Success Factors for Mergers and Acquisitions in the Financial Sector

By Tony Virdi, Vice President and Head of Banking and Financial Services in the UK & Ireland, Cognizant

Bank mergers are back on the agenda for the first time in many years as financial institutions are beginning to make strategic choices about what areas of their business are core. Alongside this re-evaluation process, banks are starting to simplify their operational infrastructure accordingly with the principal objective being to reap the benefits of economies of scale to compete more effectively and offset rising regulatory pressures such as capital adequacy requirements.

Tony Virdi, Vice President and Head of Banking and Financial Services in the UK & Ireland, Cognizant

But what are the factors that help determine the outcome of a successful bank merger and what do banks need to do to effectively integrate and operate their IT landscape?

As banks move forward with mergers and acquisitions, while still having to manage global enterprise risks as well as statutory and regulatory obligations, they are tasked with integrating technologies from various areas both within and outside their business. This involves, for example, streamlining business processes both in terms of customer experience as well as harmonising back office shared services.   This means not only aligning IT and business strategies, but also actually integrating technology and infrastructure components such as data centres, operating platforms and enterprise applications. Any glitches or disruptions during this process can negatively affect customer service and levels of trust, critical aspects of a bank’s reputation and, therefore, the bottom line. So it is essential that banks work to mitigate exposure in key areas related to process resilience, inter-connectivity, regulatory compliance, credit – and collateral – quality, innovation and liquidity

Mitigating the risks

Getting it right requires a rigorous and structured analysis of both organisations’ IT landscape relative to the business processes to be delivered. There will be multiple options and choices on the table and there are risk factors that can be mitigated through advance planning and due diligence to ensure a smooth merger. First of all, banks need to be aware that systems integration is a crucial factor that must be addressed very carefully. A failed effort can have a cascading effect on customers as well as statutory and regulatory reporting, leading to confusion and potentially irreparable damage to a bank’s reputation. Secondly, banks need to have a realistic view of the pace of integration of the merging banks, while due diligence by both businesses is critical in determining if the merger will actually yield beneficial results. Crucially, banks then need to engage IT teams and ensure the business’ needs are aligned with the merged IT infrastructures in order to avoid compromising business continuity.

Success factors

When it comes to bank mergers, the most important success factor is assuring the functionality of the IT infrastructure, which directly affects the customer experience.

Depending on the various scenarios relating to the merging of two different IT infrastructures and the banks’ business requirements, there are some points that need to be taken into consideration to ensure a successful merger – not just from the banks’ operational perspective but in order for the underlying IT infrastructure to be able to support the business in meeting its objectives.

Banks need to decide whether it is better to select one of the existing IT landscapes, or opt for an altogether new IT environment. Keeping an existing IT infrastructure will require less time and effort, since at least some users will be familiar with the systems; the expertise is already there, and can be used in the merger process to help save time and costs. Applications that together form a relatively integrated group should be identified across the merging entities, taking into consideration cost, training requirements, data from other applications that can be phased out and the degree of flexibility of the application to meet future requirements. A robust IT architecture should be flexible and scalable enough to incorporate those systems and the underlying business processes.

Safe in the knowledge

In this digital banking world, where differentiation and customer experience is enabled by how effectively banks use data, banks risk eroding significant value, without a well thought through and quickly executed data and IT integration strategy.  Going through a merger or an acquisition is an additional challenge and systems integration is one of the core components of bank mergers. With an increase in M&A activity expected in 2015, financial institutions must focus more than ever on putting in place the correct IT and data integration plan – that is aligned to the business vision which invariably will include a strong digital theme. What is more, reporting regulations, many of which define standards for data aggregation and reporting, potentially pose additional challenges during an M&A scenario.

In order to ensure a smooth transition, the IT department should be involved from the very beginning of the process and the IT integration strategy should be aligned with the business strategy to ensure a successful merger. The current technology landscape offers plenty of alternatives such as cost effective open source options, SaaS models that allow a consumption-led commercial infrastructure as well as the emerging Business-Process-as-a-Service (BPaaS). These options allow banks to consume complete services without having to worry about new technology investments.

Ultimately, however, the use of an agile IT landscape further strengthens the cultural integration of the merged institutions and enables the bank to offer a consistent and reliable service to its customers. Only then can banks be safe in the knowledge that their combined IT infrastructure is flexible and scalable enough to absorb future changes and meet the demands of the business, its customer and the regulators.