Digitalisation and M&A in Central and Eastern European Banks
Bank M&A activity is on the rise in Central and Eastern Europe (CEE). Deal value was up by 46% in 2020 compared to 2019, rising to €4.3bn. And through 2021 so far, large-scale deals including Italy’s Intesa Sanpaolo’s acquisition of smaller rival UBI Banca, and the CaixaBank-Bankia merger in Spain demonstrate that consolidation in the sector remains lucrative and is poised to reshape the banking landscape in the region.
Undoubtedly, M&A brings many benefits, allowing banks to join forces to find efficiencies, adopt new technologies, remain competitive and, above all else, grow. Indeed, the ECB seems to be encouraging banks to consolidate as a way to address overcapacity and low profitability.
But as this trend of consolidation proliferates, many banks in the region are struggling with the technology aftermath. Banks need to rapidly integrate not only their downstream legacy systems but also their customer-facing engagement banking layer – and all within tight IT budgets.
Often, banks try to first focus on merging the downstream systems, but from a technology perspective, this traditional approach to navigating the post-transaction period may not be the most effective. Research indicates a negative correlation between M&A activity and customer satisfaction, which can ultimately result in lost business – the exact opposite of the result intended.
At Backbase, we propose an alternative – and perhaps counterintuitive – approach: banks should prioritise the external-facing customer experience to harmonise disparate digital presences, implement a comprehensive engagement banking platform, and help customers realise the value of the merger sooner.
In doing so, these institutions will face less customer attrition and also enable innovation to continue as they work on the downstream legacy integration, giving them an important competitive advantage.
M&A on the rise
Bank consolidation is ramping up in CEE – and it is likely that the aftermath of COVID-19, which is expected to weigh heavily on banks’ profitability and capital positions, will bolster further M&A activity as less solid players find themselves unable to cope with such challenges alone.
Further exacerbating this trend is pressure from neobanks that have raised customer expectations when it comes to digitalization and customisation, making the disruptive influence of technology and the critical need to meet the expectations of today’s digital-first customer two of the key drivers of M&A.
But as smaller, regional banks join forces, and larger, global players enter these lucrative markets, many banks in the region are struggling to navigate the technological integration required.
Currently, banks are stuck in a waterfall mindset when it comes to technology and innovation. They want to know, plot and plan everything years in advance, and have a tendency to make ‘big bang’ upgrades one at a time, each taking around 3-5 years to implement and deliver.
And the post-transaction period is no exception. In the aftermath of an M&A deal, banks often focus on getting the overall system right: integrating their data layers, seeking to clean up and migrate both organisations’ data onto a single platform and consolidating API layers. Only then do they turn their attention to the external-facing engagement banking layer.
But in today’s fast-moving landscape, treating the customer experience in this way – as secondary to the product – is a massive error, for two main reasons.
Firstly, data integration is a long, resource-intensive process that can grind innovation engines to a halt, which then slows their efforts to offer employees and customers a seamless transition. This leads to customer dissatisfaction and potentially lost business, with several studies estimating that up to 10% of a bank’s customers leave following a merger. What’s more, this approach can create significant friction for employees. Adding even more disparate applications and processes to their workload, rather than streamlining them, will almost certainly result in reduced efficiencies as employees feel less empowered and valued.
Secondly, this approach can actually exacerbate existing siloes, making it more difficult to introduce changes and innovate further down the line. In fact, there have been multiple instances where, following aggressive acquisition strategies, banks have lost momentum in innovation, as their focus was on the back-end integration. Combining different IT architectures with vendor lock-ins and huge technical debts distracted their attention from what really mattered: the customer’s experience.
What’s needed is a more agile, iterative approach to innovation – and this is something that many banks have yet to master.
An “outside-in” approach
There is a better way to approach post-merger technology integration. Instead of focusing on the downstream systems first, banks should prioritise the engagement banking layer and reconcile disparate digital presences to ensure customers experience no disruption to their services as a result of the merger.
Why is this important? Because banks needn’t accept customer attrition as the cost of M&A. Ensuring the banking experience is architected around the customer sets banks up for long-term success. A robust, stable customer base is, after all, the lifeblood of any financial institution.
What’s more, this “outside-in” approach will ensure that the entire technology department is empowered and equipped to handle multiple problems simultaneously, resulting in a significantly more efficient business model, and a range of benefits for institutions that adopt it, including:
- Enabling innovation to continue, even as downstream integration proceeds – which is what will ultimately keep them competitive as the market continues to evolve.
- Eliminating friction for both customer and employee. Separating the engagement, the digital experience from the data and API layers will allow banks to quickly implement changes that help ease the post-transaction transition for the end-user. The processes that both customers and employees care about will be seamless, even if the back-end processes powering the integration are still being ironed out. Customer and employee satisfaction and retention is most vulnerable in the early days of the transition period; getting these front-end processes right immediately is key to avoiding attrition and frustration.
- Allowing banks to remain nimble. Technology moves quickly. Separating various technology layers from one another allows large organisations to adopt new solutions at speed – rather than requiring every layer to be overhauled each time they want to bring a new technology online.
This approach also has longer-term benefits, allowing banks to own the integration process in perpetuity. By breaking the underlying processes away from the systems themselves, banks can own those processes, create digital equity and lay the foundation for integrating new technologies (or businesses as a whole) smoothly and quickly again and again, while retaining the same superior level of customer experience. This approach can play a major role in future M&A strategy, mitigating the risks associated with post-M&A integration and ensuring the continuity of customer engagement over the long term – effectively helping banks to “out-merge” the competition.
This method may not be easy for banks navigating the challenging landscape of merging. However, it is certainly the most sustainable way to ensure long-term growth. Over the next decade, advanced engagement banking technology – and along with it, owning the customer experience from end-to-end – will be a clear enabler of M&A and growth. Those that take this “outside-in” approach will be able to future-proof themselves by demonstrating their value as an innovative disruptor, ultimately making them more powerful and attractive players in the market – both for customers and prospective buyers down the road.
About the author: Pierre-Alexandre Boulay, Head of CEE, Backbase