Here’s a hypothetical. “First Bank” is considering a potential acquisition. They look carefully at the deposit base of “Target Bank”, but don’t dig deeper to analyze account holders’ usage patterns before deciding to pull the trigger.
When First Bank finally announces the deal, they stress the efficiencies of scale and cost savings it will produce. Shareholders are told how they will benefit, and analysts are told why they will love it.
Months earlier, First Bank decided to nix Target Bank’s account structure, pricing model, fees and policies. Everyone would be migrated over to First Bank accounts.
When Target Bank’s customers are eventually welcomed to First Bank, there’s a backlash. Unfortunately, First Bank waited too long before reaching out to their newly acquired account holders.
Employees aren’t really prepared for the fallout either. Just like customers at both institutions, they weren’t fully informed. Information was dribbled out on a “need-to-know” basis. Now employees at First Bank and Target Bank struggle responding to the flurry of questions and complaints from people. Customers and employees alike start jumping ship.
While no one would ever deliberately craft a merger strategy in this fashion, most financial institutions in First Bank’s position make one (or more) of these mistakes in a merger or acquisition. It is more common than most banking executives care to admit. According to a qualitative study by Novantas, this hypothetical reflects the real-world experiences of consumers at banks that have recently been acquired.
With consolidation in the banking industry growing at a steady pace, more financial marketers will continue challenges making M&A deals successful. Ultimately it’s the relationships that are being acquired, not just assets and building buildings. Here’s what to know before you find yourself embroiled in a merger nightmare.
Mastering the Merger Emotions
Money always stirs up a whirlwind of emotions, and mergers are a major trigger. According to Matthew Sharp, VP/Head of Customer Knowledge at Novantas, people at an acquired institution experience a tidal wave of emotions once they grasp what’s really happening.
“Customers get rubbed the wrong way not knowing about the deal. And then, the ‘what’s in it for me’ factor is often not communicated.”
— Matthew Sharp, Novantas
Novantas interviewed account holders at seven different institutions that were part of mergers or acquisitions. Researchers talked with both customers who stayed and those who took their business elsewhere — an equal number of each group. The study’s forensic audit stretched three years out from the date of the merger.
The views of both consumer groups yielded a multitude of lessons, but most importantly, researchers wanted to understand those customers who departed.
“Emotion is driven by the feeling that news of the acquisition was not communicated well,” says Sharp. “Customers get rubbed the wrong way by not knowing about the deal. And then, the ‘what’s in it for me’ factor is often not communicated well either. The potential value is not presented to them.” These missteps color their impression of the acquiring institution, and the new bank is often perceived negatively right from the beginning. The relationship isn’t off to a good start, and the odds of divorce increase.
Avoiding That Nasty Merger Aftertaste
“Some customers who leave have been through multiple acquisitions, and this is just the final straw.”
— Mike Jiwani, Novantas
In discussions with customers who left after a mergers, Novantas uncovered a range of frustrations. Mike Jiwani with Novantas says that by the time some consumers decided to leave, they weren’t just unhappy, “they were hot.”
What sparks this level of outrage? According to Novantas, there are a few common “buckets” that customers feelings fall into.
“It’s a big bank takeover that’s all about profits.” People frequently believe M&A is 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 honor 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 — no 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 it 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 the customers at the institution being acquired.
The Wake-Up Call: ‘Hey There, It’s Time to Switch!’
One group in particular that should worry financial marketers are the “lurking switchers.” Some people use merger announcements as the excuse to act on an impulse to switch that they may have been postponing and/or debating for a while.
As one participant in the Novantas study said after hearing about an impending merger, “My immediate thoughts and concerns were that I wanted to switch banks anyway, so why not do it now?”
This “wake-up call” doesn’t affect everyone. Novantas found that it hits two specific groups more heavily: inactive account holders, and those who frequently incur service charges.
Matt Sharp with Novantas says that the likelihood a customer will leave is much greater if they are inactive, while active users are 80% less likely to leave. Ultimately, the acquiring institution needs to estimate attrition and calculate “stickiness”. That’s why the acquiring institution needs to look closely at the deposit accounts it’s acquiring. How often do account holders use their debit card, for example? 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.
The financial negatives caused by an acquisition also came up in a number of comments made by participants in the Novantas study. New fees, higher minimum deposit requirements, and having to pay for checks because of the institution’s name change were among the items that most irritated respondents. People also objected when the acquirer pays less on a given type of deposit than their old institution did.
What surprised researchers is that some people decide to leave after an acquisition even when their fees wind up being reduced.
“They may not be aware of the product benefits that are 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.”
How a merger gets executed is another factor significantly impacting whether someone stays or leaves. According to Sharp, screwing up transitions is “one of the things that will really tick consumers off.” He says customers will stick around “if the acquiring institution handles the transition seamlessly.”
Jiwani says some consumers simply decide to stay “because nothing got screwed up.”
Branch Closures Impact the ‘Switch or Stay’ Decision
Novantas research points out that many acquisitions these days are in-market — expansions of market share, rather than expansions of physical territory. This makes closures of locations more likely.
While branches may not be seen to be as important as they used to be, Novantas’ research indicates that closure and consolidation in the wake of a merger still weigh significantly in retaining or not retaining consumers. It’s another facet of the “wake-up call.” Once the acquisition of their bank is announced, consumers become more easily disrupted.
To determine how likely acquired consumers will feel affected, Novantas recommends first analyzing transaction patterns among the acquired base. How often consumers transact digitally versus at a branch figures into the decision. Then look at where, when, and how can help determine where branches should remain open, where ATMs can substitute, and where closure or consolidation will have less impact.
Communicating with consumers about closure decisions is critical, and Novantas recommends calling high-value consumers rather than sending mailings. Frequent communication with both employees and soon-to-be-customers is critical to making deals work.
Interviews with consumers who remained with the acquiring institution indicated that mergers can ultimately have a happy ending. It’s a chance for a fresh start, a new beginning. But that hinges on communicating with all constituencies early and often, continually stresses the merger’s advantages, benefits and upside.
Sharp says that one response that stood out in his mind came from a consumer who felt service improved.
“He said, ‘I got a better bank after this transaction’,” Sharp recalls.
At the least, says Jiwani, consumers want to be reassured that the level of service they currently have will not deteriorate.
“A lot of their feeling is just wanting to know that things will be the same,” says Jiwani. “A sense of sameness resonates with customers.”