If your bank is looking for a road map to the future, follow Capital One. Like BBVA, TD Bank and a number of others, banks should be thinking about a technology acquisition before their next bank acquisition. At a minimum, bank boards should weigh other investment alternatives to whole bank purchases and see which investment alternative can provide the highest risk-adjusted return. Oftentimes, acquiring equity in a technology company where a product can be immediately leveraged can often result in a faster and more fulfilling accretion to earnings.
Some evidence comes from consulting firm A.T. Kearney that did a study on just such a topic and found that looking at stock performance, a bank that acquires another bank gains an average of 4-6% in share price. However, for banks acquiring a technology company, share price jumped 10-15%.
Consider this week’s acquisition of Level Money by Capital One. A "Mint for millennials," the app itself has over 700,000 customers acquired in just the last 14 months. What would 700k more customers look like for your bank?
Equally important, technology like Level Money allows for engagement of your current customers by presenting their financial data in a clean visualization complete with data driven suggestions. The result is not only a unique customer experience for your current client base, but allows your bank to increase satisfaction, engagement and drives profitability by cross-sell. This not only increases current customer profitability, but makes every future customer more profitable, thereby increasing the value of the bank.
Banks can purchase all or part of a company that has some joint synergies with banks. To do this, banks need to start laying the groundwork now to make sure banks have the appropriate expertise at the board and management level to understand such an acquisition. Next, banks need to match their profile with investment alternatives in order to find the right match. A bank with an ACH or payment operation can gain through purchase of a payment processor similar to what US Bank did a couple years ago with the purchase of FSV Payment Systems. Their stocked jumped more than 20% in the year after purchase.
Outside of mobile payments, engagement tools such as personal financial management, wealth management, insurance or similar can all add to your product offerings or at least streamline operations. Digital couponing, social media and a million other ideas are all bank technology possibilities.
Alternatively, banks can look to acquire technology that either helps their infrastructure (such as a loan processing application) or helps the infrastructure of their target customer base such as small businesses. Accounting software, marketing, data analytics, accounts payable, risk management and a number of other types of acquisitions have helped banks out by not only reducing their own costs, but providing tools that their existing customer base can leverage.
No matter what your approach, acquiring a technology platform may be the best investment for your capital dollars. Instead of just having other banks in your focus, expand your horizons and chances are your earnings outlook - and share performance, should improve.
Submitted by Chris Nichols on January 15, 2015