Regulators should greenlight more M&A among banks and fintechs to avoid bankruptcies
In banking and fintech, conventional wisdom says that as the battle for retention becomes more fierce, you either have to spend a lot more on marketing or risk losing customers.
But there is another way.
Today, the pressure on regional and community banks is acute. Top-tier banks have the capital to digitise and expand. Meanwhile, tech companies are threatening to elbow their way in, leveraging their deep pockets and big data capabilities to carve out space in the sector. Now, cracks are starting to show in regional and community banks’ models as they leak revenue and lose customers.
The canary in the coal mine was Silicon Valley Bank’s collapse. Since then, First Republic Bank has followed, and a series of others have been placed on federal life support. In the UK, Metro Bank’s recent wobble had regulators twitching.
The initial temptation for those that have survived will be to spend what capital they do have on marketing. Or worse, strip back their offering and cut non-essential services. Neither of these will save regional banks from the looming recession.
Instead, I predict that more banks are going to merge over the next 12 months. Banks will need to operate at a significantly larger scale to remain competitive, and consolidation will help them achieve this. This will lay the groundwork for them to cultivate dynamic regional banking ecosystems. What exactly does this mean?
Digitisation has made comparing and changing banks easier than ever. To combat this, regional banks need to offer a ‘sticky’ service to their customers that goes beyond core financial services. The telecoms industry offers a useful roadmap here and has attracted customers through other offerings such as concert tickets and clothing discounts.
In a banking context, offering discounted access to entertainment services for long-term customers or bundling in subscriptions when signing up could give banks a competitive edge. Regional banks can incorporate fintech software and become a platform, matching users to third-party services. A parent managing their household finances can now buy a family pass to the theme park. A travelling executive checking their recent payslip can now book a flight. All without leaving the bank’s central app.
Developing an ecosystem containing these lifestyle and nonfinancial services will not be cheap. Many of these regional banks have previously resisted digitisation, so it will require technological infrastructure, software development and employee training. They will have to enter partnerships with retail, telecoms and entertainment partners, who will need sweeteners to offer banks access to discounted services.
In a world of high interest rates, geopolitical shocks and persistent inflation, this level of spending will feel counter-intuitive and will require a steady hand from senior executives. There are options available to them, though.
Consolidation and M&A activity will help regional banks form strategic partnerships. Multinationals will be more comfortable making a single deal with a large group than lots of smaller piecemeal deals.
Consolidation will also give regional banks the resources that they need to scale their business models and survive the looming banking crisis. A retail bank merging with a fintech start-up suddenly has access to a wealth of software and data. As competition intensifies, pooling resources like this is the best way to develop the infrastructure that a flourishing banking ecosystem requires.
This is why regional banks need help from regulators. Giving the go ahead to more M&A activity will incentivise consolidation and help avoid bankruptcies. This might involve relaxing legislation, like raising the cap for deposit protection, or stricter enforcement of the rules to guard against another Silicon Valley Bank-style collapse.
Banking regulation can be resistant to innovation, especially in connecting financial and non-financial services. Ensuring the health of the broader financial sector is obviously paramount. But this does not need to lead to paralysis. Within this remit, there is plenty of scope to stimulate M&A activity.
Should regulators avoid tunnel-vision and greenlight productive M&As, regional banks are best poised to take advantage of this new regulatory environment. Blue chip banks are established institutions that can be slow to adapt. The nature of regional banks is that they are smaller, nimbler and more likely to have their finger on the pulse of consumer needs.
This allows for a more personalised service. Where a top-tier bank’s app needs to be standardised to offer a uniform service, regional banks can leverage AI and ML to offer bespoke arrangements. This would allow them to build deep relationships with local communities, cultivating that commodity that’s been so nebulous in the banking sector – trust. Getting there will require brave decision-making, though.
This is why they need all the help that they can get. High-profile bankruptcies knock consumer confidence, keep investors up at night and cause contagion across the market. So, regulators need to give regional banks the required space to make the right choices. This is why I’m calling on them to greenlight more M&As to create an environment where dynamic regional banking ecosystems can flourish.
About the author:
Yerbol Orynbayev is an independent financial services consultant and former Deputy Prime Minister of Kazakhstan, now based in Washington DC, USA. He advises leading financial services and technology companies and has held a number of senior positions in private financial, research and technology companies.
Prior to his consultancy career, Orynbayev served as the Deputy Prime Minister from 2007-2013 and Aide to the President on economic policy from 2013-2015. He also worked as the Governor of the World Bank on behalf of Kazakhstan and helped to steer the nation out of the Financial Crisis in 2008.
He was also previously Chairman of First Heartland Securities and held a number of board-level roles at the National Bank of Kazakhstan and Agency for Regulations of Financial Markets.