Mergers are like marriages. They are the bringing together of two individuals. If you wouldn’t marry someone for the ‘operational efficiencies’ they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?
Dear readers, we continue the series on pro merger benefits as well as the challenges associated with them which need mitigation. I hope I am not putting off bankers who are planning M & A events or are actually involved in some form of union or consolidation. In fact, the more conscious bankers become about the two sides of the coin, the better for management of the perceived risks.
As I indicated last week, we need to suspend the blame-game and move on to rejuvenate the banking sector and boost investor confidence. The current run on financial institutions caused by fear and panic needs to be stopped. Sometimes I ask myself, where are people going to place their funds if not with the banks? Is the cash going back under the mattresses in people’s homes, or being used to purchase and hoard foreign currencies? Are we not then moving one step forward and two steps backwards?
Now I see why every Tom, Dick and Harry is owning a mobile money account. It is good for business, but should saving money on a mobile money account be the norm? it seems some members of the public now have more trust in saving on their ‘Momo’ accounts rather than investing in a bank! The financial inclusion of the past five years that has benefitted many of the unbanked public is awesome. However, not all businesses can be run on just a mobile money account. They are means of settlement and the idle funds should still be invested for a return.
In the banking industry, the impact of any merger or acquisition ripples through the combined organisation for years. When consumers acquired through a merger get angry, a deal that once looked brilliant can rapidly lose its shine. It is important for financial institutions to reduce attrition and hang onto as many relationships as possible.
In bank mergers and acquisitions, it is key to have a good balance that takes all stakeholders into consideration to have a win-win situation. In many cases, unless the pulse of the staff is taken into consideration, the negatives far outweigh the benefits. This week, I will continue with some more challenges that should be expected in any Mergers and Acquisition event (M & A event), but which should not to be overlooked.
Strategic planning for ‘Forced marriages’
As a result of the Bank of Ghana’s directive for banks in Ghana to increase their minimum capital to GH¢400m by 31st December 2018, some local banks are planning to come together in some form of ‘holy matrimony’ to enable them meet the requirements. It is therefore worth saying that prior to an M&A it is important for a smart strategy to be implemented in order to avoid any problems from arising. Research indicates that failure rates for M&A are between 50% and 70%.
This is due in large part to the fact organisations do not take the time to address challenges and come up with solutions that will actually make the M&A successful. Once an M&A is underway, institutions should not forget to take a step back and make sure everyone is on the same page. Retention of good human capital is also a strategic deal. Obviously, not all employees (on both sides) will be happy with the M&A. In order to retain desired employees, communication lines should always be left open; and ensure that everyone is in on the same page with regard to benefits, compensation and so on.
Identifying and Managing Toxic Assets
A study of mergers and acquisitions also reveals that many troubled assets are uncovered during M&As. In many cases, it is a third-party vendor that uncovers negative or problem loans and other issues – perhaps one of the banks did not have a good system for loan applications and credit monitoring processes. Independent vendors with no vested interests and may utilise a more efficient reporting system that detects and highlights the problem areas. Since they may not know the customers involved, they might recommend more effective solutions which could involve more provision for bad debts and losses. Not all that glitters is gold: no more time for window-dressing of impaired loans.
Managing Customers’ Emotions – (Quotes by Novantas)
As critical stakeholders in the success of a bank, customers’ perceptions and feelings are paramount. Without customers there is no bank, and a mass-exit of customers arising from rumour-mongering about a collapse of one of the banks derails the M & A process. After all, if most customers withdraw their funds, the net-worth of the troubled bank whittles away. Let us see some real-life quotes from customers who deserted a bank they were afraid of being acquired. These are quotes from a study by Novantas, the research specialists from the Financial Brand magazine:
“It’s a big bank takeover that’s all about profits.” People frequently believe M&As are all about big banks devouring smaller ones to boost profitability. Often, they feel acquirers have no regard for the impact deals will have on consumers, communities, and employees. “My impression was that it was all about the bottom line,” one woman told researchers about the acquisition of her banking provider.
“You don’t care, and this is the last straw.” One woman told Novantas that the institution that bought up her bank did not value or honour customer loyalty. She said the old bank “knew her” for over ten years. The bank before “knew her” for 20 years. She thought the most recent acquisition might be like the previous two — not so, so she walked. No one enjoys feeling like a pawn sacrificed on a chessboard just so someone else can win.
“What happened to my banker?” Respondents made it clear that even in the digital age, they have a loyalty and regard for front line staff — people they’ve grown to know and trust. According to Jiwani, some consumers grow angry when they feel employees at the acquired institution haven’t been treated well. That kinship for their fellow human will often translate into moral support for their banker. “When staffers aren’t looked after, it leaves a bad taste in people’s mouths,” explains Jiwani.
“What happened to my account?” When financial institutions roll up multiple institutions over many years, they frequently find themselves with a panoply of pricing, account names, and product bundles. Making it all work can be an operational nightmare, and ‘grandfathering’ can become a serious challenge. But consumers don’t care how hard it is. They only know that when the buyer decides to ‘simplify and unify’, services and policies that they had grown accustomed to go away. And this enrages account holders.
“Who the heck is this new bank anyway?” You have to assume that customers at the acquired institution know nothing about the acquirer. If they heard anything about their new bank, it’s almost certainly bad news. Novantas says there is little evidence that financial institutions’ PR ploys and investments in corporate citizenship — e.g. community events and charitable donations — create much positive among consumers who don’t already do business with them. As a result, the study found that acquirers had little-to-no equity among customers at the institution being acquired.
The above extracts from the Financial Brand give us an insight into customers’ fears and feelings. So, you see the figures do not matter to them and merger plans can easily be derailed.
The State of Customers’ Accounts Matter’
Every bank categorises bank accounts into ‘Active’ and ‘inactive’ accounts. The Novantas study also found that the state of customers’ accounts does matter in the M&A event: Inactive account holders are usually not bothered about the event, while active ones – which are those who frequently incur service charges – are more sensitive. Ultimately, the acquiring institution needs to estimate attrition and estimate the value of accounts which may become worthless. This can be assessed by:
- Examining the deposit accounts being acquired. How often do account holders use their debit card, for example? How active is the account? The length of stay with the bank also shows loyalty. The number of active account holders is the most important metric when assessing a target’s depositor base, but longevity with the acquired institution also influences the consumer’s decision to stay on.
- Any new fees being proposed?
- Will there be an increase in the minimum deposit balance?
- Will the customers pay for new cheque books to be offered today?
- What investment rates will be used?
- Will the smaller bank, which may be saddled with new cheque books, be asked to pay for them?
The Novadas researchers also realised an interesting trend: some customers still decided to leave after an acquisition even when their fees end up being reduced. “It might be possible that they are not aware of the product benefits available to them after the conversion”, Novatas explained in its analysis. “Instead, they focus on the fees they incurred at their original institution. This is important to consider, as acquirers think about the fee income versus retention trade-offs when making decisions about product conversions.”
We are still learning. Now that we are empowered with this knowledge, we will now concentrate on best means of enjoying the mergers, acquisitions, consolidations and all other unions, whether forced or voluntary!
TO BE CONTINUED….
ABOUT THE AUTHOR
Alberta Quarcoopome is a Fellow of the Institute of Bankers, and CEO of ALKAN Business Consult Ltd. She is the Author of two books: “The 21st Century Bank Teller: A Strategic Partner” and “My Front Desk Experience: A Young Banker’s Story”. She uses her experience and practical case studies for training young bankers in operational risk management, sales, customer service, banking operations and fraud.