Whether it’s People’s United Financial merging with M&T Bank, PNC acquiring BBVA, or BMO buying Bank of the West from BNP Paribas in a deal worth $16.3 billion, M&A activity across the US banking industry has continued to gain momentum within the past year

Following the onslaught of the COVID-19 pandemic in 2020, mid-tier banks have begun merging with — or have been acquired by — larger banks to help digitize their operations and offerings, as well as gain market share, expand their footprint and compete with other banks more aggressively.

In the last year, however, the U.S. banking sector has also continued to see deals, such as Amalgamated Financial’s acquisition of the Amalgamated Bank of Chicago, terminated due to regulatory concerns and an inability to gain regulatory approval. As such, for any bank considering a merger or acquisition, they must prioritize preparing for regulatory scrutiny and show that they can remain compliant in the face of such a deal, particularly with anti-money laundering (AML) and know your customer (KYC) regulations.

This will require banks to assess their current information systems, policies and controls, as well as their ability to conduct optimal due diligence, establish a go-forward strategy for the migration of their data, and confirm that all client data is up to date. In taking these steps, banks will have the flexibility they need to fully accommodate a merger, reap its benefits, and stay compliant in the future.

Establishing a data strategy

Typically, the information systems and controls of any mid-tier bank lie along a spectrum. On one side are more nimble and off-the-shelf systems, still grounded in standard grade technology. Meanwhile on the other are systems that either operate manually or via legacy tech. Establishing a data strategy is key to enabling mid-tier banks to upgrade their information controls. The type of data strategy mid-tier banks must have in place to foster any sort of merger, as a result, will largely depend on determining where along the spectrum a bank’s current systems may lie.

Smaller, mid-tier banks could sometimes find that their size has allowed them to move quickly and flexibly toward cloud adoption and software-as-a-service (SaaS) platforms, particularly for their ancillary platforms handling client lifecycle management (CLM), KYC and AML. As a result, larger banks could find that their cloud governance and SaaS readiness policies are behind the curve. In this case, the more advanced mid-tier banks will need to make information about their controls incredibly explicit to capitalize on the opportunity to mindshare with the larger bank and help them modernize and adopt their systems when merging.

Other mid-tier banks could continue using ‘off the shelf’ system offerings — offerings from industry specialists that come ready-made and power their core banking applications. These systems are not likely suitable for operationalization within a larger bank, which could have a custom-built or enterprise platform. What will then be key for these mid-tier banks is the creation and implementation of a strong data strategy and governance policy to extract, transform and migrate data from their systems to that of the larger bank.

Toward the other end of the spectrum, other mid-tier banks’ information controls and information systems may still be solely relying on manual operations and will lack any automation for onboarding and managing clients. Strategically planning for upgrading their manual processes and operations to digital CLM will be especially important in preparing them for any merger in the future. It will also ensure customers can continue to receive a frictionless and efficient experience during and after M&A activity.

Finally, there are mid-tier banks that may still be using legacy technology as part of their wider information systems and controls, which will not be able to pass regulatory scrutiny, as they most likely will not have been managed by enterprise-grade best practices. For these banks, it will be mission-critical to make their controls specific, remediate their current controls from a security perspective and create a strategy to transfer their data to more higher-grade systems.

Updating client data

Part of any go-forward data strategy for mid-tier banks must also include a focus on client lifecycle management solutions that ensure all client data is up to date. Digitizing the bank’s client outreach capabilities in this regard and making them as self-serve as possible will be crucial in updating client data and mitigating any potential for stale client data in the future. In building different self-serve data channels for clients — whether it will be used as part of a scheduled client refresh, as the results of regulatory policy changes, or when clients are looking to change their banking arrangements — mid-tier banks can further strengthen their information systems and controls.

Prioritizing digital transformation

The reality is too many banks ripe for a merger or acquisition do not yet have the required controls or digital transformation strategies in place because they have previously not needed them. Nonetheless, any mid-tier bank harbouring hopes of taking part in the current banking M&A boom can no longer afford not to have the right technology and controls. Smaller banks will especially be subject to a level of regulatory scrutiny that they have not yet experienced.

From the moment a bank M&A application is filed, regulators will be closely assessing the level of risk within the policies, operations, information systems and management of all merging parties. As such, the mid-tier banks that focus on updating and proving that they can fully maintain their data controls and client data via digitalization will be the ones best positioned for takeover. After all, if there was ever a time for mid-tier banks to underscore their worth and value, it is now.

Niall Twomey is chief technology officer at Fenergo, the leading provider of digital solutions for client lifecycle management (CLM). As CTO at Fenergo, Twomey is responsible for technical strategy, design, and architecture. Prior to working with Fenergo, Twomey spent over 10 years working with leading IT and consulting houses in financial services product development and system integration roles at Barclays Capital, Fidelity Investments, and Accenture.