The rate of M&A activity in the auto space reached an unprecedented high in 2021, and economic indicators suggest that trend will continue in 2022. Auto dealers and finance companies are looking to expand their physical and digital footprints as they compete for customers against a backdrop of record low rates and inventory challenges. These market factors underscore the need to preserve margin and expand competitive advantage through strategic revenue growth and more efficient operating practices. 

According to the Bank Director 2022 Bank M&A Survey, more than half of senior executive and board member respondents identified the top M&A drivers as achieving “scale to invest in technology” followed by geographic expansion, customer acquisition, and new business lines/revenue opportunities.

Customer demand for digital banking experience driving M&A transactions

The investment in technology is critical to meet consumer expectations for a fast, frictionless and mobile experience. Smaller auto finance companies traditionally lack the resources to keep up with deep-pocketed captives or banks, so joining forces with another financial institution can provide the necessary economies of scale to overcome traditional obstacles to technology investment and proving out subsequent returns. 

This competitive advantage for merged small to mid-sized shops can manifest itself in a number of ways: the infrastructure of one party is advanced enough to optimize the operational benefits through platform consolidation; or both parties now have sufficient resources, volume and/or redundancy in their operations to explore opportunities to scale via integrated partnerships at a pace that surpasses traditional internal builds – and often times, they can do both.

Why is the new world of M&A different? 

Simply put, fintechs are now a welcome and expected part of the FI M&A landscape. ‘Quick’ and ‘affordable’ were typically not used to describe these transactions in the past. In fact, it was more likely to be ‘tedious’ and ‘painful’.

M&A activity at any size can be a significant distraction and weigh heavily on support teams, especially when it comes to merging staff, locations, cores, customer data, and credit policies. The general expectation is that true optimization requires an initial core conversion costing millions of dollars and several years to implement – and then the newly merged institution can optimize the customer experience. 

As transactions close, many executives look to modernize the customer experience but pause until the technology simplification plan materializes. The reasons cited are fear of overburdening resources, distracting from core integrations and ultimately disrupting the employee or customer experience. Thus, online origination or loan servicing portal rebranding and other customer experience features tend to be late-in-the-game deliverables. 

This is a missed opportunity to meet customer demand for a mobile experience now, provide a richer customer experience, speed up response times especially during high volume events, drive personalized, upsell opportunities, and lower regulatory and compliance risks through automation.

With API-led tech, core conversion is no longer the first ‘must do’ for M&A

Today, modern systems can deploy APIs to implement technology that quickly, seamlessly and affordably integrates with a core - or multiple cores. A modern, multi-tenant and modular-built loan platform will meet a client where they are at and grow with them as needed - including acquisition. A digital loan/lease servicing platform can be deployed with light integrations to each core, allowing co-branding strategies to evolve quickly and cohesive customer messaging to be shared across consistent channels.  As the roadmap progresses, auto finance companies can gradually migrate both entities to a single experience with minimal disruptions to the customer base.  

Accelerating the customer experience milestone 

Wherever merging companies are in the process of consolidating staff, customers and resources, small incremental steps and API-led technology can smooth and accelerate the journey for internal and external customers, allowing customer experience to take pole position in the M&A lifecycle. 

If your dealership or auto finance company is embarking on a merger or acquisition, consider accelerating the customer experience milestone to the beginning of the journey to both leverage the excitement of the M&A and mitigate consumer angst the merger or acquisition may have on a customer’s management of their cash.  

To learn more about how Constant’s automated loan servicing portal can help immediately enhance your brand impact and customer experience during a merger and acquisition, email me at crobb@constant.ai.

About Author

Carissa Robb serves as President of Constant, a fintech SaaS provider of digital loan servicing solutions. She most recently served as senior vice president and head of US Loan Servicing for TD Bank, responsible for servicing a $150 billion dollar portfolio of auto, consumer, residential and commercial accounts. She joined TD Bank in 2009 to develop the Loss Mitigation program for distressed real estate and built the governance and control framework for TD Bank’s loan servicing and collections division. Carissa has been a part of dozens of M&A teams during periods of rapid growth and acquisition, and now applies those lessons learned in the fintech space. By Carissa Robb, President & Chief Product Officer at Constant

While the Biden administration and the Federal Deposit Insurance Corp.’s (FDIC) recent push to “provide more robust scrutiny of mergers” is causing some larger banks to pump the brakes on their M&A plans, nothing it seems is slowing the pace of smaller financial institutions - community banks and credit unions - merging, and acquiring fintechs, in an effort to stay competitive.

The rate of M&As in the financial services sector reached unprecedented heights in 2021 (nearly twice as many as in 2020), and all the economic indicators point towards that trend continuing into 2022, as banks and credit unions strive to expand their physical and digital footprints, and compete for new customers. According to a recent Bank Director 2022 Bank M&A Survey, more than half of senior executive and board member respondents identified the top M&A drivers as achieving “scale to invest in technology” followed by geographic expansion, customer acquisition, and new business lines/revenue opportunities.

Customer demand for digital banking experience is biggest driver for M&A

The logic behind the respective merger and acquisition drivers is compelling: each offers new ways to bring banking customers and drive profits, and leverage the latest in technology and banking infrastructure - all at a time when interest rates are at a record low, and customers are demanding fast, friction-free digital banking experiences.

That same customer demand for a slick digital banking experience is one of the biggest drivers for both recent and future mergers and acquisitions. Smaller banks and credit unions traditionally lack the resources to keep up with deep-pocketed megabanks and joining forces with another financial institution is one way to overcome that obstacle. The other is to acquire a fintech company that can quickly, securely and affordably stand the FI up so they can maintain a competitive advantage with the larger banks.

Quick and affordable are not words normally associated with mergers or acquisitions in the financial services industry - especially, when it comes to merging cores, customer data, credit policies and customer experience. If anything, the general expectation is that it would require a core conversion costing millions of dollars and two or more years to implement. 

We often hear from financial institutions that they wouldn’t consider adopting new technology until well into a proposed merger or acquisition plan, for fear of disrupting the customer experience. M&A plans traditionally keep the rebranding and integration of customer experience as a late-in-the-game deliverable. 

But as a fintech we find ourselves challenging that thinking. 

With automated, API-led tech, core conversion no longer a ‘must’ for M&A

Firstly, mergers and acquisitions aside, upgrading any technology that exchanges information with the core no longer has to mean a core conversion. Today, modern systems can deploy APIs to use technology that quickly, seamlessly and affordably integrates with a core. 

Second, a modern day, multi-tenant and modular-build loan platform will meet a client where they are at, allowing them to set up a customer portal where they can keep branding separate and gradually migrate both institutions to a single experience. With such a platform, both legacy platforms and core integrations are supported, and allows the financial institution to streamline processes, policy, brand and functions gradually, but intentionally.  

For example, early on in a merger, Bank A’s customers can log in and see Bank A’s logo with messaging about the M&A and what changes and benefits are to come. The core information pulled into that environment comes from Bank A’s core. The extension policy for Bank A is configured and the customer experience is upgraded, but looks and feels similar to pre-conversion. The same process happens for Bank B. 

In month [3], policies are aligned but still in the same environments. Co-branding messages can increase for a smooth transition.  

In month [6] Bank A’s brand is updated to Bank B but still in the same environment. There have been no changes to the core. Now policy, process and brand are aligned and cores remain unchanged. Perhaps integrations and partners are consolidated by updating/merging subscriber IDs for economies of scale.  

In month [18] Bank A‘s core is converted to Bank B’s core. Bank A’s environment seamlessly merges with Bank B’s. Full integration is complete, but customers thought this happened in Month 3! 

Accelerating the customer experience milestone 

Wherever the financial institutions are in the M&A process, using API-led technology, small incremental steps can be taken to smooth and accelerate the process , all without the customer or service agents being inconvenienced. 

If your bank or credit union is embarking on a merger or acquisition, consider  accelerating the customer experience milestone to the beginning of the timeline to both leverage the excitement of the M&A, and also to mitigate consumer angst around merger or acquisition of one of the most sensitive relationships a customer has: the management of their cash.  

To learn more about how Constant’s automated loan servicing portal can help smooth and accelerate a mergers and acquisition, email me at crobb@constant.ai 

About Author

Carissa Robb serves as President of Constant, a fintech SaaS provider of digital loan servicing solutions. She most recently served as senior vice president and head of US Loan Servicing for TD Bank, responsible for servicing a $150 billion dollar portfolio of auto, consumer, residential and commercial accounts. She joined TD Bank in 2009 to develop the Loss Mitigation program for distressed real estate and built the governance and control framework for TD Bank’s loan servicing and collections division.