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Tracking trends as well as targets

Understanding bank mergers and the importance of market research


Throughout 1999, the pace of merger activity in European banking has been frantic. The struggles between Societe Generale and Banque National de Paris for Banque Paribas, and between Bank of Scotland and the Royal Bank of Scotland over National Westminster Bank, and the merger of Banco Bilbao Vizcaya and Banco Argentaria, have all made the headlines. There has been significant merger activity or plans in most European countries, and now cross-border mergers are also being plotted or transacted, such as Banco Santander Central Hispano's bid for Portugal's Champalimaud Group, and ING Bank's recent German acquisition.

It is worth taking a look behind the headlines in order to understand the motivation for this spate of bank merger and acquisition activity in Europe from a corporate banking perspective, and to ask whether merger activity does represent the appropriate response to the demands of a market undergoing a protracted period of flux and change. We intend here to concentrate on the forces driving the trend toward bank consolidation, and how banks can act on this. Market research should play a vital role here, and is essential if banks are to understand and steer a successful course through this process of consolidation, in order to provide services which meet the needs of companies more effectively, and to anticipate the demands of a changing environment.

Drivers of Bank Consolidation
In the US, bank mergers occurring over recent years have been driven by the desire to reduce overheads (especially head office and IT costs) and toward nationwide commercial bank networks.

In Europe, because the causes of mergers and bank consolidation are multiple, countries are moving at different paces. For example, consolidation occurred earlier in the Nordic region and Benelux countries than in, say, Italy, which was until recently a highly protected, regulated and regionalised environment. Overall, the move toward consolidation continues to spread rapidly and gather pace.

One cause of this consolidation is that companies are increasingly demanding more sophisticated banking services, particularly in the fields of electronic banking and e-commerce. The cost implications for banks of such customer-led demands are severe, and many cannot even meet the necessary development costs, let alone the operating costs entailed, without creating alliances with other banks to share costs. Due to regulatory restrictions (now falling away) European banks have concentrated initially on rationalisation within their native country prior to turning their attentions to cross-border marriages. Thus mergers to save costs may represent only the first stage in consolidation. However, the model of consolidation prevalent in North America and Britain (albeit on a smaller scale), characterised by widespread staff cuts, and de-duplication of products and offices, is not necessarily applicable to 'in-border' mergers in Europe, as a result of national regulatory issues including employment law within a given country.

In general, the European banking market has traditionally suffered from a situation of gross oversupply caused by an overly protective regulatory environment. The European single market, however, has slowly but effectively seen the breakdown of this regulatory stranglehold, and has created a situation in which companies are increasingly looking for fewer banks to provide a range of services across Europe, such as cash management services.

Indeed, putting aside the continued attempts by commercial banks to move into investment banking via acquisition (i.e. Deutsche Bank's acquisition of Bankers' Trust), the single currency is the main cause of merger activity between European commercial banks. Major European banks have long since operated branches in some overseas markets and covered other countries through correspondent banks to provide international services to corporate clients. Now, access to local clearing supports EU Banking Directives which are intended to allow EU banks to operate on the same basis in all fifteen EU member states.

As barriers to foreign competitors reduce within individual European countries, the implications of increased competition are severe, if not life-threatening, for the majority of European banks competing in the corporate market. In this turbulent environment, a bank's strategy is therefore critical, and must be based on a more complete awareness of the situation than is perhaps standard at present. Europe's banks are aware that they must be able to meet the needs of their major clients' operations across the euro-zone (and beyond) if they are to meet the challenge of global banks such as Citibank, Chase Manhattan Bank and ABN AMRO Bank. To do this, they need to consider changes in the focus of their relationships with corporate clients, and the type of services offered within this framework in the near future. Given these challenges, the attractions of consolidation may prove overwhelming. However, cultural, organisational and other hurdles will take longer to clear than regulatory issues have. Recent history tells us that it will take a long time for the benefits of merger activity (e.g. lower costs and better services) to become tangible to corporate customers.

'Short-term pain for long-term gain' is therefore the message currently being broadcast by banks to corporate clients as well as staff, when in truth it should be 'long-term pain for possible some-time gain'.

Thus, consolidation is in itself not a sufficient response. It should be based on a thorough understanding of market dynamics. A new maxim that 'bigger does not always mean better' must therefore be recognised as banks approach the question of merger activity.

Is merger activity the correct response? Is it having or will it have the desired effect? So how does a bank keep a firm grip on the competitive European environment? Most wait for events to overwhelm them before they react. Various types of research and market analysis can help banks to understand better customers' needs and identify trends within the marketplace, so that they can position themselves ahead of events. However, as with consolidation, research alone is not sufficient. The process must be grounded in a bank's willingness to look beyond its present concerns and listen to the market. Even if this is possible, many banks still fail even to heed, or filter out through layers of management, the feedback of their own sales forces, a source of potentially invaluable information and their closest link to clients.

One of the most problematic aspects of market analysis is that of obtaining useful information from corporate clients which can be used to determine the correct strategy, through product development and enhancement to delivery. In-house research often suffers from the clients telling the bank what they think the bank wants to hear. A further, and potentially more serious, failing occurs if the bank fails to identify the right issues and to ask the right questions of its clients because it is too focused on its own priorities. A given bank's research agenda will frequently be led by questions structured around its current perception of the marketplace and its own current and planned products and strategies. This often fails to identify significant emerging trends affecting the marketplace as a whole. The area of e-commerce represents one such current critical issue: banks failing to identify and act upon trends in business-to-business e-commerce at this time will find themselves severely lagging as the market restructures itself and clients move to the most forward-thinking providers.

There is a real and fundamental need for banks to take a few steps back in order to identify corporate needs precisely, and to develop and maintain an awareness of trends currently affecting a wider market than their traditional areas of business. Across all areas of banking, this need can be met by independent market research and analysis, using techniques orientated toward the provision of unbiased data, based on informed awareness and expertise. '..Short-term pain for long-term gain' is therefore the message currently being broadcast by banks to corporate clients as well as staff, when in truth it should be'long-term pain for possible some-time gain.'..

For example, in the sphere of European cash management, The Bank Relationship ConsultancyÕs biennial survey of European cash and treasury management practices, GlobalCash-Europe, has over recent years, identified and predicted problems faced by banks in the delivery of cash management services demanded by corporate clients. For over half a decade, our research has warned of global banks reversing into national markets by virtue of their ability to provide an efficient and consistent service across Europe and of the inherent fallibility of retreat strategies. This cherry-picking of the largest European companies is now hitting the bottom line of more domestically-focused banks. Throughout the 1990s, it was possible to predict how this trend would eventually hit the domestic cash management markets in all European countries. However, most indigenous banks in southern European and Scandinavian countries preferred not to know. Only now that they are losing domestic business to foreign banks are they coming to recognise the true value and centrality of independent market analysis. With lead times measured in years, their situation will become worse before the actions they are taking now redress the problems.

Research found that companies' key demands of European cash management banks are for high technological standards and what we refer to as 'the McDonald's experience'; that is, a standardised, homogenised and easily accessible range of cash management products and services, delivered via a wide network of branches across Europe.

It is also clear that companies are looking to use fewer cash management banks across Europe, demanding presence in a number of euro-zone countries (including membership of local clearings), better payment cut-off times and sophisticated European-wide electronic banking services. Mergers may well be the best way in which the majority of Europe's banks can hope to meet such needs and establish more remunerative relationships with companies, but a re-positioning within the market or alliance with non-traditional providers may offer more effective alternatives. Regardless of the eventual solution, the merger process must be informed by a keen awareness of the marketplace as a whole, of the fact that companies are (and have been) prepared to desert long-standing national relationships if new banks or other suppliers offer better services, and of how best to turn these circumstances to the bankÕs advantage.

There is therefore a strong and clear need for independent market research that identifies both the immediate and longer-term factors influencing the market-places in which a bank competes, and so positioning the bank to turn current problems to their advantage. The trend toward consolidation must be viewed as a pro-active opportunity, rather than a reactive necessity, if banks are to maintain and enhance their commitment to corporate clients, and hence their market share, in the current environment.

David Middleton
The Bank Relationship Consultancy




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