The banking industry’s biggest service providers, sometimes referred to as “battleships,” have grown largely through acquisitions. When market demand moves toward a new channel for delivering financial services (e.g., smartphones) or potential for a replacement solution opens up a new market tier (e.g., digital banking among regionals), these “battleships” acquire other entities to keep pace and/or unlock a new opportunity for revenue growth. Often, they wait for an upstart to gain some market traction then give its investors an exit strategy worth multiples of their initial stake.
Though there were acquisitions that fit this profile in 2019, overall, the battleships have been running silent with a few exceptions, of course. That may be about to change. As the COVID-19 pandemic continues into its seventh month in the United States, banks and credit unions continue to report growth rates in digital banking that are outside of prior trends.
A survey conducted by SRM in July found a significant number of financial institutions were reporting 20%+ digital banking user growth rates. The same survey indicated the executives of these institutions had already determined they would need to place most of their focus on digital over the coming months if they wished to remain competitive.
To meet this challenge, banks and credit unions need to do more than replace their digital banking provider or push harder for the features consumers are demanding to be pulled forward on their existing vendor’s road map. If replacing the core was ever an answer to the challenges of digital – and it wasn’t, in my opinion – then it is certainly off the table now, given most five year digital transformation plans have had their end points compressed to 18 to 24 months.
In fact, some banks and credit unions have already decoupled their digital solutions from their core platforms. The impact of the pandemic on the consumer’s banking habits will likely create even more impetus for doing so. In addition, there is an increasing willingness in the community banking space to consider options built around API toolkits which allow institutions to normalize the customer experience while bringing new third party innovations to market faster.
It would be erroneous to think that the “battleships” in our industry are not in possession of similar intel about potential sea changes in the digital space. And, while core solutions tend to be the primary fuel for them, they will need new products and services to deliver the results their stakeholders expect. The pandemic may ignite another round of acquisitions by industry battleships looking to provide value-adds that address their customers’ needs.
Why the Battleship Label?
Battleships were key to the US victory in World War Two. They carried multiple batteries, air defenses, and guided missiles. Though they were smaller than aircraft carriers, their size was still impressive (the USS Missouri, for example, is roughly the size of three football fields). However, as speed and nimbleness became increasingly more important to the US defense strategy on the high seas, battleships were retired to make way for new ships that were better adapted for those needs.
The battleships in our industry are impressive in their size as well and, like most large organizations, they also tend not to turn on a dime or accelerate quickly – at least not at the levels required in the digital age. However, unlike the battleships that once were vital to the US fleet, these industry battleships remain relevant in today’s marketplace by acquiring what they need to defend their market share. The list of such deals runs pages, with key examples including NCR’s acquisition of D3, FIS buying Clear2Pay, and Fiserv rolling up CheckFree.
What does this mean for banks and credit unions looking to rapidly implement innovative new solutions? Many might worry that, at some point, their new, nimble partner will be absorbed into one of the battleships, therein compromising the very attributes that made the institution select the emerging company’s technology. It is likely best to not let any such theoretical uncertainties slow you down.
Some of these combinations are inevitable and the downsides of inaction in the present for fear of such in the future is far greater. Besides, the battleships will have plenty of incentive to keep their acquired customer base happy and, if they don’t, options will arise at a rate far greater than was the case when most of our industry battleships were commissioned. In a future where software architectures use APIs to allow for continuous innovation, vendor lock will become less onerous.
Fair Winds and Following Seas
One thing is certain, speculating about the future acquisitions which might prove fruitful targets for our industry battleships is a practice in prognostication with a lower hit rate than weather forecasting. It would be better to highlight some of the recurring themes that community-focused financial institutions raise in our firm’s conversations with them.
One area that has come up more frequently in discussions with community banks and credit unions is servicing small businesses. The SRM Academy has captured much of what has been said in these discussions in an eBook entitled “Unlocking the Value of Small Businesses.” This has been a long-underserved market segment (with revenue generating potential) for a long time forcing many owners to seek financial services from non-traditional providers. Now, especially, these small business owners need financial services that address the difficult terrain in which the pandemic has placed them.
Another opportunity exists on the consumer side, where COVID’s disruptions provide a rare opening to encourage account holders to revisit their card use patterns. It’s often difficult for smaller institutions to find ways to differentiate and move to “top of wallet” status. Here the play is toward data analytics leveraged through digital channels. Understanding the buying patterns of cardholders at an individual level provides opportunities for community banks and credit unions to reach a level of relevance and value-add that creates card loyalty. The SRM Academy offers a report and an interview with SRM’s leading card guru, Robert Koehler, that can help institutions begin to identify where they can apply data and personalization to achieve this goal.
The Bottom Line: The technology that can assist in these two areas exists – some already part of the industry battleships’ arsenals and some with companies that are new to the banking landscape. If I were the captain of a battleship, I would be looking for targets that bulk up my ability to defend my client base.The large companies that provide solutions to community banks and credit unions built their businesses around core processing solutions, adding additional products to their portfolio when the opportunity and/or market indicated it was prudent. With digital becoming the primary focus due to a pandemic that has dramatically increased the number of consumers using the Internet to satisfy their financial needs, there may be new deal opportunities for these organizations.