Beyond Day One Minimizing customer attrition …oportunidades.deloitte.cl/marketing/Reportes-internos/...the “moments of truth” in the integration — high-impact events that can

Produced by the Deloitte Center for Banking Solutions

Beyond Day One Minimizing customer attrition during bank mergers and acquisitions

As used in this document, "Deloitte" means Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Contents

Executive summary 2

Risk of customer attrition 4 Key drivers of switching 5

Customer integration framework 8

Conclusion 15

The banking industry remains under huge pressure following the financial and economic turbulence of the last few years. This has resulted in new strategic opportunities for healthy banks to expand their geographic and customer footprints via acquisitions and mergers. And as the number of deals grows, so it has become evident that banks face a major challenge – can they successfully retain the potential value of their deals by reducing or stopping the loss of customers that tends to follow the announcement and completion of a transaction?

Why have so many acquisitions been unable to generate superior returns and greater shareholder value? A key factor is the lack of a sufficient focus during the integration process on retaining newly acquired customers and building loyalty. Instead, many acquisitions are characterized by a primary focus on squeezing out costs and on integrating technology and business processes so that the combined institutions can operate as one bank. The attention given to reducing costs is understandable. Acquisition premiums must be recouped, and typically it is easier to achieve this in the near term by realizing cost rather than revenue synergies. And cost synergies are indeed present, especially with in-market deals, and can be achieved by eliminating redundant functions and resources.

By under-investing in customer retention, however, the acquiring institution runs the risk of losing a significant portion of the value of an acquisition in future revenue and profits. The intrinsic value of a bank is largely a function of the deposit base, loan portfolios, and fee streams of its customer base. Given the difficulty and expense of replacing lost customers, managing how customers are treated and ensuring that their concerns are addressed during integration should be considered as an important focus of any acquisition.

To understand the issues around customer attrition in the wake of a merger or acquisition, the Deloitte Center for Banking Solutions conducted a survey of customers who had recently gone through such a transition to gather insight into what drives a customer to stay or to defect post-acquisition. This report first examines the behaviors of these customers and then provides detailed insight into how to build a framework that can guide a bank’s efforts to help ease the transition process, identify and manage “moments of truth,” and start building valuable relationships even before the merger or acquisition takes place.

We believe this report will be helpful in guiding you through these transitional times and help you stay focused on the most important asset a company has – its customers.

Don Ogilvie Independent ChairmanDeloitte Center for Banking Solutions

April 2010

Foreword

Consolidation within the banking industry has been steadily increasing for the last several years and the recent financial crisis has accelerated this trend. With a merger or acquisition comes the opportunity to grow and expand the business while capturing efficiencies through economies of scale. While the latter is a widely achievable outcome, banks often experience customer attrition after undergoing a consolidation. One of the key reasons for this may be that banks primarily focus on cost savings and place too little emphasis on efforts to retain customers.

Inadequately investing in customer retention can set the stage for lost value because of lower revenues and profits. Given the challenge and cost to acquire new customers, effectively managing customer integration should be considered as a primary focus in any acquisition.

To assess the risk of customer attrition during an acquisition and identify key factors driving it, the Deloitte Center for Banking Solutions and Harris Interactive conducted a survey of more than 800 U.S. consumers who had lived through this experience. The survey found that 17 percent of respondents had switched at least one of their accounts to another institution after their bank was acquired, while an additional 31 percent said they were at least somewhat likely to switch over the next year. But the potential loss of revenues may be even greater than these figures suggest because respondents who had switched had more financial products and more investable assets than those who had not. Rather than one significant event, a number of experiences have led respondents to change banks. Emotional factors, such as feeling that their bank no longer valued them as it did before or the belief that it no longer looked out for their best interests, were most often cited as important reasons why respondents decided to switch banks. In addition to emotional factors, other reasons cited frequently were having received a competitive offer from another bank, problems with account service, and higher fees.

These results suggest that rather than being able to focus only on one aspect of the customer relationship in their effort to reduce customer attrition after an acquisition, an acquiring bank may want to address a variety of customer events. Further, it would be wise to consider moving quickly to integrate new customers. Almost two-thirds of the survey respondents who had switched an account to another bank did so within the first month after the deal was announced. To increase customer retention, we believe banks should consider employing an explicit framework to guide efforts to improve the customer experience and build relationships with their new customers. Such an integration framework includes the following elements:

•Standard customer integration protocol. Even before a specific acquisition is being considered, banks have the opportunity to develop a standard protocol for managing the customer experience throughout the life cycle of the integration. This protocol should identify the “moments of truth” in the integration — high-impact events that can determine enduring customer attitudes, trust, and loyalty. For each moment of truth, the acquiring bank should consider detailing the target customer experiences that it seeks to deliver, together with the supporting employee behaviors required. The result of this analysis is a standard customer integration playbook that describes the specific actions to be taken in each phase of the acquisition in order to provide the desired customer experience.

Almost two-thirds of the survey respondents who had switched an account to another bank did so within the first month after the deal was announced.

2 Deloitte Center for Banking Solutions


Executive summary

• Tailored approach for each acquisition. When the time comes to develop an integration plan for a specific acquisition, banks can use the standard customer integration protocol as the foundation and customize it to reflect the objectives of the deal and the special characteristics of the institution being acquired. This process typically examines such factors as the type of deal, the rationale for the acquisition, the geographic footprints of the two banks, and the similarities and differences between their business models. Banks may also carefully consider, and quantify wherever possible, the tradeoffs that exist between actions to reduce customer attrition and actions to reduce expenses.

•Effective, disciplined execution. Success depends on effective execution. Establishing clear accountability for the integration, designating an executive as the integration leader, and providing support from a cross-functional team can help set the stage for good execution. The tailored customer integration playbook provides the foundation for the implementation by detailing the key milestones, activities, and responsibilities. This can be supplemented by an operating manual that translates the playbook into detailed instructions for employees. Finally, metrics are important to assess customer satisfaction and retention across channels and products and are best captured in a customer integration dashboard that allows executives to easily track progress.

Ensuring that a bank places sufficient emphasis on the customer experience during an acquisition helps safeguard the customer base that provides the core value of the bank being acquired. Beyond simply minimizing customer attrition, an acquirer has an opportunity to drive additional growth by making a positive first impression on its new customers, communicating the bank’s brand and value proposition, and starting the process of building customer loyalty.

Finally, the focus on customers is best maintained beyond conversion. The effort to continually strengthen customer relationships — both with new and existing customers — is never completed, essentially being central to a bank’s culture. This is especially true with existing customers whose satisfaction is as important as that of newly acquired customers. Investing in understanding and improving the customer experience can help a bank build strong, profitable relationships with all its customers over the long term.

Deloitte Center for Banking Solutions 3


Risk of customer attrition

Customer attrition can be significant after an acquisition. Deloitte’s survey found that 17 percent of the respondents that were customers of banks that had been acquired switched at least one of their accounts to another institution (“switchers”). Further, an additional 31 percent of respondents remained at risk — saying they were at least somewhat likely to switch one or more of their accounts to another bank over the next 12 months. (See Exhibit 1.)

A customer attrition rate of 20 to 30 percent or more after a merger represents a major loss of potential value. However, the loss may be even greater because survey respondents who switch accounts tended to have more banking products and more assets. Switchers had an average of almost six financial products across all their banking relationships compared to four among those who had not switched any accounts. Also, switchers were much more likely to have investment and loan products in addition to checking and savings accounts. Further, 66 percent of survey respondents who had switched accounts had investable assets of more than $100,000, compared to just 28 percent for those who had not switched.

These findings underscore the potential value at risk in an acquisition. A large share of bank profits is usually generated by 10 to 20 percent of customers, that is, those with which the bank typically has a greater share of wallet. If these customers switch accounts after an acquisition, a significant portion of the expected value of a deal can be placed at risk.

Critical first month after an acquisition is announcedIn minimizing customer attrition, it is particularly important to focus on events that occur soon after the acquisition is announced. In the survey, roughly two thirds of the respondents who had switched an account did so within the first month after the acquisition was announced, while 85 percent switched within the first three months. The first impressions that customers have regarding the acquisition

and how it may affect them can create lasting attitudes that either build or undermine customer loyalty to the new bank.

A bank’s initial communications with its new customers are important in this regard. But the direct interactions with customers that occur in the branch and in the call centers have even more impact. Subsequently, the acquiring bank may do well to consider moving quickly to convey its customer approach to the acquired employees, who are the face of the bank to the customer. The fact that most switching by the respondents occurs quickly after announcement highlights how important it can be to have a customer strategy and integration approach defined before the deal is announced. By having a standard customer integration protocol and processes in place before a deal is contemplated, a bank can then customize it to the unique characteristics of a particular acquisition under consideration.

64%

21%

7%

3%5%

Exhibit 1: Vulnerability of acquired clients

Switching behavior post-acquisition Switching activity during monthsfollowing announcement

17%

14%

17%

52%

Switched banksLikely to switchSomewhat likely to switchNon switcher

Within 1 month2-3 months4-6 months7-9 months10+ months

Source: Deloitte Center for Banking Solutions survey, 2009



Key drivers of switching

Deloitte’s survey asked respondents whether they had experienced any of up to 46 negative events to assess which types of experiences led respondents to switch accounts after an acquisition. These events included problems with the level of service, access to services, competitive offers from other institutions, increased fees, and poor communications, among others.

Not surprisingly, respondents who had switched accounts were much more likely than non-switchers to report that they had experienced these negative events. But, in most cases, switchers had not experienced simply a single negative event, but instead reported several negative changes in their banking relationship. This suggests that the decision to switch is not usually driven by one event but results from the cumulative impact of a series of negative experiences.

Banks remain vulnerable to customer attrition even months after an acquisition. Respondents who remain at risk of switching appear to have adopted a wait-and-see attitude. They want to see if their new bank will provide similar customer service, products, and fees to those provided by their old bank, and many are shopping around to see what other banks can offer.

When respondents who switched banks were asked for the top two reasons they moved their account to another bank, the types of reasons cited most often were: emotional factors (the primary driver of switching); competitive offers from another institution; problems with account servicing; and concerns over fees. (See Exhibit 2.) Driven by these factors to switch accounts, 68 percent of switchers said they liked their new bank more than their previous one. In developing an integration approach, it is important to understand each of these drivers and their implications for efforts to minimize customer attrition.

Exhibit 2: Key drivers for switching

Top two reasons why respondents switch accounts


0% 10% 20% 30% 40%

Migration issues

Communication

Lost services

Convenience

Fees

Account servicing

Competitive offer

Emotional

Percent of responses

36%

17%

12%

10%

9%

8%

4%

4%

Emotional By far the most common type of reason for moving accounts was emotional factors, cited in 36 percent of responses (versus 17 percent for competitive offers, the next most common reason). These high-impact events included losing trust and confidence in their new bank, concerns about the security of accounts, not feeling that their new bank valued them or looked out for their best interests as their old bank did, and the loss of a personal relationship with bank employees.

These negative experiences can result from a variety of interactions, but the role of employees in building strong customer relationships cannot be overstated. When employees of an acquired bank do not receive clear communications about the changes affecting their future with the new institution and feel they are not valued, this is a recipe for poor customer service or even having employees criticize the acquiring bank to customers. Employees who are beginning to live the acquiring institution’s values and who interact effectively with customers are essential to increasing retention. Such engaged employees may help new customers fairly consider the acquiring bank and help build their loyalty.



Competitive offerAnother common reason for switching was receiving compelling competitive offers from other institutions. Specific experiences in this category included offers of more appealing products, improved returns on savings, loans with lower interest rates or more flexible lending terms, or services that made banking more convenient.

This receptivity to competitive offerings speaks to an absence of compelling reasons for customers to stay. Acquiring banks can go on the offensive and proactively communicate their strengths and the benefits of the acquisition for customers. These communications can remain positive and go beyond simply assuring customers that the changes will be minimal and that service will not be disrupted. The acquiring bank has the opportunity to emphasize its brand promise and how customers will benefit from the products and customer service offered. These communications can be even more effective when they are customized to specific customer segments.

Account servicingProblems with service were another reason for switching. This includes the perception of an overall decline in service quality, especially when telephoning the bank, and a feeling that meeting their needs required too much time and effort. Effective integration plans place a priority on minimizing disruption and maintaining service levels during the acquisition process, with the goal of avoiding any account errors during the transition that could erode customer trust.

However, effective planning and execution goes beyond addressing obvious disruptions. It involves ensuring strong communication that is consistent across channels and proactively identifying opportunities to provide service that exceeds expectations. Given the central role of employees in interacting with customers, acquiring banks can benefit from investing early in training customer-facing staff, especially in call centers, on product offerings and expectations regarding customer service.

The role of employees in building strong customer relationships cannot be overstated: Those who live the acquiring institution's values and interact effectively with customers are essential to increasing retention.

FeesConcerns about fees were another key driver in customer switching decisions (e.g., the experience of having to pay for services that they received for free before the acquisition). In some cases, particularly when buying a distressed institution, the rates offered on deposit accounts by the acquired bank are above the acquiring institution’s rates, or the fees charged are below the purchaser’s price structure, and may need to be adjusted. But careful consideration is warranted in determining the path for changing fees and rates. Alternate strategies include providing different rate/fee adjustments for different customer segments and phasing in new pricing in stages, rather than making an abrupt, one-time change.

Price sensitivity is not surprising. In other studies and from Deloitte’s experience serving clients, pricing always has significance for customers. When it is the primary driver of a customer’s decision to switch, however, it may be indicative of the weakness of ties the bank has with the customer. Proactive communications of the benefits of the acquisition for customers can help to ensure that fees, while always important, do not become the exclusive issue. Training employees will be important in this area as well. Employees need to have the information and skills to address customer concerns by answering questions on fees. It is helpful when they are equipped to move discussions from focusing simply on the absolute level of fees to the relationship between fees and the value provided, highlighting the benefits of product and service packages for the customer.



Exhibit 3: Investable assets of switchers vs. non-switchers


0% 20% 40% 60% 80% 100%

Non-switchers

Switchers 30% 49% 17%

58% 17% 11%

Less than $100K $100K - $500K More than $500K

Note: Percentages total less than 100% because some respondents declined to answer.

The rationale for placing a greater focus on customer retention during an acquisition is compelling. The loss of newly acquired customers who switch can seriously erode the value of the customer franchise being acquired. The loss may be even greater if those who leave represent the bank’s more valuable customers. And, indeed, this survey indicated that those respondents who switched tended to have more banking products and more assets. In particular, among switchers, 66 percent reported having investable assets of more than $100,000, compared to just 28 percent for non-switchers, while 17 percent had more than $500,000 in investable assets. (See Exhibit 3.)

Lost customers, especially profitable customers, cannot easily be replaced. The cost to a financial services institution of acquiring a new customer is a multiple of the cost of retaining an existing customer. For this reason, even modest improvements in customer retention rates can lead to substantial improvements in profits and shareholder value.

Beyond simply minimizing attrition, an acquisition provides a unique opportunity to forge a relationship with customers at a time when they fear the worst. If managed correctly, it can build satisfied, profitable customer relationships, which not only contribute directly to topline growth, but also can increase brand loyalty and trust for the bank.



Banks should consider establishing an explicit focus during an acquisition on retaining and building relationships with their new customers. To do so effectively requires strong, focused preparation before a deal takes place. To drive greater retention, banks may want to consider employing a customer integration framework that includes, for example, the following three dimensions:

•Standardcustomerintegrationprotocol

•Tailoredapproachforeachacquisition

•Effective,disciplinedexecution

Standard customer integration protocolEven before a specific acquisition is being considered, banks should consider developing a standard protocol for managing the customer experience throughout the integration process. By having a standard protocol developed in advance, they can be ready to move quickly when a specific deal presents itself. Additionally,

establishing a standard protocol allows for the incorporation of lessons learned from previous acquisitions, where fundamental approaches, guiding principles, and decisions are addressed and defined anew with each deal. A customer integration protocol is one element in a comprehensive approach to managing acquisitions that can also include similar protocols to guide integration in other key areas such as operations and technology.

As outlined in Exhibit 4, establishing a standard protocol involves developing both an understanding of the ways and times customers could potentially be impacted in an acquisition and a definition of the target experiences that can be delivered to customers to generate positive impressions and foster retention. Ideally, how customers are treated during the integration reflects both what customers desire as well as the acquirer’s brand promise. The brand promise, translated into key attributes, provides direction to the definition of target experience, with which

Announcement to legal day one

Exhibit 4: Standard customer integration protocol

Playbook for customer and employee experiences

Point of customer impact

Integration lifecycle

Target customer experience attributes

Acquirer's brand promise and positioning

Legal day oneto conversion

Conversion weekend

Post- conversion

Announcement to conversion

Moment of truth one

Moment of truth two

Moment of truth three

Target customerexperience

Target customer

experience

Target employee behaviorsTarget

employee behaviors

Target employee experience

Considering brand promise and positioning and the experience that acquired customers

want during an integration…

…and the events that impact the customer across the life cycle of an integration …

…as well as how the attributes should be manifested in key moments of truth – the most significant points

of impact – across the integration lifecycle…

…supports the development of target customer experiences…

…and the associated target employee experience that will directly impact the delivery of the

customer experience…

…which provide the foundation for identifying opportunities to enhance the customer and employee

experience components of an integration playbook

Source: Deloitte Center for Banking Solutions

Customer integration framework



the integration decisions and approach are then aligned. This is particularly important if the bank plans to adopt an offensive mindset, i.e., using the integration period to proactively engage with customers and employees and demonstrate the acquirer’s virtues.

Moments of truth and target experiencesA foundational element in crafting an effective customer experience protocol is defining events that can potentially impact the customer across the life cycle of integration, from time of announcement through post-conversion. (See Exhibit 5.) Walking through the integration life cycle from the vantage point of the customer can help highlight possible events that could be disruptive. Determination is then made as to which of these events would have the greatest impact and thus represent “moments of truth” in the customer relationship. Once these moments of truth are identified, the bank can define the target experiences for each of them. The expectation is that these experiences, if delivered, will lead to customers staying with the bank. Once established, these target experiences should provide the foundation for developing a standard protocol to follow in an integration to address and manage customer concerns and retention. In identifying moments of truth, a variety of customer touch points and events are considered, including:•Whatcommunications,bothformalandinformal,

customers might receive•Howwellemployeescanaddresscustomerquestions

and concerns•Changesthatmightoccurinhowcustomersinteract

with the bank, whether in person, by phone, or online•Changestoproductsandservices Customer experiences to be considered span across the integration life cycle, from the first day that the deal is announced through the post-conversion period. In the early stage of an acquisition, for example, customers have fundamental questions that arise as they hear news of the deal. If these questions are not addressed sufficiently and in a timely manner, there is the risk that early concerns and skepticism about the deal will become permanent. This can be aggravated by the efforts of competitors to “poach” customers. In the early stage, the morale of employees of the acquired bank can also suffer, with increased anxiety

and concern about what happens to them, which can all translate to eroding customer service.

Following day one, many decisions concerning channels, products, and staff can have important impacts on customers. For example, what changes will be made in how customers can access the bank? If the call center number is changed, but calls to the old number are not automatically transferred to the new number, customers may have a negative experience when first contacting their new bank. Customer experiences when attempting to access account information and conduct transactions are even more important. Banks may want to consider whether the transition will be seamless for customers or whether it will instead require significant effort on their part. For example, if checking accounts are renumbered, customers may need to remember all the companies that automatically debit their account and then contact each of them to provide the new account information. If the sign-in process for accessing their accounts online is changed, this can require a significant amount of effort for customers and lead to frustration.

How the bank provides account information can also affect the customer experience. For example, if checking account statements at the acquired bank included savings account information and this is removed by the new bank, customers may view this as a reduction in service. On the other hand, if the information provided in the ATM display is altered, few customers will care, provided that their PIN works and they can withdraw cash.

Finally, an acquiring bank should carefully consider how changes to product offerings and prices are managed. The challenge, and opportunity, is to present these changes as providing a better value proposition for the customer — where higher prices are justified by better value or where fewer features or service is matched by more competitive prices. If customers do not see how they will benefit from any changes in products or fees, they might consider seeking out and entertaining offers from competitors.



Key role of employeesInteraction with bank employees is often the most critical aspect of the customer experience. As outlined in Exhibit 5, for each moment of truth, the behaviors required by employees to deliver the target customer experiences can be defined. Banks can consider taking several actions to foster these behaviors, including:•Communicatingclearexpectations•Providingtools,information,training,andsupporton

new processes and systems•Deliveringtheinformationrequiredtorespondto

customer questions

But these elements may have only limited value, unless employees are effectively engaged and motivated. Employees have concerns about how their jobs will change and about their future with the new institution. Many acquisitions involve consolidating branches and eliminating redundant positions. These actions, while often necessary, clearly have the potential to undermine employee morale and can lead to reductions in service quality and a failure to communicate a positive message to customers about the benefits of the acquisition.

Employees typically want to be reassured about these personal concerns. Banks should consider clearly informing employees about such issues as job security, compensation and benefits, reporting relationships, and job prospects so they have confidence in their future and are motivated to deliver high-quality customer service. A key element to positively engaging employees is transparency about what, how, and when decisions are to be made. Also, making timely decisions about issues that affect employees is important. For example, communicating benefits coverage at the outset can address some of the most pressing concerns. Similarly, quickly making decisions concerning retention, severance, and supervisory alignments can help lessen employee anxiety and allow employees to focus on maintaining customer service.

Customer integration playbookThese target customer experiences provide the foundation to develop a standard customer integration playbook that specifies the activities required in each phase of the acquisition cycle. The playbook should provide the standard operational template for customer integration, which can then be customized to fit the unique profile and requirements of individual acquisitions. For each phase of the acquisition cycle, the playbook can specify in detail what is to be done to manage events affecting customers,

Exhibit 5: Examples of potential moments of truth for customers

Conversionweekend

Post conversion Legal day one to conversion

Planning

• News of acquisition deal covered in media

• Competition begins to contact customers to solicit business

• Ability to answer customer questions

• Employee morale and impact to customer interactions

• Branch closures and openings

• Product offering and pricing changes

• Employee morale and attrition

• Access to legacy accounts

• Maintenance of legacy account numbers

• Access to account or fund information

• Migration to future state online channel

• Availability of legacy accounts

• Re-enrollment in online bill pay

• Customer service levels

• Account information accuracy

• Employee morale and retention

Announcement to legal day one

Announce-ment

Legal dayone

Customer andemployee prep

Day oneplanning

Exam

ples

of k

ey c

usto

mer

inte

rfac

ing

even

ts


Representative integration lifecycle



Special considerations for failed bank dealsIn the current market environment, an increasing number of acquisitions have taken place after a bank has failed. The number of bank failures rose from just three in 2007 to 25 in 2008 and then skyrocketed to 140 in 2009.3

Deals involving the acquisition of distressed institutions have a special profile. Customers of failed institutions can be even more prone to switching accounts upon being acquired, given concerns about the viability of their institution and its continued ability to meet their needs.

Having a standard integration protocol in place is thus especially important for failed bank acquisitions. Not only are the risks of customer attrition greater, executing the acquisition of a failed institution typically has an accelerated timetable that requires management to make faster decisions and leaves little time for customizing the approach. The fact that the management of a failed bank is often changed only makes integration more difficult. The acquirer must be ready to move quickly to reassure customers, maintain service levels, and make fast decisions on the acquired bank's portfolios. Quickly reassuring the employees of the failed institution and making timely retention decisions are also important since they will have specific concerns about benefits coverage as well as their continued employment. Banks that anticipate acquiring failed institutions may want to consider developing a playbook that is specifically designed for the unique characteristics of these deals.

who is responsible, when activities should be completed, and any interdependencies among different activities. It can also include what tools, information, or other resources are required. Developing a playbook early can help identify any gaps in capabilities needed to deliver the target experiences, so that steps can be taken to fill these gaps before an actual deal is undertaken. For example, a bank may conclude that it needs to develop training programs for acquired employees, define a roster of managers who can be dispatched to acquired branches to oversee the transition, or develop a process for transitioning customers’ bill pay information to the new systems.

Tailored approachThe standard integration playbook should serve as a template in addressing the high-impact customer events and activities common to most acquisitions. Once a bank starts planning for an actual deal, it can tailor this playbook to reflect the unique objectives and characteristics of the acquisition at hand. The result may be a customized customer integration playbook that contains a comprehensive inventory of the integration activities, milestones, and responsibilities for delivering the target customer experience in each phase of the acquisition. Deal characteristics that factor into the tailoring playbook include deal type, rationale, geographic footprint, and business models.

Deal typeThe type and size of the acquisition are important when customizing the standard playbook. In smaller acquisitions, for example, the bank being acquired will usually adopt the business model and employ the infrastructure of the acquiring bank. In contrast, in a merger of equals between two large institutions, management is more likely to consider a wider range of options. Each bank may adopt the aspects of the products, processes, or technology systems of the other bank that are deemed to be more effective. In some cases, integrating products, channels, and processes of two large institutions may be so complex the banks decide to leave them separate at the outset and only integrate them in a phased process over time to minimize disruption.



headquartered –

branch managers. When the two institutions involved in the merger or acquisition serve different geographic markets, there may be a greater competitive threat since the acquiring bank may be entering a market in which it has less brand recognition than its competitors, potentially leaving it vulnerable to efforts to steal its customers.

Business modelsAn acquiring bank also needs to consider the extent to which the two institutions have similar product offerings, the primary channels and capabilities for each, the customer service philosophy, and the service quality. When there are important differences between the business models of the two banks, a greater emphasis on change management activities may be required. Alternatively, the acquiring bank may choose to minimize customer disruption by integrating product offerings more slowly. It may decide to maintain the products or services of the acquired bank for an extended period before finally integrating them into a single set for the entire institution. Managing tradeoffsThe decisions on the specific integration approach to adopt often involve tradeoffs between increasing customer retention by improving the customer experience and reducing cost by rationalizing operations. (See Exhibit 6.) We believe the more a bank invests in executing a seamless transition and delivering a better customer experience during integration, the more likely it will be to retain its new customers. For example, creating special helplines in call centers and additional staff in branches, deploying trainers to help employees with the integration, and only integrating systems and consolidating branches or reducing headcount slowly may all result in more satisfied customers and less attrition. The challenge is that these investments also entail additional costs that can reduce or delay the forecasted cost savings from the deal.

Aggressive moves to slash costs — such as consolidating branches, reducing headcount, and introducing new service levels or fees — can increase cost savings. However, they can also result in customers feeling less valued, dissatisfied with service quality, and more likely to switch to another institution.

Acquisitions of distressed institutions will typically require faster integration time frames. In these cases, it will be desirable to immediately convert the brand of the acquired institution, even before all the operations have been integrated, since the brand reputation of the acquiring bank can play an important role in allaying customer concerns. Deal rationaleThe rationale for the deal, and where benefits are expected to be gained, should also be considered. Is the deal principally predicated on achieving cost synergies through rationalizing branch networks or achieving economies of scale by merging back-office operations? Or does it depend on expected revenue synergies from cross-selling to its new customers through more effective marketing or a wider set of product offerings? In deals that expect benefits to accrue primarily from revenue synergies, the playbook may need to accelerate marketing, training, and IT activities to enable new products to be introduced quickly. A deal that is more focused on cost savings may place a higher priority on other activities, such as rationalizing overhead.The objectives of the deal may also have an impact on the speed and timing of integrating brands and IT systems. If generating revenue synergies is paramount, a bank may decide to first convert IT systems and only integrate brands after system conversion is complete to ensure more consistent delivery of service.

Geographic footprintWhen acquiring a bank that operates in the same geographic market, the integration team will typically want to evaluate the degree to which overlapping branch networks can be consolidated. With these deals it can be beneficial to pay special attention to managing the concerns of branch employees and maintaining morale. Bank management may consider having an employee communication and retention plan ready, especially focused on retaining high-performing branch employees across all levels from junior employees to



It is important to address these tradeoffs explicitly, considering the implications both for cost reductions and also for customer retention and revenues. Quantifying these tradeoffs wherever possible allows these decisions to be made in a factual, data-driven way.

Clearly, delivering an enhanced customer experience may not always take precedence over reducing costs. But making these decisions with only a focus on short-term benefits that could destroy long-term value by losing valuable customer relationships is a trap to avoid. While some disruption is unavoidable, explicitly assessing the tradeoffs between cost reduction and customer retention can lead to more balanced decision-making and help identify where more cost-effective attrition risk management actions could be developed and taken.

Effective, disciplined executionIn addition to preparation and planning, successful integration requires effective implementation. To enhance execution of customer experience management, consider the following success enablers.

Clear accountabilityThe bank should give consideration to designating a customer experience leader of the overall integration effort. The integration leader would be responsible for defining the target customer experiences and for overseeing and coordinating the activities of all the areas of the bank involved in delivering these target experiences. The integration leader may be supported by a cross-functional team involving all products and channels as well as other key functions, such as communications, IT, and human resources. Banks may also find it helpful to create a senior-level customer experience steering committee that can help the integration maintain high visibility and senior management commitment.

Appropriate toolsA key to achieving seamless integration is having a customer experience protocol that provides a comprehensive view of the key milestones, activities, and responsibilities throughout the integration life cycle. Building on the customer experience protocol, banks may also consider developing a customer experience operating manual that provides detailed instructions for all

Exhibit 6: Tradeoffs – decreasing cost vs. increasing customer retention

Acquirer's brand promise & positioning

Decreasing cost By…• Closing branches• Consolidating call centers• Reducing service levels • Decreasing employee compensation• Eliminating nonstandard products• Reducing account history

By…• Creating helplines in call center and branches• Deploying trainers to help with execution and messaging• Elongating the overlap for systems conversions• Maintaining service levels to high-tier customers

…can result in…• Customer disruption• Increased attrition if not proactively addressed through integration activities

Increasing customer retention

…results in increased costs, but can also result in customers…• Feeling more valued• Understanding the benefits of changes• Becoming brand advocates• Increasing loyalty




post-conversion activities designed to increase customer retention. Such an operating manual can help employees provide appropriate answers to questions from customers and give them the tools needed to help reduce the confusion and complexity that customers can experience during the transition. The operating manual should serve as the “source of truth” on the integration and its benefits for customers. Well-designed metricsBanks can benefit from having metrics to monitor the impact of the integration on the customer experience and business performance. To provide a comprehensive view of customer satisfaction and retention across channels and lines of business, the metrics address the following four major areas:•Access to channels. Assessing any operational issues

that customers may have in interacting with the bank or accessing their accounts during integration.

• Employee engagement and retention. Tracking both employee satisfaction and turnover, which are often leading indicators of problems with customer attrition.

• Customer satisfaction. Understanding the perceptions of newly acquired customers and highlighting any areas of increased customer dissatisfaction.

•Customer growth. Tracking new customer acquisitions and further penetration of the existing customer base through cross-selling to reap the potential synergies of the acquisition.

These metrics should be captured in a customer integration dashboard that enables executives to easily monitor key customer experience indicators and take action quickly when customer experience problems emerge. The customer integration dashboard should provide a comprehensive view of the customer experience during integration, while having the flexibility to be customized to the needs of individual users.

By understanding the extent to which it is delivering the target customer experiences identified in the customer integration playbook, the acquiring bank is then better positioned to make adjustments in its integration game plan and its execution. This can help ensure that employees remain focused on the customer and deliver the target customer experiences needed to satisfy customers and reduce attrition.

Consideration of effective practicesIn addition to these foundational elements of an effective integration, there are opportunities to take up more effective practices. For example, employee councils can help empower employees and leverage their critical role as the face of the bank in delivering the customer experience. Employee councils can gather feedback “from the field,” which can be invaluable in identifying emerging customer issues and identifying appropriate responses. Another effective practice to consider is using employees from the acquiring bank to act as trainers for front-line employees in the bank being acquired. This approach can help employees in the branches and call center learn the new bank’s processes and product offerings, and how to communicate to customers the rationale and benefits of the integration. These are but a few examples of how acquired customers and employees if positively engaged could lead to more effective integration planning and execution.



Banks that fail to place a sufficient emphasis on the customer experience during an acquisition run the risk of not achieving the value they anticipated when the transaction was originally conceived. All too often, however, acquisitions have focused principally on achieving cost reductions, while paying too little attention to customer retention.4

The result has been that many of the customers, especially many valuable ones, which a bank believed it was acquiring quickly move their accounts to other banks. The risk of customer attrition lingers for a significant period after the transaction is completed, as customers consider whether or not to remain with the new bank.

To achieve the potential value of an acquisition, banks can benefit from having an explicit plan designed to drive greater customer retention. Even before an acquisition is being considered, a bank should consider developing a standard customer integration protocol that identifies the target customer experiences that it seeks to deliver during an integration. When a specific deal is being planned, this protocol can then be customized to reflect the special characteristics of the deal at hand.

An acquisition is a critical moment in the customer relationship. It is only natural that customers are concerned when they learn that their bank is being acquired by another institution. They are worried that their products, pricing, and service may deteriorate. The change can make them more aware of their banking relationship and more sensitive to any problems that may occur during the transition. If their worst fears are realized, and they experience problems during the integration or believe that the new bank has lower-quality service or product offerings, our survey indicates that they are more likely to switch to a competitor.

But while any acquisition runs the risk of customer attrition, it also creates a unique window of opportunity. The first impressions that the acquiring bank makes on its new customers, especially when they are concerned about the acquisition, can have a lasting impact. Banks that can deliver a seamless integration, while providing quality customer service and good value in its product offerings, can acquire a new set of loyal, profitable customers and help maximize the long-term value of their acquisition.

Conclusion



About the survey This survey was conducted online within the United States by Harris Interactive on behalf of the Deloitte Center for Banking Solutions between February 26, 2009 and March 11, 2009, among 825 respondents who are 18+ years of age, with a household income of at least $50,000, and reported their bank underwent a merger or acquisition. Figures for age, sex, race/ethnicity, education, region, and household income were weighted where necessary to bring them into line with their actual proportions in the population. Propensity score weighting was also used to adjust for respondents’ propensity to be online.

All sample surveys and polls, whether or not they use probability sampling, are subject to multiple sources of error which are most often not possible to quantify or estimate, including sampling error, coverage error, error associated with nonresponse, error associated with question wording and response options, and post-survey weighting and adjustments. Therefore, Harris Interactive avoids the words “margin of error” as they are misleading. All that can be calculated are different possible sampling errors with different probabilities for pure, unweighted, random samples with 100 percent response rates. These are only theoretical because no published polls come close to this ideal.Respondents for this survey were selected from among those who have agreed to participate in Harris Interactive surveys. The data have been weighted to reflect the composition of adults 18+ years of age and earned at least $50,000. Because the sample is based on those who agreed to participate in the Harris Interactive panel, no estimates of theoretical sampling error can be calculated.



1 Dragoon, Alice, “Customer Relationship Management (CRM) – Banks Fight Customer,” CIO, April, 2004.2 Cover, Jerry, "Profitability Analysis--A Necessary Tool for Success in the 21st Century," ABA Banking Journal, 1999. 3 Federal Deposit Insurance Corporation, http://www.fdic.gov/bank/individual/failed/banklist.html.4 Deloitte Consulting LLP.

Endnotes

Michael StachowiakSenior ManagerDeloitte Consulting [email protected]+1 312 486 2084

Malika GandhiManagerDeloitte Consulting [email protected]+ 215 446 3979

Arikan OlgunerSenior ManagerDeloitte Consulting [email protected]+1 212 618 4196

Kristen EsfahanianResearch ManagerDeloitte Center for Banking [email protected]+1 617 585 5854

Industry Leadership

Jim Reichbach Vice ChairmanU.S. Financial Services Deloitte [email protected] +1 212 436 5730

About the Center

The Deloitte Center for Banking Solutions provides insight and strategies to solve complex issues that affect the competitiveness of banks operating in the United States. These issues are often not resolved in day-to-day commercial transactions. They require multidimensional solutions from a combination of business disciplines to provide actionable strategies that will dramatically alter business performance.

Deloitte Center for Banking Solutions

Don OgilvieIndependent ChairmanDeloitte Center for Banking [email protected]

Contributors

Lallande de GravelleSenior ManagerDeloitte Consulting [email protected]+ 212 618 4976

Authors

Toby KilgorePrincipalDeloitte Consulting [email protected]+1 404 631 2626

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

Andrew FreemanExecutive DirectorDeloitte Center for Banking [email protected]+1 212 436 4676

DisclaimerThese materials and the information contained herein are provided by Deloitte and are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s).

Accordingly, the information in these materials is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser.

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Beyond Day One Minimizing customer attrition …oportunidades.deloitte.cl/marketing/Reportes-internos/...the “moments of truth” in the integration — high-impact events that can