“Traditional financial services institutions and insurance companies (FSIs), fintechs and insurtechs will see increased M&A deals and will shed assets that no longer align to their strategy. But the biggest winner of all will be the consumer,” says Wayne Busch, president, Financial Services and Insurance, in our latest in a series of conversations with industry leaders across NTT DATA regarding the outlook for 2021. Wayne also shares guidance on how to reduce business and technology complexities to emerge successful, post-M&A.
Q: The FSI sector rebounded from the economic crisis of 2008 by using M&A for strategic expansion. Do you see the same thing happening as we start to emerge from the darkest days of the pandemic?
A: This year and beyond we can expect to see it all. Acquisitions, joint ventures, investments and so forth. As customers have truly migrated to digital engagement with their banks and insurance companies, those with the biggest digital budgets and best capabilities are distancing themselves from the competition. Mid-market institutions have been put on notice and will need to seriously consider mergers and acquisitions to compete and survive. By making these bold moves, they can find cost synergies, expand tech/innovation budgets and move the needle toward offering digitally enabled services. All FSIs, regardless of size and market position, will continue to closely evaluate their balance sheets and will look to shed non-core assets that no longer align to their strategy.
In 2020, during the COVID-19 pandemic, only 112 bank M&A deals were announced for an aggregate $27.67 billion, compared with 258 deals worth $55.05 billion in 2019. But the numbers are showing that mergers are back — and they are back big — with 10 deals announced per month in four of the last five months.
An interesting trend for life insurance companies is the M&A activity driven by private equity firms. The long-term, low-interest-rate environment has put pressure on life insurance companies to produce desired returns. The PE firms see these closed blocks of life and annuity policies as an opportunity for predictable cash flow that they can better leverage through their investment portfolio. The most recent acquisition was Blackstone acquiring Allstate’s life insurance business. This trend is likely to continue as the interest rate environment remains under pressure.
In light of this upturn, there are a few imperatives — I like to think of them as mantras — that I want every financial institution to consider when embarking on M&A in the year ahead, and beyond.
Q. I like the word, mantra; what are the mantras that FSIs should follow when embarking on a merger, acquisition or spinoff?
A: Five of them come to mind:
- Allocate the necessary resources to execute the transaction. Organizations routinely underestimate the time and energy required to execute the transaction and/or overestimate the skills and capacity of their current workforce. Put your most talented leaders on this effort as it truly is betting the future of the company.
- Develop a target operating model that aligns and delivers to the deal objectives and the organization’s overall strategy. Best of breed is rarely the right answer.
- Define success metrics that address the full transaction lifecycle (i.e., near-term, interim and target) and having effective governance in place throughout the transaction.
- Keep an eye on the human experience/element. While technology efforts require heavy lifting, they are rarely a reason that M&A fails as a strategy. Any target/potential value from the deal can be quickly lost if companies underestimate the implications to their customers or the cultural changes and impacts to their employees.
- Get the technology right. A significant majority of a transaction’s target value is directly tied to technology-related efficiencies. Accordingly, organizations must have a clear strategy and plan to optimize their technology across data, applications, and infrastructure.
Q: Anyone who’s been involved in a merger, acquisition or divestiture knows the difficulty of dealing with tech complexities. What should FSIs do to simplify?
A: Yes, tech complexity and aging systems come with the territory. Here are a few things one can do to navigate this tricky path:
- Keep it simple: Even small changes become complex and challenging during a large integration. The application changes can have unforeseen effects when integrations begin. The size of the organization increases dramatically in a short time frame. Business leaders require time to adapt. This combination makes simple changes difficult. Focus on minimal viable products and essential changes.
- Get your arms around data: Wrangling data of both organizations is among the trickiest things to do, but one of the most important. Organizations must create and strictly adhere to an agreed-upon data governance model and connect systems via Master Data Management (MDM). They must also strive to eliminate data siloes and be diligent about data duplication.
- Keep your eyes on the road: Have a view of the current environment, the target destination, and the roadmap ahead. This doesn’t need to be overly granular but be cognizant of the big-ticket items, such as your strategy for target platforms, data, APIs, buy versus build, and partnership/ecosystems. Address these before allotting the dollars or assigning the tech team.
- Get a cloud-first mindset: Go cloud with an idea of being Amazon-like. Startups such as Chime and Ally are attracting millions of customers thanks to their lower cost structures and focus on customer experience.
Q: Let’s end this conversation on a high note. What silver lining do you see for the banking and insurance industries in 2021?
A: For all the damage COVID-19 has wrought, it has also presented companies with an opportunity to reinvent and transform. Traditional FSIs need to continue viewing fintech and insurtech disruption as an opportunity versus a threat. This will manifest through increased mergers and partnerships among traditional players, fintechs, and insurtechs, where all will benefit.
Fintechs bring agility and innovation; banks bring capital, market reach and experience navigating the regulatory environment. And there’s going to be one definite winner in the new normal: the consumer.
For the insurance industry, COVID-19 has been a wake-up call for both the P&C and Life segments. For P&C, the radical shift of property utilization ranging from real estate to automobiles is not likely to snap back to pre-pandemic times. P&C companies need to adapt to this lifestyle change and redesign products to support it. For Life & Annuity, the digital platform transformation has been accelerated and will continue to accelerate. This includes changes to their distribution channels, their products, and how they underwrite. And, venture capital arms will bring investment insurtech technology partnership opportunities.
All the deal-making that will ensue in the coming months will be to benefit the consumer in the long run. Consumers will experience ease-of-service and will also have more options in terms of how to engage with FSIs. There will be less “noise” in the marketplace with products and service choices, and it will be easier to see which companies have best operating models and service. This also means that companies will invest in digital and tech enablers to meet the new CX and UX expectations from consumers.
While digital is going to be a focus area for banking and insurance, my colleagues in other industries echo this sentiment. Read their perspectives and advice on M&A:
- M&A Forecast for Life Sciences with Adam Nelson, Senior VP, Life Sciences
- M&A Forecast for Manufacturing with Prasoon Saxena, Senior VP, Manufacturing
- M&A Forecast for Health Plans with Shashi Yadiki, President, Health Plans
Post Date: 03-03-2021