Banking Consoldation

Banking consolidation

In a discussion with a President of a retail bank, territory focused, and with more than 4,000 branches came out that his bank is “condemned” to grow to reach the economy of scale needed to compete today.

The bank lacks scale and competition, and they have failed to invest enough in technology or to cut the costs for their clients.

Merger will have the scope:

• To cut costs at home
• Well placed to do deals abroad
• Could catalyze further mergers that would bring gains of their own

And, most of all, he claims that “instead to become a possible prey, he would like once in a while also to be the predator”

Then he questioned me whether it is better for his bank to grow internally or externally (through acquisitions).

To grow only internally it takes too long and I do not think there is the time, but to grow externally there is not only the “conqueror” solution (to become either predator or prey), instead exists even the “affiliate” way to become a commercial entity with solid relationships with peer or larger banks.

Reading the article on The Economist (The alliance against Google- August12th) there is a similar debate about the merge between Microsoft and AOL to face Google superpower. Some thinks that if Microsoft will acquire AOL this would help Microsoft strategically. Others are not so sure, in fact they do not see a terribly good merger. There would be big cultural differences between a “media” company and a “software” firm.

Paul Saffo, a Silicon Valley analyst and a fellow of the Institute of the Future, a research group, thinks that any merger between groups with “big cultural differences”  is a “grand dramatic gesture” that would only hasten their decline.

Big mergers also run counter to a number of other trends on the Internet today, which are collectively known as “Web 2.0”.

“This is the age of mash-ups not mergers, open over closed” says Mr Saffo referring to the open Internet standards that allow users to combine, or “mash” services.

Another argument against full-blown mergers is that the bigger and more self-absorbed the established powers become, the less likely they are to spot new insurgences and innovations.

Then I would like to remind, Web 2.0, the new Internet trend

The Web 2.0 lesson: leverage customer-self service and algorithmic data management to reach out to the entire web, to the edges and not just the center, to the long tail and not just the head.

This leads to the model of a "dumb, minimal, network" with smart terminals, a completely different model to the previous paradigm of the smart network with dumb terminals. This paradigm shif will help implement new mash-up organizations.

Conclusion

Here are the results of my thinking, based on following facts, to propose an answer to the retail bank’s President dilemma:

• Key issues
  • Consolidation does not automatically equal success, larger banks, more products, higher profit or efficiencies. It can also mean losses and redundancies and statistics show that more than half of Financial Services’ M&A do not succeed

• Key findings
  • According to M&A experts, about 60% of M&A deals are unsuccessful because they approached the deal with overconfidence and instead of taking into account all the facts, they choose to purse their goal of global expansion (conqueror approach).
  • Estimating the costs and benefits of merging with or acquiring a Financial Institution is a major problem particularly as combining different systems and corporate cultures can be difficult ad costly.
  • The key to a successful merger to take account of stakeholder interests: Employees need to know they will benefit as individuals, whilst shareholders need to understand the rationale of the deal.

• Web 2.0 and the New Collaborative technology
  • One of the most influential effects of collaborative technology is that they “push authority way out to the edge”.
  • Organizations must be willing to push power to the edge.
  • Leverage technology means that organizations must work from the “edges in” (not like the old approach from the “middle out”).
  • You push your sensing and your collaboration tools out to the edges of the organization.
  • Your organization almost becomes an organic form where everything that’s touching the outside world is collecting and sifting information.
  • After empowering the people at the edge, organizations must create safety net systems in case activity spins out of control.

Therefore to grow externally through Affiliations is another option to be considered and it is based on developing and managing good relationships with all the bank’s stakeholders either internally (employees) either externally (clients, shareholders, suppliers,…).

Moreover, the now available New Collaborative Technology could help implement the new mash-ups based organization.

Your comments and ideas are welcomed

Lucio Vollaro

Comments

[pb]

In present days, there are strong interactions among goods selling, services selling and technologies.
Technologies used for establishing correct and winning value chains, suitable to address each right market segment, must be known and understood: they are not only tools, they are parts of the business model.
Those interactions need to use a method for selling, considering the business model in a wide sense, taking care of all the factors influencing the purchasing, from social aspects to individual features, to technology capability and so on.
That is the present main paradigm for applying a winning business model to the “one person market segment”, as market is defining itself in the last years.
Is it correct that some countries (e.g. USA, Japan, GB, France, Germany, etc) invested a lot in managers with “good” knowledge, in a “wide sense”? That now China is doing the same thing? Is the above mentioned investment the winning aspect for their success?