Bank Mergers and Data Integration: Survival of the Boldest

Spend wisely and be bold, or stay home and keep cover. In 2009, these are the choices IT professionals at banks and financial institutions will face. While the current economic turmoil has many running for cover, hiding your head in the sand will not protect your company from these tough times.

As 2008 has shown us, mega-mergers and near failures are around every corner. Your customers need only read the recent headlines to begin to reconsider their banking relationships: “Merrill 95-Year Run Ends as Bank of America Buys Firm,” Reuters, 1/1/2009; “Lehman Files for Bankruptcy, Merrill is sold,” The New York Times, 9/14/2008; “JPMorgan Chase to Buy Washington Mutual,” Business Week, 9/26/2008; “Wells Fargo Purchase of Wachovia Tested by Economic Crisis,” Bloomberg, 1/1/2009; and, “M&T to Purchase Provident Bankshares,” Washington Post, 12/20/2008.

While banks should rightly be focused on the major implications of these mega-mergers on customer satisfaction, they also need to consider what they mean for the technology on the back-end that keeps transactions moving. How can CIOs and IT managers ensure the transition from two incredibly large, global and fragmented legacy systems into one seamless operation goes smoothly?

Agile IT Is Key

The key, as with most dramatic changes a company might face, lies in how agile the banks’ IT systems are — and the key to that agility lies in their integration architecture. But integration has long been a problem for financial firms — both internally and externally — with customers, partners and networks. The expected continuation of merger and acquisition (M&A) activity in 2009 will exacerbate this as integration of the acquired firm and its customers will be paramount to M&A success.

To “Be Bold” in 2009, IT professionals at banks and other financial institutions need to overcome the integration challenge. In doing so, they can reap benefits in three key areas:

• Streamlined enterprise operations, especially important across newly merged entities, to facilitate straight-through processing and reduce costs.
• Improved operational risk management and data security practices to protect the bank’s brand and comply with government mandates.
• Improved deposit and transaction services to increase revenue and achieve greater growth.

Integration technologies can play an important role in each of these areas. They streamline enterprise operations to dramatically improve straight-through processing efficiency with their customers and help reduce operating costs. They also help keep customers from a new acquisition satisfied by integrating them more easily into the bank. Most importantly, these solutions allow banks to automate operations everywhere across disparate, siloed systems and solve the challenge of data communications and integration among financial services organizations and between these organizations and their customer communities. Let’s look specifically at how integration can help with business customer-to-bank communications and inter- and intra-bank communications.

For business customer-to-bank communications, the following scenario, common today in the banking industry, underscores the need for integration tools and a customer implementation facility that banks can use with their corporate clients to activate and implement their automated usage of the organizations’ services.

Business Customer-to-Bank Communication

Bank X has acquired Bank Y, and Bank X wants to begin receiving files of Bank Y customers, but Bank Y customers send data into their bank in various formats. Bank X wants to be customer-friendly but needs to start the integration and consolidation process to reduce costs.

Business customer-to-bank communications solutions for automating the movement of information can help enable integration of both a bank’s existing operations and the IT systems of new acquisitions. More importantly, a bank can simplify the process of retaining newly acquired customers by being an institution that is easy with which to do business. Bank X, for example, can continue to allow clients from Bank Y to send their files in formats they are used to, preventing increased costs for their newly acquired customers so they are happy and satisfied. Ideally, the integration solution for automating this file and data movement also allows Bank X to transform the data into its formats for use inside its organization so there is no disruption to how Bank X handles the transaction flow. This increases efficiency and reduces costs for Bank X while making Bank Y’s customers satisfied with Bank X’s service, improving overall customer retention and increasing revenue.

The next scenario highlights how financial institutions must overcome the integration challenges in communicating among themselves — a result of years of legacy system growth and a reliance on brittle, inflexible technologies where the business process logic is embedded into the independent silos of information.

Inter- and Intra-Bank Communication: A Payments Transaction Integration Scenario

A financial firm needs to leverage many different domestic and international industry standards and protocols to send payments data into the appropriate network. However, because many of the processing rules and validations are built into the individual processing silos, payments processing tends to have redundant processing steps.

For example, Office of Foreign Assets Control (OFAC) checking is done in the Federal Reserve’s wires system, the new cross-border Automated Clearing House (ACH) system, and in the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payments system. Instead of having one place, there are several. This kind of redundancy is costly.

What financial institutions need to do is build a payments integration services hub, which will allow them to much more efficiently process payments transactions. This means one location for business rules, one location for validations, one location for exceptions handling, and one location for customer service personnel to look when customers call to inquire about a payment file’s status. From the payments hub, the bank can gain visibility into risk management issues, such as counter party risk, and have a centralized area for compliance rules. Additionally, the bank can apply rules for least cost routing into the appropriate outgoing network, and can even “bulk transactions” as needed.

Ultimately, by leveraging a payments hub solution, the bank can reduce costs by limiting redundancy, but also gain:

• Increased straight-through processing
• Improved compliance and risk management
• Increased revenue and deposit growth

Banks Have Two Choices in ’09: Survive or Thrive

Today’s banking industry is under intense pressure and scrutiny from commoditization, globalization and an increase in regulatory and compliance mandates. Added to this challenging mix is the fact that current economic conditions are leading some banks to hunker down and wait for the storm to end. That decision can leave them behind when this time of anxiety and uncertainty ends.

Financial institutions that choose to be wise and bold in tackling their integration challenges stand a much greater chance of creating opportunities to sell new products and services to customers, and leapfrog the competition. As the industry continues to experience turbulent times, banks that are smart with their IT investments stand a much greater chance of cutting through this overwhelming complexity and simplifying IT environments in order to drive profitable growth on a global scale.