M&A Opportunities in Banking

Sean and Gina discuss the current state of the banking industry and the rise in global merger and acquisition activity in 2020, despite more sluggish deal-making domestically. Through 2021 as M&A picks up in the U.S., they expect that more strategic partnerships and joint ventures to solve for particular operational pain-points. They also address new data that sheds light on consumer financial planning post-COVID that presents banking with opportunity, including the one-third to half of consumers who are opening new accounts in 2021 and the number of people visiting the branch for in-person consultation.

Text Transcript

Intro: This is Believe in Banking, a podcast series for decision makers, influencers, and leaders. Featuring experts taking on the financial industry’s most pressing issues with insight and empathy. The podcast features information and conversations designed to enlighten and empower. Here are your believe in banking hosts, Sean Keathley and Gina Bleedorn.

Sean Keathley: Welcome. This is our believe in banking podcast. I am Sean Keathley, president and CEO of Adrenaline.

Gina Bleedorn: And I’m Gina Bleedorn, chief experience officer at Adrenaline.

Sean Keathley: Well, this week I’m excited to talk about some top line trends in the world of banking, and we can reflect back on some of the final numbers of 2020. It was interesting domestically, the merger activity was actually down and that’s not too surprising given that we were really a frozen market in the spring and summer with COVID and all the challenges that’s still bringing us. But when you take a look back and look globally, actually merger and acquisition activity is pretty frantic, including last year. And I think it’s going to be a little bit of a fortune telling about where things are headed. I think we’re going to continue to see more and more complete and partial mergers. I know we’ve worked with E-Trade over the last few years, their deal with Morgan Stanley, Charles Schwab and TD Ameritrade. I mean, it’s not just specific banks, it’s all parts of financial. And I think one of the things that’s going to be interesting to watch is maybe some of these non-bank deals and this could bring in FinTech where you’re starting to buy pieces to help you gain new markets or do things more strategically, and the appetite to just build and invest is not there. I think with all these market opportunities.

Gina Bleedorn: I think we’re seeing joint venture type approaches, E-Trade and Eaton Vance in the Morgan Stanley deal. They’re solving for gaps and pain points and maybe in a similar way, TD and Schwab with Schwab, typically having a higher income clientele and TD having a lower income. They’re trying to solve for pain points, and that is very, very much the case in these FinTech and other non-bank deals and it’s interesting to see you mentioned globally, Sean, I think there were more MNAs globally in 2020 than in 2018 and 2019 combined. So although we’ve not seen that in the US we think it’s coming right and coming in spades.

Sean Keathley: And as we think about this activity, Jean, I think FinTech is going to become a bigger part of the equation and how people evaluate this. The Fifth Third Bank CEO was just recently talking about this whole notion of FinTech and it is concerning. And I think it is not a time to put your head in the sand and bury it. You have to be thinking strategically and it’s interesting. We’re even seeing the average sized bank this real true community bank, 300, 400 million are saying that the idea of FinTech is not out of the equation. It is very much a part of how they’re thinking about it. And I think it has to be when you think about things like these digital banks that are having success Chime, that’s a real number when they have 12 million accounts already. So very interesting discussion and I think it’s going to continue to be in the narrative all year.

Gina Bleedorn: I am really curious as to how Chime has broken out from the pack there as you mentioned, over 12 million and really the closest out there that is Vera Money and then Ally at 2.7 and 2.2. So they are really out in front and I’m wondering why, and if it’s just kind of an adoption curve and they are on the right brand side of that adoption curve.

Sean Keathley: I think Chime had a little bit of what we think about is luck is hard work and good timing with strategy involved, for sure. During the pandemic, when branches were closed and people were worried about money, maybe more than ever, the feature sets out at Chime were very simple and straightforward, early access to money, as an example, and getting people access to money within 48 hours of opening the account. And so you think about stimulus checks and tax refunds, that type of thing, if Chime was a way to get to that money faster, that was important. Some of their lingo too, it tells you who they’re after from a vase, they have a feature called SpotMe, and that’s where you can use your debit card without triggering overdraft, even without money. You know, SpotMe, this is just for coffee or ice cream and so clearly they were thinking about the end-user and making things simple and easy, but it’s also about education and the credit builder credit card that’s one of the things they’re trying to teach people is the value of money. And so I think as you think about time success, part of it anyway builds up to maybe trends that are really beyond just the people they are targeting, make it easy, give me access help me learn. I think those are all positive attributes to apply to any strategy.

Gina Bleedorn: Yeah, we’ve certainly covered that before with the idea of purpose driven banking help. Help me look after my financial wellbeing. One thing to consider that came out recently in an Accenture study on the rise of digitization and banking talking about the risk on two levels. The first risk is commoditization as there is increased competition, and it becomes all about price and ease of digital experience. That’s going to make it very difficult for a lot of institutions to compete and the second is lack of trust. Apparently banking, trust in your bank, to look out for your well-being is down by over half, in the last two years. The same Accenture study reveals that although most consumers were satisfied with how their primary financial institution supported them through the pandemic, only 29%, trust them to look after their financial wellbeing only 29%. And that is down from 43% in 2018. But trust is actually gone down and digitization is increasing the risk that it may go down further. So in total digital banks gained market share in 2020, going from about 4% of all market share to 11% gaining 7%. But interestingly, the mega banks lost market share by about that same percentage. And then in the middle, community and regional, both increased the same by about two and a half percent and credit unions slightly decreased.

Sean Keathley: What that tells me, Gina is this headline should be, it’s not only digital. It’s not all digital. And I mean you better than anybody can explain. You know, why not? Why not only digital. We talk about this all the time. What happens if you become digital only in your strategy.

Gina Bleedorn: You lose the value of in-person relationships that most financial institutions have built a business upon.

Sean Keathley: I think it’s going to have to continue to be the exception, these digital banks and there are some good ones. There are some adding in customers or some that are focused on specific social issues that have been successful. But I think for the most part, what you said is true that the platform of banking is built on people and relationships and the sensitivity around money in needs and adding digital capability should be on everyone’s mind. But this notion of going online only is too much of a pivot for many.

Gina Bleedorn: I think it comes back to the great risk of commoditization and loss of trust. If those two things happen, there will be a great loss in community and regional banks and credit unions throughout the country. But I don’t think that there will be because there are too many people ingrained with those institutions today. And that’s one of the reasons why the U S banking market has not been as disrupted digitally by FinTech as other markets have been. So the importance of, yes getting digital up to speed to service the basic table stakes of consumer needs absolutely needs to continue to be a focus. Everything you can do to make your strategy as customer centric as possible, all of that needs to be in place. But, with the idea that you’re not going to be better than the best digital bank out there or the national banks, digitally. So you have to be better in other ways and those other ways are going to have to involve in-person financial relationships with real bankers.

Sean Keathley: And Gina with that comes a real opportunity, new data, just out 49% of the US consumers plan to open a new checking account in 2021 that’s every other person and it gets back to what you’re talking about, this idea of losing trust. And there was a lot of trust loss last year and so there’s a sea of opportunity coming. Then you get into the needs 44% plan to increase their investments. That was one of the things that was a bit surprising out of 2020 with these PPP funds. A lot of people save money and I think it was the uncertainty there, there was no end in sight, but for the most part, there was a lot of people that didn’t go just on a spending spree. We see this in a lot of different manifestations, consumer spending etc. But this notion of how many people saved money and therefore there’s about a third of people saying they’re going to create a new budget this year, new savings accounts. How about 15% want to meet with a financial advisor? A lot of these things to your point, Gina, especially with those community organizations need to happen safely, but in person. These are important money issues and I think the average American is thinking about what the banks and credit unions provide and that is this personal advice driven service,

Gina Bleedorn: That idea of the financial advisor and the opportunity there cannot be under stated, even though it was only about 15% saying they plan to meet with a financial advisor. Accenture has reported, and we’ve talked about the great unmet need of middle to higher income households that would absolutely pay for an advisory service, but aren’t currently seeking wealth management or financial planning. There is essentially an unmet need in an underserved segment of people that banks and credit unions can and should be capitalizing on. And here is really the perfect intersection of helping customers make better financial decisions, looking out for their wellbeing, helping them financially in the long haul versus these in the short term, and actually getting a source of revenue, doing it

Sean Keathley: All great points. I think the 15% with people looking for new financial advisors may be even a little misleading, a little low. I mean, we’ve seen how important this is the other study we talked about recently where 81% of people wanted financial advice in person. That’s a huge number. I mean, that’s 80% of people want the advice portion in-person. The 15% was actually just the new people seeking financial advisors.

Gina Bleedorn: And actually, Sean, I’d forgotten about that stat, that 81% of people who wanted access to their advisors in person during COVID I think that was September of last year. So people, especially now, especially when it comes to finances, in a way, I think in addition to being the great digital catalyst that COVID has been, it’s made people get serious about their financial life, more so than they have in the past. People are thinking I got to buckle down and figure out what the heck’s going on. Even people that typically haven’t. So this is the opportunity to become that source of financial advice, wellbeing, become trusted and not commoditized.

Sean Keathley: It’s not our next episode, but I have to mention that this is where I’m excited for one of our upcoming guests. And we’ll just give a little teaser out. It’s, it’s really an industry shaper in terms of FinTech and financial services and we’re going to have a very exciting discussion around what these folks are up to. And I think it fits right into what we’ve been talking about today, looking for this balance. Digital is part of the story. It’s not the end all be all emotions, money, that’s personal and even in COVID people were seeking it. So as we move on through 2021, it will be an interesting discussion. And I’m looking forward to bringing in some other experts to help us illuminate that.

Gina Bleedorn: Yeah, I’m excited to pick the brain of this person as it relates to learnings that we can all benefit from how, when only delivering a digital service, do you engender that trust? How do you create a digital personality and stickiness beyond just functionality? And that’s something that all institutions need to be striving for.

Outro: You’ve been listening to Believe in Banking, a podcast series created to empower decision makers, influencers, and industry leaders in financial services. Be sure to also join us on our flagship site, BelieveinBanking.com.