Keeping the engine running smoothly

Recent months have seen a spate of mergers and acquisitions in the European wealth management space. While some have happened in the normal course of business, much of the M&A activity is being driven by the impact of the financial crisis.

While HSBC has merged its two Swiss private banking concerns, HSBC Private Bank (Suisse) and HSBC Guyerzeller Bank, Banco Santander recently announced its plans to merge its wealth management and private banking businesses that have been hit hard by the financial crisis. French giant BNP Paribas has in the meanwhile acquired the troubled Fortis’ operations in Belgium and Luxembourg and Swiss private bank Julius Baer has acquired ING’s Swiss private banking assets. Deutsche Bank has announced its decision to acquire Luxembourg based private bank Sal. Oppenheim Jr. & Cie while Vontobel, the Swiss private bank, has acquired Commerzbank’s Swiss operations.

Technology integration is a critical aspect of the post-merger phase for financial institutions. It is during the integration phase that the management decides on which of the technology platforms to retain and which to phase out. This phase can take several months, if not years. Apart from the technical complexity involved in the integration, the decision making process contributes to the phase lag, with the IT departments of the merging organisations lobbying to retain their specific solutions. Notably, none of the banks approached for this feature offered any comment on their integration projects.

“In most M&A situations, it is usually the buyer’s platform that is chosen to replace the acquired firm’s technology platform,” notes Ray Soudah, wealth management acquisition adviser and founder of Millenium Associates. While this strategy works well in most instances, he cautions that it can backfire in cases where the acquired firm’s technology is superior to the buyer’s.

“A key success factor for a merger or an acquisition is selecting appropriate technology solutions during the post-merger integration phase. Taking the wrong decision can prove highly risky to the health of the merged organisation,” he explains.

Fabrice Bidard, product marketing manager at wealth management technology vendor Odyssey Financial Technologies, echoes these views. While in several post-merger cases the better quality systems remain, he observes that in some instances political compulsions come into play while selecting technology platforms which can prove extremely detrimental to the success of the merger.

A case in point, he says, is that of a leading Swiss private bank (whose name he did not divulge) which had acquired a few smaller banks, that tried to impose its archaic platform on the acquired entities. This led to several successful relationship managers quitting since they felt that they could not offer the same level of service their clients were used to.

In the case of Italy’s Unicredit Group, which acquired Germany’s HVB a few years back, Mr Bidard points out that they took a different approach. HVB had successfully implemented Odyssey’s private banking platform long before the acquisition. Seeing the benefits of this solution, Unicredit decided to extend it as their portfolio management and advisory platform across its domestic and international private banking operations as well.

“The post-merger technology and operational integration needs to ensure that there is no disruption for relationship managers otherwise it will directly affect the flow of business,” says Mr Bidard.

Client relationships

“The private banking and wealth management business is hugely dependent on client advisers and relationship managers. The success of a merger depends very much on retaining and integrating these key individuals,” explains Lupus Maltzahn, who leads Accenture’s wealth management and private banking practice across Europe.

“It is essential to keep client servicing relationships intact while migrating between technology platforms. The challenge lies more in integrating front office solutions than back office solutions because that is where clients get impacted the most,” says Millenium Associates’ Mr Soudah.

Apart from selecting the most appropriate technology solution and managing client relationships, the key factor determining the success of an integration project is proactive planning, he says. “Banks should have an emergency task force to deal with any eventualities. Additionally, they should have a well laid out communication framework with clients. Ultimately, planning is vital.”

Nonetheless, Mr Soudah notes that despite all the planning, people underestimate the complexity involved and very often integration projects have problems. He opines that the only true measure of the success of a post-merger technology integration project is client retention although it is very difficult to estimate, “If the percentage of clients lost in the first year in terms of monetary contribution is around 5 per cent then it is fine but if it is more than 10 per cent then that should be considered a serious issue.” Mostly it is the larger organisations that lose clients, he adds.

Accenture’s Mr Maltzahn says that strong leadership and governance structures are important in ensuring success in the post-merger phase. Speed too is critical. “The post-merger technology integration phase needs momentum. The biggest problem is not taking the wrong decision, but taking no decision at all. Most private banks have highly fractured operating models. They have legacy systems and siloed data infrastructure. This creates a huge challenge during integration. In an acquisition the idea is to create economies of scale, but with fractured systems that is difficult to achieve.”

Centralised data

Banks that have implemented a centralised reference data management system are at an advantage while integrating with a different organisation, states Mr Bidard at Odyssey. “It is very complex and time-consuming to translate data between two banks if there is no centralised reference data. On the other hand firms that have a single securities master file and a single client master file will find is much easier to consolidate and aggregate data with another organization.”

According to Mr Bidard, there is a significant difference between a bank CIO’s attitude now and say ten years ago which is impacting how post-merger technology integration projects are executed. Earlier firms focused on internal IT development, but over the past decade banks are increasingly deploying packaged software. This makes technology integration much simpler and easier to perform. Services oriented architecture is another recent development. It is further fuelling the move away from monolithic platforms into simpler systems that can be easily decoupled and integrated.

It is the focus on flexibility that is a major difference, says Mr Bidard. “Earlier, banks were only worried about their own requirements. They did not focus on their technology systems’ ability to extend and integrate with additional business units,” he explains. “But today flexibility is very important since any CIO and IT department would want their own platform to continue to exist in the case of a merger or acquisition. Packaged software and services oriented architecture are making this focus on flexibility much easier to achieve.”