As they strive to retain and grow their customer bases, today’s banks are facing two key challenges. One is that pervasive digital experiences are redefining how banking customers expect to interact with them. The other is that new entrants such as virtual banks or the tech giants like Google, Apple, Facebook and Amazon (GAFA) are entering the market, with differentiating value propositions. As a senior banker told me last week, “our major competitor is Amazon.”
The resulting competitive pressure is intense. Recent Accenture research¹ shows that 17 percent of industry players in 2017 entered the banking market in just the past 13 years, grabbing one-third of revenue growth in Europe. And in terms of stock market valuations, “Bigtechs”—GAFA and China’s Baidu, Alibaba and Tencent, or “BAT”—are 10 times bigger than banks because of their higher growth prospects. To retain their customers in such an environment, incumbent banks have started transforming faster than ever before—and investing in new capabilities and scale to create stronger value propositions.
No longer targeting scale—but capabilities
When it comes to acquiring the right capabilities, the quickest and lowest risk approach for banks is to look to their existing ecosystems. Many banks have taken this message on board: While previous waves of banking consolidation were about increasing the footprint, the focus now is acquiring scale and capabilities. In our study², 42 percent of banking leaders said their merger activity was triggered by the need for next-generation technology. And nearly 26 percent have acquired a digital company to gain the latest talent and technology, with 58 percent considering doing this.
The focus on capabilities has fueled a trend for banks to invest in or acquire fintech start-ups to supplement their traditional banking operations. Recent active acquirers include BBVA and BNP Paribas. And besides outright acquisition, there are several other ways for banks to access the capabilities they need. These include partnering with fintechs on open innovation, running joint research and development or setting up a venture arm to invest in start-ups.
Non-banks move into banking M&A
However, it isn’t just banks that have entered the banking M&A market. Private equity investors are also involved, using three main strategies: outright acquisition of banks to turn them around; acquiring businesses with similar competencies to enable build-ups in areas requiring scale, like payments or IT operations; and acquiring undervalued assets such as non-performing loans to work them out, often with the support of an operating partner. Payments companies are also active, mostly seeking new digital capabilities. Finally, platforms such as Rakuten have started acquiring financial institutions, to speed up their international footprint, mainly focusing on Asia so far.
According to an Accenture Research study, while the fintech M&A trend can be seen worldwide, European banks and payments companies are especially active acquirers. They’ve accounted for 22 out of 27 recent deals, mostly small to mid-size transactions, with 133 investments vs. 22 full M&A deals. The payments sector has witnessed a wave of takeover deals in 2018, including Worldline buying the payments unit of SIX Group.
M&A imperatives for banks to get right
To emerge as digital leaders in this fast-moving M&A environment, banks need to develop a systematic end-to-end approach that includes proactive identification of targets, valuation of digital assets, synergies and risks, and operational implementation and integration.
There are four imperatives:
- Factor capabilities into buying decisions, with an emphasis on digital, new IT and agile ways of working.
- Evaluate digital assets rigorously in the M&A process, ideally using an adapted valuation model for screening targets and a continuously updated database of start-ups.
- Use new tools to execute M&A, enabling the bank to boost deal speed, reduce costs and increase the focus on extracting value. Outsourcing can be an accelerator, for instance.
- Adapt the governance and elevate the CTO/CIO’s role in M&A from the start. Buying for capability and using digital in deals require a new mindset, skills and voice—all the way from target screening and due diligence through to integration and shaping new digital capabilities.
Amid today’s intense disruption and growing dominance by GAFA, targeting ecosystem synergies is banks’ best strategy for survival and success. M&A offers a way to enter a new sector or market quickly. And when a fintech is a clear strategic fit, the impact on a bank’s growth and performance can be very rapid indeed. So, the question is: What capabilities do you need—and where will you find them?