3. Financial industry and bank mergers
3.1 Financial industry
The financial industry consists of companies and institutions e.g. providing money management, lending, investing, insuring and trading services. Banks are one major player in the finance sector and in fact the one of the oldest business in the world.
Financial industry is a constantly evolving and very fast-paced landscape to operate in. It is facing technological changes and changes in customer demands and well as changes in regulations and laws. Lately the speed of the technological changes is the main driver for banks to think how to remain relevant to their customers and how to remain competitive in the marketplace. (Wealth and Finance 2020)
Banks are closing branches in a fast rate due to these changes that the financial industry has forced upon banks. It was unpredictable that 90% of daily transactions would be electronic and that internet banking would provide more revenue than branches. Nevertheless, no one would have guessed that conversations in social network would affect so much on customers’ preconception of the banks’ brand. And the latest, mobile banking has taken over and is becoming the main source in
customers’ daily banking. Assessing the role of the branch is important to consider what function the branch holds today. It has been considered a place where customers can walk in or book an appointment to ask anything that they need to know about
their personal finances. But the reality is that most customers visit a branch increasingly less. The future for branches is critical. Advanced technology has changed consumer behaviour and branches that we know today are not the most cost-effective. The role of the branch must evolve as has the technology and the customer behaviour. The sooner banks realize this the sooner they can serve customers
appropriately. (King 2010) 3.2 Bank mergers
In a bank merger two or several banks amalgamate their asset and liabilities to become one bank. The banking industry is consolidating in a fast pace and you will hear and read about mergers in the news frequently. Mergers are very common in all fields of business. Milbourn et al. (1999) state that mergers allow banks to diversify their services and provide them with high potential profit. Mergers are the fastest way to achieve strategic goals and are often the most cost effective (Phillips 1999). Cost savings and revenue enhancement are primary motives for financial consolidation.
Merger often effects on firm size, scope or market power. In the banking sector mergers are meant to reap the benefits of economies of scale. Advances in
information technology, financial deregulation, globalization of financial markets and real markets, financial distress and increasing shareholder pressure for financial performance are also major drivers for mergers (Kumar 2012).
Phillips (1999) posit that mergers often have major effects on their competitors, suppliers and customers as well as to their shareholders and employees. Most often the merger literature has focused on the two, or several, merging parties and their organizational fit as well as the synergy between the companies, not the parties connected to the merging companies. Anderson et al. (2003) have researched how customers and suppliers to the merging companies perceive and behave in relation to a merger and state that merger influences and is influenced by the merging companies as well as well as their suppliers and customers. Business relationships evolve over time and are time consuming and resource intensive. Long-term relations are
characterized by mutual commitment, adaption and trust. Most studies do not address the issue of how mergers influence the involved companies’ customers. It is
understood that something positive usually comes along a merger.
According to Anderson et al. (2003) methodologic reason might be the reason why customers and suppliers are not investigated in merger and acquisition research. Also time lag between a merger and the reactions among the customer or supplier as well as causality problem increases challenge for research. Another reason can be that researchers are stuck in traditions or paradigms. By not acknowledging customers and suppliers in the merger research one will miss the understanding of what kind of importance mergers and acquisitions have for the development of any integration between companies and for the outcome of any strategic step. Customer or suppliers are not likely passively to accept a merger and might not actually experience the benefits that the banks have used as arguments for a merger.
Focarelli & Panetta (2003) have studied if mergers are beneficial to customers.
There are various concerns for bank mergers. Banks need to renew their processes, rethink the vitality of their branches and train the personnel. There can also be culture clashes as the personnel from different banks unite and the soft information about the customers might not get transferred efficiently. Mergers also often lead to key
executives to resign which mean some information can be lost, especially when the new management does not necessarily have time to develop customer information.
Foracelli & Panetta (2003) would have liked to measure customer satisfaction after merger but stated that constructing such a measure is difficult because customer’s perception of quality is hard to observe and measure.
In their article Miles and Rose (2011) state that mergers can lead to customer
evanescence, but companies have a chance to avoid that of they listen and understand customers’ point of view before making big integration decision. Often customers expect the worse whenever mergers are announced. It’s common that bank customers lose their favourite branch because of merger. Merger embarks on seemingly minor changes which can make a big difference to customers. Even the most loyal
customers might re-evaluate their relationship with the bank. Companies that retain customers the best adopt the view of the customers as they make important integration decisions. These companies usually gather teams which evaluate every step and every change made through customers’ eyes and this way act as an advocate for the
customers.
3.3 The case company
The specific case company, which is a part of a bigger financial group called OP Financial group, has wished to remain unknown. I will instead represent OP
Financial Group. OP cooperative banks are independent, local deposit banks. There are 143 member cooperative banks. All independent share the same values, principles and vision and offer retail banking. OP Financial Group is the largest financial
services group in Finland, it has over two million customer-owners. Being a Finnish Financial Group is an important part of its identity. OP Financial Group's success is about their strong foundation of promoting prosperity, well-being and security of its owner-members, customers and business partners. (OP Financial Group 2020) OP is guided with its new mission: “we promote the sustainable prosperity, security and wellbeing of our owner-customers and operating region.” (OP Financial Group 2020). Group’s strategic priorities for this year are: “best customer experience, more benefit for owner customers, excellent employee experience, faster growth in
revenues than expenses and productive development.” (OP Financial group 2020).
Three main values of OP financial Group are: people-first approach, OP Financial Group is for people, which is shown as a genuine concern for both customers and co-workers. Human respect is visible in all operations and each person is treated as an equal individual. Responsibility, OP is and ethically responsible company which operates locally, regionally and nationally. Their focus is building long-term customer relationships based on mutual trust. Prospering together with the customers leads the way for the development of operations and services. Operating as a unified group gives customers greater security and improves service capabilities. (OP Financial Group 2020).
3.4 Mergers in the case company
For this section I have interviewed a Governance Lead in the OP Financial group on 20th of February 2019. He has years of experience on mergers and he works as a support person for banks planning to consolidate. In his interview, we went lightly through history of mergers in the OP Financial Group, main motives for mergers,
objectives, advantages and challenges as well as effects on the personnel and possible changes mergers create for the customers.
3.4.1 History of mergers in the OP Financial Group
The history of merger in the OP Financial group includes over a thousand
consolidations. Small village cash offices have amalgamated to bigger municipality cash offices and then they have transformed to banks and then later some of the banks have merged and become sub region banks and eventually banks for the entire county.
This is also how the concept of being local have evolved. Every bank has gone through a merger, it might have happened earlier in the history or it might be relatively recent.
Figure 8. Number of banks in the OP Financial Group (2020)
3.4.2 Motives and objectives
Mergers are somewhat connected with the history of the concept of locality. The perception of being local has changed and it has been natural for banks to change in the same pace. The main motives for mergers are securing and improving service ability. Every bank consolidating has their own list of motives that they think are the most important drivers for a merger. The biggest influence on the background is the financial industry as whole. Strict regulation and demanding competitive situation are most often unbearable to handle for a small bank as well as the pressure of being
cost-0 500 1000 1500
1903 1913 1923 1949 1959 1969 1979 1989 1999 2009
Number of banks in the OP Financial Group
2010:213 banks 3/2020: 143 banks
effective. Most often in small banks one third of the resources go to tasks that are away from the work that creates value for the customer.
In a small organization, there are also a lot of pressure for individual workers, not to mention the CEO, as they are needed to do almost everything, no matter what they are actual good at or what they interest are. The transition pace in the financial industry is fast and it is hard for a small bank to live up to the standards and needs of the
customer rather lone the demands from the authority and form the OP financial Group. Vulnerability and the well-being of the employees are such challenges in a small bank which make them consider to merge. The competitive situation is brutal in the financial industry nowadays. Other financial operators have a lot less branches around the country, which makes them more cost-effective. Customer are not ready to pay considerably higher prices just because they want to keep their own branch alive.
The main merger objectives in OP financial group are secure service ability, growth and effectiveness for the banks operating in the same economy area. Furthermore, in the demanding financial competitive and market situation mergers secure and amplify that banks can offer services that are cost-effective yet diverse, resilient and personal.
3.4.3 Advantages
Mergers are different in sizes, depending how many and how big banks merge. The biggest advantage in a bigger bank, it is possible to offer a larger scale of financial services and more personal services for their customers, simply because there are more employees with a variety of special skills. Also after a merger banks are often able to offer flexibility in their service hours.
“No matter the size of the merge, comparing old to the new, all banks feel that they can provide their customer with better and larger scale of services after a merger.”
(P1)
“One of the biggest advantage for customers is that in a bigger bank the employees have time and resources to be actively in contact with the customer” (P1)
Sharing of the best practices is also an advantage in a merger, this way they will be spread around the organization and the bank can find the best way to create a superior
customer experience and create a coherence procedures. In addition, the support from the co-workers is considered a positive impact of a merger, because employees feel that together they can serve the customer in the best possible way.
3.4.4 Challenges
There are two types of challenges within a merger; challenges involving the decision-making process and challenges of the option continuing to operate as independent bank. The biggest dilemma is that government, who are best aware of the challenges and of the future, initialize the merger process but the people, the co-operative membership, who make the merger decision do not know or understand a lot about the background, motives and arguments. The challenge is that how does the
government is able to communicate all the merger motives for the co-operative membership in a way that they would deeply understand the challenging in situation the bank is in now and especially in the future without a merger. Other big arising challenge in a bank merger are that people fear that the bank is no longer local for their customers, when in fact we come back to the beginning where we need to rethink what locality actually means. In the final merger meetings, the body of delegates feel that the branch itself is what concretize the feeling of locality, especially the cash office is associated with locality. This is overall a distorted paradigm, but it is a fact that in the decision-making ceremony this is what is being emphasized.
“The most often asked questions when the government and the co-operative
membership is being heard in a merger meeting are: is the locality going to become weaker? Are the decision making going further from the customers? How do the customers feel about the consolidation of the organization and its procedures? Are the services in my own branch going to end and will my contact person change or be further away from me?”(P1)
Also, the fear of losing a tight community when losing an independent bank is relevant. Local banks sponsor a lot of events and take care of the community in that way. These can be classified as emotional aspects which lot of customer have for their bank. In some level people think it is an absolute value to have an independent bank in your hometown. But it is good to remember that there is a big number of customers
that do not have emotional relationship with their bank and perhaps think they are all the same and mostly use online services.
3.4.5 Effects on the personnel
As mentioned before after a merger the bank shares a bigger work community. This gives security, possibilities to specialize and even enables new career paths for some.
People can find areas where they are good at. In a small bank employees, might be forced to do tasks that they do not see natural for them. Usually employees see a bigger organization more attractive than a small one, but this of course is very
personal depending on the nature of the person. After a merger, one of the main goals is to create a coherence organizational culture, which naturally brings changes to all employees. This might also bring insecurity and fear of not being good enough in front of the new co-workers or valuable for the organization.
“Change is always somewhat scary; it brings up insecurity and questions from the employees: is my manager going to change? Is my work environment going to change, do I have to commute more and what about all the fringe benefits and everything else?” (P1)
“The worlds are different between the banks even if you have worked within the group for ages” (P1)
3.4.6 Effects on the customers
Customers do not need to do anything after a merger, all their services remain the same. This one of the fears that customer might have when they hear about the merger for the first time. Also, customers are afraid of if their contact person is going to change and will there be any familiar faces in the bank anymore. Most often the old personnel stay at least in the beginning, it is natural that within time there will be some changes made. Nevertheless, usually customers are delighted that there are new professional services available for them.
Being able to secure the service ability is the biggest step towards bettering the customer experience. In addition, experts and utilizing new customer service channels, actively being touch with the customers all add to long term goals of
improving the overall customer experience. In long term, mergers can secure that the bank can secure their customers banking services even during the turbulence in the financial industry. Importantly in the merger meeting it is documented that the common will is to secure and develop the new operation are fairly and uniformly.
4. Methodology
In this chapter the methodology of qualitative study, data collection and analysis of data is being shared. In this research the creation of customer experience and its management after bank merger is being described. Qualitative methodology was chosen as the research method because it suits the best for the nature of the study.
4.1 Qualitative study
The material of the qualitative study constructs of the subjects’ description and its’
relation to the studied phenomena. In qualitative study the material is vivid, the researcher must outline a specific narrow phenomenon to study. It is not possible to interpret everything about the studies phenomena in advance, therefore it is possible that the nature of the study might change as the study proceeds. (Alasuutari 1999) Daymon and Holloway (2011) posit that what characterizes a qualitative study is that it is often holistic and contextual and that the research questions are complex and diverse in nature. Other main characteristics are that the researcher act as a reflector and as an interpreter and that a qualitative study is processual which creates new viewpoints and meanings for the studied phenomena. Creswell (1994) posit that the background ideology in a qualitative study is an inductive process. The study proceeds from private to general and is concerned in multiple simultaneous matters that effect on the result of the study. According to Maison (2019) in qualitative
research is more of a contextual research and one is moving away from the “questions and answers” type of interview. The posed questions are probing and expletory in nature. Qualitative study is concerned with and in-depth understanding of the interviewees experiences on the studied phenomena. The researcher focuses on a qualitative description of reality and is paying attention to a whole spectrum of the studied phenomena and not their actual frequency.
4.2 Case study
The chosen qualitative method for this study is a case study. A case study is an empirical inquiry investigating a contemporary phenomenon in depth in a real-life context. Yin (2009) posit that case studies explains, describe, illustrate and enlighten.
Case study research is said to suit for studies that start with how, who and why. It is good for investigating single or multiple units, usually through interviews or surveys.
Case studies are empirical studies because they are based on knowledge and
Case studies are empirical studies because they are based on knowledge and