Cutting the Gordian Knot: A Counterintuitive Approach to Post-M&A Digital Integration for CUs

Consolidation in the banking industry is nothing new. Financial institutions of all sizes – from smaller credit unions to even the largest players – are looking for opportunities to band together to find efficiencies, adopt new technologies, remain competitive and, above all else, grow. Amplifying this drive to consolidate is pressure from innovative neo-banks, lifestyle brands and fintechs that have been quick to capitalize on consumer appetite for turnkey, digital experiences, leaving more established institutions scrambling to play catch-up. In other words, two of the main drivers of M&A in today’s banking sector are the disruptive influence of technology and the critical need to meet the needs of today’s digital-first customer.

But merging with another credit union is rarely (if ever) a perfect solution for those looking to maintain their competitive edge, especially when it comes to technology. Moreover, the conventional wisdom about how to effectively navigate the post-transaction period – from a technology perspective, at least – may not actually be the best approach.

Among the many tasks awaiting a credit union in the wake of a merger or acquisition – branding, communications, real estate, logistics and more – is the integration of two disparate technology systems. Every aspect of each institution’s IT operation must be evaluated and adapted to ensure a consistent, cohesive experience for both the credit union and its members. This undertaking grows even more challenging when you consider how years of legacy systems, organizational siloes and disparate data sets have compounded each other, creating deeply complex IT systems that are difficult to unravel and reconfigure.

It’s easiest to think about a credit union’s technology infrastructure existing as three layers. Serving as the foundation of the entire operation is the data layer, consisting of the credit union’s underlying back-end data. Next, there’s the API/services layer, which helps credit unions actually analyze and use that data. Finally, there’s the top, most visible layer – digital services, which is the interface and experience credit union employees and members interact with day to day.

Often, credit unions undergoing the post-M&A integration process will drill right into the most complex task: Harmonizing their data layers, and seeking to clean up and migrate both organizations’ data onto a single platform. From there, they consolidate API layers, and only then do they turn to the digital experience. The focus is on getting the overall system right.

While this may seem like the obvious method, there are two problems with it.

First, data integration is a long, resource-intensive process that can effectively grind credit unions’ innovation engines to a halt, which then slows their efforts to offer employees and members a seamless transition. For example, while each institution works to clean up and merge their data layers, members must continue to navigate an unintuitive and perhaps onerous digital experience (disparate URLs, separate portal logins, frictional interfaces, etc.). This leads to member dissatisfaction and potentially lost business. Migration consultants create the expectation that any merger will encounter churn – but it is actually preventable, and not at all a given. Second, taking this inside-out approach can actually worsen existing siloes, making it much harder to introduce changes and innovate further down the line. It creates too many contingencies that may slow – or altogether hinder – a credit union’s ability to build or adopt new solutions.

There’s a better way to cut the Gordian knot that is technology integration: Working from the outside in. This approach prioritizes the digital experience – the layer that is most critical to member retention – as well as getting the transformation process right instead of focusing only on creating a single underlying system. Further, it helps eliminate the contingencies that link the three layers of technology together, ensuring the entire technology department is equipped with the tools and resources it needs to tackle multiple problems at once. In the near term, credit unions will be able to reap many benefits, including:

• Eliminating friction for the member and employee. Breaking the digital experience away from the data and API layers allows credit unions to quickly implement changes that help ease the post-transaction transition for the end-user. Members and front-office employees don’t see – and arguably, don’t care – about the back-end processes powering the digital experience. What they do see and care about is how easy it is to log in, to navigate the interface and to find the information they need to do their jobs and complete a transaction. It is critical to get this right in the early days of the integration period to avoid member attrition and employee frustration.
• Allowing innovation to thrive. Much of a credit union’s innovation happens at the API/services level, where new products, services and solutions are born. And innovation is what ultimately will keep credit unions competitive as the market continues to evolve – which it will do, regardless of where an organization is in the process of integrating data apparatuses.
• Remaining nimble. Just as the market moves quickly, so does technology. Abstracting the various technology layers away from each other allows the entire organization to adopt new solutions quickly, versus requiring every layer to be overhauled just to bring a new technology online.

From a long-term perspective, the main benefit of the outside-in approach is that it allows credit unions to own the integration process in perpetuity. By breaking the underlying processes away from the systems themselves, credit unions can actually own those processes, create digital equity and lay the foundation for integrating new technologies (or businesses as a whole) smoothly and quickly again and again, while retaining the same level of member experience. Creating this digital equity and owning the digital process independently of any one technology system can play a major role in future M&A strategy, mitigating the risks associated with post-M&A integration and ensuring the continuity of member engagement over the long-term – effectively helping credit unions to “out-merge” the competition.

This is not to say that an outside-in approach to technology integration will be easy for credit unions navigating the challenges of merging. However, at the end of the day, it is the simplest and most sustainable way forward. Over the next decade, advanced digital banking technology – and along with it, owning the member experience from end-to-end – will be a clear enabler of M&A and growth. Those credit unions that can overhaul their approach to technology and create a repeatable, owned process for doing so will have future-proofed themselves and demonstrated their long-term value as an innovator and disruptor, and in the process, turn digital capabilities into equity.

Vincent Bezemer is SVP, Americas for Backbase, a fintech software provider based in Amsterdam, The Netherlands.