From January 1994 through August there were 797 bank mergers.
Since there are more than 10,000 banks in the United States, experts predict consolidations will continue at a rapid clip, with institutions in the $10 billion to $100 billion asset range likely to be the most active players.
Analysts say the trend will not end until the 25 largest banks hold 80% or more of industry assets, up from 60% now.
In bank boardrooms across the country there is a palpable sense of urgency - not only because of overcapacity in the marketplace but also because of nonbanks' relentless pursuit of banks' traditional franchise.
To address these issues, banks are devoting much attention and money to the development of computer-based marketing and delivery systems.
Using a marketing data base for customer segmentation is hardly a new concept. What is new are the methods available to leverage marketing data bases and segmentation to provide solutions in the bank mergers and acquisitions arena.
Creativity and flexibility, rather than sheer size, will determine success. Even though the banking industry seems obsessed with largeness, bank marketing must focus on the small, because most bank-customer relationships hinge on one-on-one contact.
Banks that know how to apply segmentation strategies to manage customers will have the power to effectively match an offer to a customer's need and thus realize a merger's true potential.
Segmentation allows banks to develop and implement marketing and service strategies based on a customer's product usage, channel preference, and current and potential profitability, as well as on a demographic and psychographic profile. The data that can reveal all this information already reside on the data bases maintained by most banks.
It has been a generally accepted rule that, from an implementation standpoint, mergers and acquisitions are unfortunately but necessarily chaotic undertakings.
Restrictions on the sharing of data between banks prior to legal consummation of a deal make it difficult to do any planning at the customer relationship level.
So when the data finally become available and marketers for the first time have a view of the merged entity, they must quickly address time- critical issues, such as customer overlap, account retention, and deposit runoff.
There is a surprisingly straightforward solution to this problem. Once a merger or acquisition is announced, both banks can sign a confidentiality agreement allowing a third party to merge the banks' data bases. At the legal merger date, the third party can install the merged data base on-site so marketers and systems managers can immediately get down to the business at hand.
There are numerous issues that can be addressed by using a merged marketing data base.
Before the Merger
After the announcement of the merger, but before it is legally consummated, the merged marketing data base can be used to plan merger activities and communications, to identify opportunities and risks in advance, and to establish benchmarks against which the impact of the merger can be measured. Here are a few examples:
Customer segmentation. It is important to know early on how the banks' customer profiles compare, where the similarities and differences can be leveraged, and what the implications are regarding image, competitive positioning, service delivery, and pricing.
Shared relationships. Given an in-market merger especially, what may appear to be an unprofitable customer on each bank's separate data base can turn out to be a profitable customer on the combined banks' data base. Being able to target your newly identified best customers is crucial to retaining significant business, for if these customers leave, they are likely to take both halves of their business with them.
Community Reinvestment Act. Bank mergers are big news, and often the local media will choose sides in a merger, which can seriously disrupt merger proceedings. It is therefore very important for the bankers to be armed in advance with CRA reports and statistics that can be referenced in the event of a challenge by regulators, the media, or public interest groups.
During the Merger
From legal date to conversion, the objective during this phase is to use the merged data base to support merger communications, conversion planning, and cross-selling programs.
Here are a few examples:
Segmented communications. Merger communications and dollars spent on them should vary depending on the value of the customer relationship. A single-service checking customer ought to be dealt with differently than a customer who holds a checking account, a mortgage, mutual funds, and an auto loan.
Cross-sell analysis. Merger communications, especially those related to product conversion and repricing, can be leveraged to serve not only notification purposes but also cross-selling objectives. This takes advanced planning and analysis, which the merged data base is there to facilitate.
Direct mail. Once the customer audience segments have been identified, targeted messages can be developed for direct mail programs. Results of these programs are tracked on the merged data base, allowing for accurate analysis of return on investment.
Product repricing. Prior to conversion, merging banks need to assess the impact of portfolio repricing, both in terms of fees and interest revenue. A merged data base can provide the necessary information to gauge current price distributions and gaps, and can allow the banks to perform repricing sensitivity analyses.
After the Merger
A systems conversion usually marks only the beginning of a long process of bringing the two banks together.
Branch consolidation, systems integration, and service delivery standardization take months if not years. Monitoring this process and its impact on customer relationships is essential for retaining and growing a bank portfolio. Data base support can help banks' post-merger efforts in a number of ways:
Customer retention tracking. In all bank mergers, customer retention is one of the highest priorities, for obvious reasons. Thus it is crucial to have accurate information regarding attrition at several portfolio levels, including customer, account, and deposit and loan.
There are powerful data base tools designed to track and measure attrition. And, measuring against pre-merger attrition benchmarks provides the much-needed analysis to pinpoint high versus low waning segments and whether or not their behavior is merger-related.
Closed account surveys. Just as it is important to understand peoples' attitudes toward the merger, knowing why some customers have left the bank is essential for formulating retention strategies.
Attrition early warning modeling. Although attrition tracking and research is necessary, it still only measures the damage done. To be proactive, merged banks must have a mechanism to support preemptive strategies. Using logistic regression and neural network modeling techniques, predictive models can be built and applied to the data base, enabling clients to identify customers who are at risk of leaving while time remains to do something about it.
Branch consolidation tracking. Not all overlapping branches are closed at once. The process is usually handled one branch at a time in order to avoid major disruption. Because of this, there is an opportunity to learn how customers are affected by branch closings. The data base can be used to track branch closings, allowing the bank a chance to modify consolidation plans and to more effectively manage the process from a customer retention standpoint.
The Future is Now
Banking is undergoing a revolution. As the industry continues to consolidate, goliaths are being created practically overnight.
The banks that are likely survive and gain market dominance will be the ones that have learned to apply technology not only to marketing and service delivery but to the merger process itself.
Mr. Blackwell is a vice president of data base marketing services at Harte-Hanks Data Technologies, Billerica, Mass.
