements, the banking regulatory agencies are suggesting cautious optimism in 2022, though they are wary of complacency and loosening credit underwriting standards. One of the key forces that drive innovation and change in the world is a crisis, and if nothing else, 2020 and 2021 have seen rapid change and massive innovation, including in banking. With this backdrop, let’s look at some of the related developments and some new trends in credit risk management that will likely take place in 2022.

One significant industry change preceded Covid, and that was another acronym that started with a “C,” which was CECL. The story behind the current expected credit losses accounting standard is long and tedious — but a by-product of that rule for most bankers was a newfound understanding of the value of their portfolio’s credit data and how that data ties directly to reserves, risk and profitability. Thanks to CECL’s requirement for vast amounts of historical data, including credit attributes like collateral types, delinquency, payments and segmentation, many banks invested a lot of time and resource gathering, inventorying and cleaning up their credit data for CECL compliance. A result of this activity was that like never before more banks have more information about their loan portfolios, borrowers and their historical and current behavior.

During the time that CECL implementations started, Covid hit and bank managers were challenged with remote work requirements along with addressing PPP and other fast-moving emergency credit programs — creating a need for innovation and automation. Many areas of the bank were suddenly faced with new processes, operations and technology tools that were unplanned. A result of this accelerated change was that areas like commercial lending, credit and loan review were forced to adopt new innovative ways to work. While some of these areas may return to “the old normal,” many will retain most, if not all, of the new improved processes and tools that were needed to survive the challenges of the Covid crisis.

Those two developments, along with a growing understanding of the importance of credit concentration management, are driving new opportunities and synergies in credit risk management in 2022. The concept of credit concentration management is not a new one in banking. Even before the Great Recession of 2007-2009, the agencies made it clear that concentrations could be “bank killers,” with subprime lending and investor-owned commercial real estate (CRE) clear priorities. But now, the combination of more readily available, relevant credit concentration data and new tools and automation have made it significantly easier for banks of all sizes to proactively manage their concentrations.

A very obvious but valuable case study on the importance of concentration management is going on right now at the start of 2022 within the retail, office and the hospitality industry segments. Suddenly understanding exposure to these industries and property type segments is a high priority. Unlike the past, this time banks are much better positioned with improved data, tools and a more automated approach. The next use case to look at in 2022 is portfolio concentrations based on exposure to acute environmental threats like forest fires, hurricanes and flooding. That will likely be an early first step as more banks incorporate the environmental, social and governance framework into their risk management programs.

Another often neglected, proactive credit risk management process that has gotten a lot more attention during the past two years is portfolio stress testing, or “shocking segments of the portfolio.” This practice was used widely in banking during the end of the Great Recession to effectively monitor CRE risk, but by 2015, most smaller banks performed only annual tests, most of which were not looked at as having much, if any, strategic value. Part of the issue was that the banks simply weren’t collecting enough credit data to perform meaningful testing, and there was a sense that money for stress testing tools could be better spent elsewhere.

Now with additional risk management tools and better data, stressing concentrations simply makes sense and is achievable for most banks. New stress testing programs for concentrations like restaurants and business hotels are the norm, while more comprehensive, and strategic programs are starting to be put in place in banks of all sizes.

As we look back at the years of the Covid crisis, it is only natural to think of the disruption, challenges and uncertainty that banks faced, some of which are still being faced today. But thanks to the forces that drove the challenges in 2020 and 2021, bankers rapidly embraced automation and performed proactive credit data management leveraging innovative practices. Banks need to seize those opportunities and continue to enhance their risk management processes, not letting those benefits pass them by. A 2022 with this more synergistic approach to credit risk management may make the future a little bit brighter for bank management.

Five Fintech Solutions Every Bank Should Have

If Money 20/20 was any indication, it seems like banks are finally ready to really embrace fintech. Small and medium-sized banks have realized that their technology budgets can be used for things other than building and managing technology in-house to keep up with large financial institutions with big budgets and neobanks with brand new tech stacks. A tech stack is the combination of technologies a company uses to build and run an application or project, and typically consists of programming languages, frameworks, a database, front-end tools, back-end tools and applications connected via APIs.

For banks starting to explore fintech partnerships, we’ve compiled a list of the top five fintech solutions every bank should have in its tech stack today.

1. Account Opening Platform
New customer acquisition is one of the most important components of a successful financial institution. An online account opening platform powers an omnichannel interface to onboard new customers quickly and seamlessly. A good account opening platform should also provide a customizable user interface, increased account conversion rates and detailed reporting.

2. Identity Decisioning Platform
An identity decisioning platform, or IDP, automates identity and risk decisions across the lifecycle of your customer. IDPs power smart decisions that can reduce risk for your business while providing a frictionless customer experience for identity verification and onboarding, ongoing transaction monitoring and credit underwriting.

IDPs are the decision engine behind the account opening platform that helps banks determine whether to accept or reject an applicant. It continues to monitor that client’s account activity and powers underwriting decisions. Your IDP should connect to multiple data sources through application programming interfaces, or APIs, allowing you to add and change data sources as needed. By bringing all of your identity and risk decisions into one platform, you’ll see a holistic view of your customers and automate more decisions.

3. Open Banking Platform
Your customers expect to be able to access their financial data across various apps. Open banking platforms make it easy for banks to securely share data with third-party businesses through an API that allows customers to connect their banking data. Open banking platforms are the key component connecting your bank to popular apps like peer-to-peer payments, financial management and cryptocurrency investments.

4. BaaS Platform
You’ve probably noticed the trend of non-bank businesses beginning to offer financial products. This trend is powered through BaaS, or banking as a service, platforms. BaaS platforms enable a third-party business to integrate digital banking or payment services directly into their products by connecting them with a bank. This model allows non-financial institutions the ability to offer a financial product without getting a banking license. Unlike open banking platforms, which share the financial data within a bank account to a third-party business, BaaS platforms transfer the complete banking services into a third-party business’s product.

5. Know Your Transaction Solution
If your bank is starting to think about how to approach cryptocurrency and digital assets, one of the first things you’ll need is a Know Your Transaction, or KYT, provider to complement your Know Your Customer (KYC) procedures. KYT solutions help you remain compliant with anti-money laundering laws when monitoring crypto transactions. A KYT solution allows banks to track crypto funds and ensure they are not coming from mixers (a service that mixes streams of cryptocurrency to improve anonymity and make it more difficult to trace), foreign exchanges or blacklisted addresses.

Fintech companies can provide a lot of value to banks. Many of them are built to plug into your existing infrastructure and be up and running in weeks. They can help banks be more agile and adapt to new customer needs faster, save banks money on engineering resources and bring focused expertise to their category. Alloy also has resources available to help banks select fintech partners and build out their tech stacks.