| Already bad at mega-mergers, banks face ‘take-no-prisoners’ newcomers |
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| UCD's Professor Anthony Hourihan told the World Economic Forum that few banks have a proven competence at merger execution and the internet is a poweful force for 'creative destruction' of traditional banking. The following is an edited version of his remarks. |
Most of the current and future mega mergers between already large scale commercial banks are a serious waste of financial and even scarcer managerial resources. They embroil the resultant banking behemoths in post-merger integration problems, which further distracts them from implementing effective customer relationship management. These behemoths become easy prey and weak defenders to the growing golden horde of technology competent opponents of the immediate future who are likely to have names such as Bank Amazon, Bank AOL, Bank Microsoft, Bank Dell, etc
Many banks are about to lose a large share of the 20 per cent of their customers from which they make 140p.c. of their profits to these "take no prisoners' new-comers over the next ten years.
With banks' cost accounting much better than it used to be, it has been discovered that many make 140p.c. of their profits from their top 20p.c. of customer, they break even on the next 60p.c. of customers and they make a loss on the final 20p.c. - thus accounting for 140p.c. of profits at the top end. Unfortunately many banks don't allow this information affect their strategic decisions, particularly their expansion, where they often end up buying networks of unprofitable customers.
Bigger, not necessarily better
While already past the point of diseconomies of scale, mega banks are spending billions on traditional acquisitions and mergers. To me, this is 'Maginot Line' thinking. It is acknowledged that being bigger at banking once you reach a certain point above $100 billion in assets or so all it gets you is, well, bigger. You do not become more efficient. In fact, in certain situations mega banks are more inefficient.
Furthermore, in 60 per cent of all European bank mergers in the last decade, shareholder returns of the acquiring bank under-performed the sector by up to 17p.c. in the two years following the deal!
For example, acquiring a customer in the United States has risen to $2,500 each, but US bank profitability per customer is only $150. This figure would have to rise to $450 to yield a minimum 10p.c. return on investment.
Therefore, only banks who have already demonstrated a core competence in merger execution, such as Banc One, Lloyds/TSB etc., should travel this road. Banc One, for example, has acquired more than 100 banks in the last twenty years and virtually all of them have been successful. With this level of activity, it really does have a demonstrated track record in merger execution.
Internet banking and customers
Only those banking groups who achieve customer relationship management and master internet banking will remain dynamic. Effective branding and becoming 'gateway controllers' on the internet is as likely to be achieved by non-financial, as by financial, server companies.
Existing banking groups (including the usually unsuccessful commercial bank-investment bank merger productions) will have to ruthlessly remove the many barriers to implementation of their customer relationship management strategies, whatever they may be. Unlike the major banking groups who will have to dramatically and radically change their organisational structures, their management processes, their human resources and their organisational cultures in order to be capable of implementing customer relationship management strategies, these Net newcomers, of course, won't have such legacy problems.
New technologies aimed at medium-sized banks will quickly give them all of the advantages of large scale banks and therefore, by 2010, many of the currently mid-sized banks will have proven to have been the pace setters.
Interestingly, such companies as Cognotec, which had a-n Irish origin, are world leaders in developing the new technologies aimed at giving medium-sized banks all of the technology firepower which once was only available to mega banks.
Irish mergers still likely
The major Irish banking groups, it should be noted, are not yet by any means of the order of magnitude which would classify them as mega banks (i.e. those having well over $100 billion in assets). Therefore, it is logical to expect that there will be some significant merging activities still in the future for the two main Irish banking groups.
This would be consistent with them wishing to achieve all of the remaining economies of scale and scope which are still out there to be achieved by banks of their size
Internet - creative destruction
Internet banking involves creative destruction of the historical advantages in consumer banking: it informs customers of what the prices they are paying for the services really are; it informs customers of what the range of products and services which competing institutions are offering; and furthermore it educates customers as to what their range of choices are so that they can make rational and yet convenient choice among competing products.
At least four new types of internet based servers are present in banking and, whereas most banking groups are making investments in 'company sites', it is likely to be the 'vertical portals' and the 'speciality manufacturers' who will be the winners. Specifically, vertical portals will deliver the all important critical shopping variables in financial services selection, convenience, and price. Many defenders in banking are asleep and the attackers will take no prisoners.
Facing relegation
Internet banking exploits all three value creation opportunities in business. It is efficient and it can reduce costs dramatically. It allows product innovation to take place at a very rapid pace. Finally, it allows for customer intimacy, in the sense that products can be tailor-made to suit individual customers' needs.
Distracted with building branch-based, even bigger, Maginot Line-type networks through often poorly chosen mergers and acquisitions (which are rarely consummated properly enough to ever achieve the promised operating or marketing synergies), at least three of the biggest ten names in US banking and four of the biggest ten European banking names will fall prey during the next decade to the technology-based and truly customer- focused newcomer, and will be relegated to junior league or extinction.
The banking industry leaders shouldn't be playing ‘catch up’ with technology while they still have the resources to be playing ‘lead on’ instead. The best way to predict the future is to help to invent the future'. |
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| Article appeared in the March 2000 issue.
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