When banks assess a potential deal, technology integration is a key consideration. Prebuilt connections with peer-fintech solutions can be crucial for successful deal-making, slashing the time, energy and cost of integrating deposits and loan books from acquired banks.
In the past decade, the void created by institutions pulling away from relatively undesirable market segments, notably retail customers and SMEs, was profound. Challengers have been battling to fill the gap, winning large swaths of the market as institutions focus on large corporates and HNWIs.
The specific implications of this industry shift have been covered. Institution’s replacement of legacy systems with modern alternatives has spurred enormous growth in the BaaS segment of the fintech ecosystem, and institutions’ launch of their challengers (most abandoned within a few years) has demonstrated the scale of the neobank assault.
However, this fragmentation of the banking industry and expansion of the number of participants has fueled another trend: modernization to enable M&A.
The Status Quo
Acquisitions are a complex business process in any industry, but none more so than banking. New York Community Bank faced integration delays following its acquisition of assets from Signature Bank. BB&T’s merger with SunTrust to form Truist incurred $5 billion in integration costs, and the new bank took five years to reach the combined net profitability of its predecessors.
These troubles are not uniquely American. An infamous example is Deutsche Bank’s acquisition of Postbank in 2008, after which it did not immediately move to integrate Postbank’s 20 million customers. In the following 9 years, the acquired bank struggled, and Deutsche opted for full integration, kicking off a six-year process that failed to deliver business benefits and led to the sale of Postbank last year.
An even more damning case comes from across the channel: Banco Sabadell’s drawn-out integration of TSB following its purchase from Lloyds. Although the data migration from Lloyd’s legacy systems to Banco Sabadell’s relatively modern platform was successful, albeit severely over-budget, 1.9 million of TSB’s 5.2 million customers could not access their accounts for five days, while data breaches further mired the merger.
The banking industry has taken stock of the dire financial results and reputational damage expected from legacy-dependent integrations, and preparation for mergers and acquisitions is a key driver for legacy system replacement and operational improvements.
A Building Imperative for Modernization
Although broad consolidation is not yet viable given current economic headwinds and a skeptical regulatory environment following 2023’s bank failures, the window for mergers and acquisitions in the banking industry will open once again when conditions improve. In that landscape, banks face a stark choice: adapt or disappear. Those tied to legacy cores will lack the agility and capacity for integrations required to pursue deals, either acquisitions, mergers or sales, risking decreased valuations and a degradation of their competitive edge.
Replacing a core banking system is a mammoth undertaking, requiring a significant cash investment and at least two years for implementation. Subsequent staff up-skilling for new processes, customer education and diverted attention from product development add to the scale of the challenge.
The expense and timeline make it hard to realise a return on investment in modernization from an institution’s current deposits and loan books. Yet without modernizing legacy infrastructure, banks will be sidelined when the consolidation surge arrives. Only by investing now in transformation can institutions gain the agility and capacity for integrations to enable them to survive and thrive when the market turns.
Banks increasingly rely on fintechs to modernize their systems and products, driven by a need to streamline acquisitions and mergers. However, fintechs should focus on gradual implementations rather than disruptive all-at-once legacy replacements to serve this demand best. Banks are focused on improving their systems without significant disruptions to customer-facing operations and other IT projects.
Therefore, a platform that can complement and gradually replace banks’ legacy infrastructure is preferable, enabling banks to continue uninterrupted with their typical activities while preparing for future consolidation. Simplifying inefficient processes that have been central to banks’ operations for decades is disruptive, and fintechs should not add to this with grand transformations; slowly adding modern functionality and replacing legacy core infrastructure enables a sustainable and iterative deployment.
In addition, fintechs should prioritize integrations with legacy systems and peer fintech solutions. Supporting legacy infrastructure enables a smooth switch to modern platforms, reducing the technical overhead incurred during transitions and boosting cost efficiency.
When banks assess a potential deal, the costs of integration are a key consideration in the financial viability of the merger or acquisition. Maintaining a library of prebuilt connections with peer fintech solutions is crucial for increasing banks’ competitiveness in deal-making, decreasing the time, energy and cost of integrating deposits and loan books from acquired banks.
The banking industry is gearing up for industry consolidation, with institutions investing in infrastructure upgrades to boost agility and protect valuations when the window for M&As opens. Fintechs must deliver incremental, non‑disruptive paths for modernization that can initially run alongside existing cores and include libraries of prebuilt connections with peer solutions. Supporting this measured approach will ensure fintechs remain competitive as consolidation heightens, acting as the gatekeepers and key enablers of increased M&A activity.
Source: The Financial Brand
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