Macroeconomics is pushing the US banking sector to consolidate further. The FDIC now insures 4,135 banks in the US, down from 7,802 in 2022 and 14,434 in 1980. Higher regulatory and technology costs eat into banks’ margins, leading analysts to expect further consolidation. 

As an analyst recently told Barron’s,

“Banks are a commoditized product. It’s a cost game,” Mark Fitzgibbon, a research head at Piper Sandler, tells Barron’s. “With the overlay of the cost of regulation, there is downward pressure on profitability.”

These are merely the latest tug in an ongoing pull toward greater industry consolidation. But what does this mean for those making business and technology decisions within banks? First, it’s a call to get stronger. Second, it’s a call to take the long view on your technology stack.

More (read: new) deposits

For J.P. Morgan Chase and others, this will be an opportunity to go shopping. For many, there will be pressure to strengthen their business to avoid being forced into a merger, either by shareholders or a keen regulatory supervisor.

The key is almost always to grow deposits. This has been hard for banks in regions outside of major urban centers. Between 2010 and 2021, the rate of US urbanization increased by 19%, despite a tepid 0.7% in 2021.

When customers of local rural and suburban banks move to major urban centers, these customers are likely to change banks. However, if a bank improves its digital experience, such a bank is far more likely to retain that customer because the quality of service is detached from the personalized, homegrown branch experience.

What’s more, banks with state charters can expand their addressable market with better account opening. For example, Chillicothe is a town of 22,009 in Ohio.

A bank with an Ohio charter might have a handful of branches in the town to attract new customers and their deposits. But if that same bank has a strong digital account opening journey, they can now target 11.78 million Ohio residents.

Improving your digital experience is critical to strengthening your deposit base by retaining mobile workers and attracting new demographics.

Platform, value, journeys

Viewed from a banking transformation perspective, consolidation intensifies the challenge of the task. Financial institutions already know their patchwork tech stacks inhibit innovation. Combining two of these beasts doesn’t help.

For those that are looking at acquisition or merger, there is debate about whether it makes sense to subsume a purchased bank into your brand, but there should be no debate about the cost-effectiveness of serving both customer sets on a single, repeatable technology platform. StandardChartered Bank, for example, used the same core tech stack for its new digital banks in both Hong Kong and Singapore.

If it comes to a merger, amortizing a shared tech stack across a larger customer base significantly reduces your cost to serve. Three focus areas are critical to unlocking post-merger value from the tech stack.

The typical technology exercise post-M&A resembles kickball captains picking their favorites from each side and leaving the rest. But simply picking the highest-performing individual point solutions exposes a bank to even higher integration costs. When evaluating technology and crafting a new shared stack, bank CTOs give added weight to platforms. Platforms inherently reduce integration time, both at the time of the merger and in future innovation cycles.

Beyond this, bank CTOs need to use the post-merger window to form a clear view of which elements in the tech stack add value through differentiated customer experiences and which are simply table stakes. Amidst the challenges of integrating two stacks, this burden can be reduced by ruthlessly but prudently moving non-differentiating technology onto a SaaS footing, reducing the cost of ownership and freeing up resources for the value drivers customers will see.

Finally, the progressive modernization of customer journeys should be the rubric bank CTOs organize around. While there is a short-term need to rationalize two tech stacks, a merger provides the opportunity to align with business leaders to focus efforts on holistically improving specific customer journeys. Besides being the quickest path to value, this approach also creates additional long-tail benefits when combined with the bias for platform solutions. Taking this approach means modernizing the next journey will be simpler and more cost-effective.

Mergers can be chaotic, but bank leaders must use that moment of change to create a compelling path to value for the newly merged bank and its technology stack.