Last month, the regional banks SunTrust and BB&T announced the largest bank merger since the 2008 financial crisis, one that would create the sixth-largest bank in the U.S.
At the time of the announcement, some commentators interpreted the deal as the latest in a long tradition of regional players consolidating to gain scale and reach. But there was a larger factor driving the union. With SunTrust and BB&T, we witnessed an early example of M&A driven by the opportunity to pool investment in digital capabilities and services. As consumers demand digital banking services, SunTrust and BB&T set a model that many other regional banks will follow.
Up until a few years ago, banks with a strong regional presence sought acquisitions primarily for geographical reasons. A big part of this was expanding their branch networks into new cities and regions, as well as generating operational savings by consolidating in places where there were overlaps.
In the old world of branch-based and largely physical banking, this strategy worked fine. But we’re now in a different, digital world. While branches remain an important part of the banking business model, the real growth is in digital banking services — and increasingly, as millennials become essential to a financial institution’s long-term viability, in mobile banking. Today, there’s a growing focus on taking the mobile banking model and refining it with sophisticated data collection capabilities, in order to fuel artificial intelligence engines that deliver more personalized and engaging experiences.
What’s more, digital platforms and service models are more scalable than their physical predecessors. When you acquire a bank branch in a particular city, that’s where it stays — servicing just local customers. By contrast, invest in creating a digital banking platform and you can leverage it anywhere, even in cities where you’ve never had a physical presence. Merge with another bank and pool your digital investment war chests, and you have twice the budget to digitize and accelerate innovation.
Given all these factors, it was not surprising that after their deal was announced, executives at both SunTrust and BB&T stressed the important role digitization played in their decision to merge. The BB&T-SunTrust deal will prove to be just the thin end of the wedge in 2019, as more regional banks decide to consolidate or pursue M&A as an avenue to fast-track digitization.
Of course, wider industry conditions are also driving regional banks toward consolidation. The current economic environment is especially positive for larger banks, intensifying the competitive pressures on their smaller counterparts. With strong 2018 earnings and interest rates at their highest in over a decade, the largest U.S. banks have the flexibility and free capital to prioritize investment in the digitization needed for their long-term survival. A further favorable factor for the largest banks is the 2018 tax law, with the reduced liquidity requirements and a friendlier regulatory environment freeing up further capital for technology investments.
Regional banks’ most powerful weapon against these larger institutions is digital transformation of their customer offerings. At the same time, the momentum behind digitization — and therefore the attractiveness of consolidation for regional banks — will be further increased by the industrywide move toward open banking and open APIs.
We can already see many of these forces playing out. Heavyweights like HSBC and Goldman Sachs have put investing in fintech and open banking at the heart of their strategies, with both banks recently investing in the U.K.-based open banking startup Bud. Even without a push from federal regulation, a consumer-led revolution will drive a shift toward open banking in the U.S. as well. As U.S. consumers enjoy more seamless experiences on their personal finance apps, banks that lag behind in digital adoption will increasingly struggle to hold on to their customers.
The message for regional banks is clear: Consolidation is an increasingly valuable and viable way to raise their game in digital. If a bank is already sufficiently advanced with its digital transformation to compete with fintechs, then it may be able to go it alone. But even then, there may be opportunities to acquire digital laggards along the way.
Whatever the strategy, the key will be investing heavily and at pace in new technologies. SunTrust and BB&T have demonstrated how M&A can help regional banks achieve this — and more will now follow their lead.
