The recent announcement of BB&T’s $66 billion merger with SunTrust marks the largest bank merger in over a decade, prompting many to question whether a new wave of consolidation amongst regional banks is about to reshape the banking landscape. The promise that this merger will deliver sector-leading performance has certainly caused others to explore their strategic options.
The benefit of scale is not a new concept in banking, but the arguments have become more convincing. Having the closest branch to a customer’s front door is no longer enough to ensure they’ll open their first savings account with you, or come to you for their first mortgage. Technology and increasingly remote interactions mean physical proximity is no longer the advantage it once was, leaving smaller banks to compete head-to-head with the sophisticated customer experience offered by larger banks.
The advent of technology that allows real-time, responsive banking, improves key transactional elements and delivers against the core principles of visibility, security and control is a game-changer. And it creates a real opportunity for large banks with the capability and foresight to invest in technology and customer service to gain market share.
Of course, bigger isn’t always better. Many large banks have already significantly improved their customers’ experience, but many still have a way to go. With fintechs nipping at their heels, they have little choice but to improve and have the vast resources to do so.
Capturing the value of scale
As traditional banking becomes less of a local neighbourhood business, the benefits of scale are increasingly pronounced. Building a brand, acquiring customers and using data effectively in an online world presents new challenges which are more easily solved with scale.
However, despite tremendous technological advancements, the post-crisis period has seen a dramatic decline in bank consolidation. While many hundreds of bank deals have been announced, large transformational mergers have been rare.
While the accommodating regulatory backdrop of the 1990s ushered in a period of massive consolidation, a more restrictive environment is a primary driver of the post-crisis lull in large mergers. Would-be candidates have been hampered by a slew of new regulations and enforcement actions.
Recent changes in leadership at the oversight agencies has brought about a gradual easing of the regulatory tone. Growing confidence in the process is critical to encourage M&A activity and make transformational mergers possible.
Embracing the next generation
The impact of technology will only increase over time as the Millennial generation matures. The overwhelming majority of wealth still sits with the Baby Boomers, whose adoption of technology is somewhat slower. The real urgency is for banks to respond in anticipation of the shifting balance of wealth.
Neither BB&T nor SunTrust were forced by a crisis or underperformance to delve into this huge endeavour. Rather, they were guided by a vision and the courage to compromise. While all parties acknowledge the challenges of combining the banks, they are completely committed to its success. Few banks align as well as BB&T and SunTrust, and given their complexity, large mergers of this scale are likely to remain rare.
So are we on the brink of a new era? The easing of regulations, an appetite for scale, advances in technology, shifting customer expectations, and the confirmation (from multiple stress test cycles) that the crisis era problems have been purged means the environment is indeed favourable for further consolidation. But while this could be the beginning of regional bank consolidation that will change and reshape the U.S. banking landscape once again, this could also be a short-lived window of opportunity.
