2019 could be a big year for mergers and acquisitions (M&As) in the banking industry, according to a Yahoo Finance report. Lower corporate tax rates and regulatory changes could all lead to larger banks making deals. As the report claims, prior to these changes—many of which took place under the Trump administration—banks around the $50 billion mark had been hesitant to make deals because growth would subject them to additional regulatory requirements.
Now, larger banks have more incentive to make moves. Savings from the Tax Cuts and Jobs Act of 2017 and other regulatory changes have freed up capital that can be used for M&As. This is at odds with historical data, which shows that M&As have traditionally been dominated by community banks.
Following the post-crisis period (referring to the financial crash of 2008), the voluntary attrition of banks increased significantly—including a 15-year high increase of 4.9 percent in 2015—according to data the FDIC released in Q2 of 2018. Traditionally, community banks have merged with other community banks. In fact, 91 percent of merger participants were community banks (although it's true that community banks make up 92 percent of all institutions).
For the last decade, this has led to a banking landscape that, according to the FDIC, is “composed of somewhat larger institutions that continue to provide essential financial services within a limited geographical market.” But is this about to change?
Many experts believe that 2019 and 2020 may see increased consolidation among large banks and a reversal of post-crisis trends. Regardless of the outcome, it’s safe to say that the M&A market has changed. Whether smaller banks are acquired by the heavy hitters, or continue to merge with similar-sized institutions, it’s important to be aware of the benefits of mergers and acquisitions.
The benefits of mergers & acquisitions.
For most banks and other financial organizations, a successful merger and acquisition means increased brand awareness, diversified revenue, and expanded market share. Let’s review some advantages of mergers and acquisitions.
1. Quick Growth
Mergers and acquisitions can help banks scale rapidly. And acquisitions provide banks with immediate access to more capital that can help boost its lending and investment efforts. When executed properly, this can lead to an increase in new clients. For example, a small bank expanding into a new geographic territory has immediate access to a trove of customer data. And when banks make the most of this data, they can convert leads into customers.
2. Increased Efficiency
Being acquired not only helps banks scale, it also increases their productivity, both in terms of their efficiency ratio and operational efficiency. Increased internal operational efficiency can help improve banking data analysis and performance management, streamline processes, and can lead to reduced costs—which, ultimately, contributes to a bank’s bottom line.
3. Improved Digital Capabilities
Mergers and acquisitions enable banks of all sizes to benefit from improved digital proficiency. As we’ve mentioned, being acquired by national banks can improve your digital capabilities. Not only can banks benefit from the exposure to new tools and technologies, they can also gain access to more human resources, which can increase their proficiencies.
How digital marketing can help alleviate risk.
While there are many tangible benefits of an M&A, it’s also important to be aware of its inherent risks. For starters, the banking industry must deal with the realities of compliance in every decision. Without diving too deep into that legal quagmire, it’s essential to align with your future partner on risk management processes and procedures.
Community banks may also feel a strain on customer perception. Because customers may have emotional connections with regional banks, it’s important for banks to manage a merger with careful, consistent communication. Digital marketing makes it easy for banks to deliver customized, targeted ads and messaging to customers in specific geographic regions—which can help mitigate the risk of a merger.
Digital marketing has made it possible for banks to unify their data and messaging across all touch points, channels, and product lines. This helps banks build awareness in new markets and convert leads into new customers. Because many banks rely on local audiences, digital marketing can help them deliver campaigns to attract customers in a new location.