We’ve had the boom, we’ve had the bust, and then a decade of painful re-stabilisation. Now, the banking and capital markets industry stands on the cusp of a tech-powered resurgence. How can your business get out in front?
The Big Bang market liberalisation of the mid-1980s unleashed 20 years of financial innovation. Return on equity (RoE) of 20% or more became routine. But the Global Financial Crisis put an end to all that. Soaring capital and compliance costs have made a lot of once highly profitable businesses no longer viable, including much of financial innovation. Average RoE in most developed markets now barely covers the cost of capital , and all too many banks are trading below book value as a result. The industry cannot limp on like this indefinitely. The good news is that it doesn’t have to.
The technological revolution that has transformed other sectors – retail, media and communications being amongst the most prominent – has been slower to make its mark in Banking. For much of the past decade, the demands of new regulation, de-leveraging and restructuring have left most Banks with little time or money to focus on much else.
Yet as investment in new technology begins to pick up, a fresh wave of innovation and value growth is emerging. Harnessing automation, blockchain and artificial intelligence won’t just enable your business to drive down costs, but also serve more customers and target valuable new segments. We are already seeing investment banks reaching into retail markets, and services that would once have been reserved for large corporates being extended to increasingly smaller enterprises. In turn, sharper customer intelligence allows your business to target and tailor solutions more precisely than ever before.
As I outlined in an earlier blog, the other big breakthrough – the equivalent of the liberalisation that paved for the way for the innovations of the 1980s – is the availability of ultra-adaptable and accessible ‘plug-and-play’ technology platforms. For example, shifting core legacy banking systems to the cloud makes it easier to connect with clients and scale your operations to meet changing demand. In turn, integration layers such as application programme interfaces (APIs) allow you to quickly and easily link up with multiple partners to offer a range of best-in-class services , just as large online retailers have been able to do in their ‘marketplaces’.
So what is the role of M&A in contributing to this strategic and operational transformation? Consolidation in the pursuit of scale will continue. Yet, merging two businesses running on outdated technology simply creates a larger business running on outdated technology that is even more fragmented.
If the key priority is to reignite innovation within your business and modernise your operational platform, then the real value of M&A is securing the required technological capabilities at the necessary speed while acting as a catalyst to transform business and operating models. Historically, many change programmes have struggled with compelling investment cases. Linking transformation to the M&A agenda can provide the right conditions to accelerate change.
Driving growth and transformation across banks, likely targets include challenger banks and FinTech businesses, along with tech businesses from outside the sector. We’re also seeing deals that target talent at a time when banking organisations’ need for tech expertise is now as big as financial acumen. Further openings include joint ventures with some of the big technology players.
Once you have the platform you need to compete, that would be the time to acquire larger organisations as you’ll be able to serve their customers more effectively at less cost. You will be a frontrunner in the accelerated consolidation of the banking industry.
The key to thriving in this dynamic environment is a clear plan to manage your initiatives and maximise the value of your M&A strategy:
M&A offers a fast and effective way to transform your capabilities and break out of the cycle of stagnation and slow growth. Yet the window of opportunity will be brief. If you wait for a competitor to establish a decisive lead, then you could quickly become prey in the follow-up wave of strong groups acquiring weaker peers.
Our integrated M&A value creation platform brings together a group of deal value architects, who work with you to determine strategic priorities, identify opportunities and help you to initiate the optimum operational change to your business. Banking has always been among the most innovative industries and we are pleased to be working with Banks and other Financial Services organisations on this journey back to growth.
Find more information on M&A value creation here.
 Average RoE is around 9.5% in the US (https://fred.stlouisfed.org/series/USROE) and 7% in the EU (https://www.bankingsupervision.europa.eu/banking/statistics/html/index.en.html)
 A key catalyst for the move to API-enabled banking is Second Payment Services Directive (PSD2)