In a typical bank merger, the profitability plan calls for cost savings with limited revenue losses. The general idea is to run a fast and efficient process to close the merger deal and convert your new customers and staff to your systems so you start earning those savings as soon as possible.
Is that really the best approach? Repeated studies of mergers show that 70% or more fail to reach their financial goals, which are based on such cost savings from operational synergies. Why?
The problem is that mergers prove highly disruptive for every person and customer in both banks involved. Your staff will be busier than ever planning and executing the hundreds of actions needed to consolidate your new customers into your systems and train your new staff in the use of those systems. Meanwhile, your partner’s staff is worried about their job security so productivity and customer focus is down by over half. No one in either institution stays as close to their customers as usual, even though every customer and employee of your bank and especially your merger partner’s bank becomes a target for your competitors to steal. With all the extra work there is even less time to develop new customers so the sales momentum of both organizations drops badly and it’s hard to replace the accounts lost.
The solution to this dilemma is to approach the merger as two events. First, execute the merger in the traditional way, i.e., focus on creating the cost savings. The second part, which most banks ignore, is to plan and execute the customer conversion as though you had bought a group of portfolios, not a bank. The customer conversion planning team has no operational cost savings to pay for their work; they simply have to figure out how to keep the customers and generate greater revenue from the portfolio to pay for the acquisition.
Product Changes
You may feel there is no need for customer development planning because your products must be more profitable since your bank is more profitable than the one you bought. The major reason for the difference in profitability is often the higher problem loan rate of the bank you acquired. An analysis of all bank mergers between 1980 and 1994 found that the acquired bank averaged almost a 60 basis point higher rate of non-performing assets. So, detailed customer analysis has great potential for increasing revenue as well as becoming the basis for improving borrower performance.
Now you are probably asking: why would I ever add more work to my already overworked staff? Because increasing revenue is far more powerful than cost savings in hitting your financial goals for the merger. McKinsey & Company’s 2010 study of mergers found that exceeding revenue targets by 2% to 3% offset missing cost reduction targets by 50%.
To increase the revenue from the newly acquired customers, you want to change the products they are using in ways that encourage greater use. If you are launching new products targeted at your new customers, you should offer them to your current customers too. If the new products increase revenues from the acquired customers they probably will from your current customers as well.
There are many ways to modify products even if they feature fixed terms and conditions. You can add carefully selected new rate tiers to encourage consolidation of balances with your bank. For lines of credit, you can increase the line limit, which often increases usage, or reduce interest rates to encourage expanded use. For term loans, you can offer to allow them to be paid off early with a new loan with advantageous terms and a larger balance and/or longer term that you offer. Or you can offer a product that rewards customers for using both credit and deposit products with lower fees. Or add a loyalty reward program to increase use and retention.
This marketing and sales planning effort has to be completed before the operational conversion planning can be completed, and the execution of both needs to be closely coordinated so your customers are moved to the appropriate new products. This means you need to make fast, accurate decisions on what to offer each customer.
It can be easier to decide what to offer individual consumers if you use external data to better understand your customers. Credit bureaus provide updated scores and you can see the usage for products not supplied by you. You know which customers pay in full regularly and which don’t. Other third party data will help you understand their life styles and life stages so you can make offers consistent with those attributes.
Business Customers
Less external data is available for business customers. One option is to work with the data in your credit files as-is. This will probably prevent you from making any significant offers since the data is most likely in a manual form, so moving rapidly is difficult. The data is generally stale, making it tough to make new and different credit offers confidently. And the frequency of data collection makes it very hard to see changes in performance patterns within a reasonable time frame.
A second option is to analyze commercial customer data from internal operating systems, such as loan balances and payments and overdrafts over time. This allows you to use current information on their contractual performance and provides limited indirect information about changing financial performance.
A third option is to use payment transactions to calculate cash flows and directly measure financial capacity. With this approach you have direct and current information on financial capacity that allows you to re-evaluate the debt offered. The daily frequency of payment transactions allows changes in performance to be seen clearly and quickly so that you can make fast, confident decisions.
Analyzing payments data also allows you to effectively allocate time to those distressed customers with the best chance of recovering and give them the information needed to see the impact of their decisions and actions quickly, allowing you to recapture the asset value not entered onto your books. No matter which approach you choose, you want to work closely with the relationship managers for each account to prepare a sales plan for each commercial customer based on what you now know of each.
Finally, consider the cultural differences between your organizations. The large number of new employees coming aboard sharing a common background will change your culture so use the merger as an opportunity to redefine your culture and reinforce it. People from both organizations working closely together through a full sales planning and execution process can help do this early and quickly. The alternative is to allow the tension from cultural differences to build and kill employee commitment and engagement. That’s a dangerous option in banking because the real knowledge is held by the people and the ability to perform is largely within the unofficial communication structures – one reason that cultural issues are the cause of many merger failures.
The planning process suggested above will minimize the damage that can result if key turnover occurs. Developing detailed customer profiles and individual sales plans leaves you in a much better position to defend all customer relationships, since multiple people in the new organization are now familiar with every customer.
Mr. Merkle is the founder and CEO of Unionville, Penn.-based CashFlow Insights, LLC, a firm specializing in improving the profitability of financial services firms. He can be reached at [email protected].
