Data is the Secret Weapon for Successful M&A

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.

Sorting Necessary from Noise: How to Focus Your Board’s Time


Director liability has expanded dramatically over the last decade. As pressures on bank boards intensify, their time has become constrained. How can board members protect themselves while building value for their institution? We can win if we play offense; below are 11 focal points for bank boards.

Focus on value creation. Few banks connect executive compensation and return for shareholders. Too many boards accept mediocre performance by executives, who should be enriched for growing tangible book value per share (TBVS), earnings per share (EPS) and franchise value, not the bank’s asset size.

Understand what drives value. An institution’s stock price is driven by multiples of TBVS and EPS, which reflect the market’s perception of the risk profile of the bank. By looking to build value for investors, boards can put in place the proper strategies to achieve their goals, and manage the risk, governance and regulatory environments.

Implement an enterprise risk management program (ERM). An ERM program does more than satisfy regulatory guidelines to establish an internal risk assessment program. The process also aligns the interests of different stakeholders, and improves the bank’s culture by instilling risk management responsibility, accountability and authority throughout the entire organization. It can boost the institution’s ability to raise new capital at higher multiples, fix liquidity and increase earnings. Finally, ERM enhances the strategic planning process by analyzing clearly delineated paths with the associated risk and rewards of each.

Stay educated. Board members have a limited time to stay up-to-date on the issues impacting the banking industry. Custom bank education, using the bank’s data, provides the most flexibility for directors. Topics should include emerging issues, economic developments, capital markets trends and regulatory pressures, as well as each topic’s direct impact to the directors’ institution.

Adopt governing principles. Prevent corporate drift by setting concrete principles which prevail above strategy or tactical solutions. Some examples are to achieve a specified CAMELS rating, eliminate regulatory orders, only consider a sale if market multiples reach a pre-determined level, or to set specific compounded annual return of TBVS over the next 3 years.

Validate corporate infrastructure. An ineffective corporate structure could mean that more regulatory agencies are examining your institution than necessary. Boards should discuss the value of their holding company, registering their stock, the appropriateness of the bank’s charter and target capital composition at least annually.

Commit to talent management. Many senior managers will retire over the next few years, but a proper talent management program encompasses more than succession planning. An annual management review helps the organization prepare for the future, but a robust program further enables banks to attract, retain and motivate employees.

Control the balance sheet. Between 2004 and 2007, the last rate rise, interest expense at depository institutions tripled. While models are necessary to understand the risk, the only way to turn this into a strategic advantage is to conduct price sensitivity analysis, customer retention analysis and customer loyalty studies.

Streamline corporate governance. The board’s primary responsibilities include setting the strategic direction for the bank, creating and updating policies, and establishing a feedback monitoring system for progress. Though conceptually simple, a typical director’s time is strained. Time spent on board matters can be streamlined by centralizing information under one system, using consent agendas, spreading policy approval dates, utilizing video technology, educating the board using bank specific data, and appropriately scheduling committee meetings.

Perform customer segmentation. Historically, banks have analyzed growth opportunities by assessing geographic boundaries. Today, institutions must now know and sell to their customers by identifying target customer profiles, developing products to profitably serve those customers, analyzing where those customers live, understanding how they communicate and building delivery channels specific to those customers.

Have a capital market plan. What is the institution worth on a trading and takeout basis? Who can we buy? Who would want to buy the bank and why? Should the institution consider stock repurchases or higher dividends? Regardless of size, every institution needs to ask itself these questions, and memorialize the discussion in an integrated capital markets plan.