Banks fight customer flight

FRAMINGHAM (04/05/2004) - With some 80 mergers already behind them, the I.T. executives at First Union Corp. knew that the CoreStates acquisition boded trouble long before it made headlines as a customer service disaster. Then-CEO Ed Crutchfield had paid a whopping US$17 billion (5.3 times the book value) to buy the Pennsylvania banking franchise in late 1997. And that meant First Union would have to deliver some spectacular cost savings in short order to prove to Wall Street that the deal made sense. For IT, that pressure to slash costs translated into not enough time to plan or execute the conversion of CoreStates' customer data onto First Union's systems. Some applications weren't even tested before they went live. To make matters worse, layoffs at the branches left the remaining tellers stretched too thin as they floundered to learn the new technology.

Predictably, customer service plummeted, and nearly one in five CoreStates customers fled to competitors in a matter of months.

The problems at First Union were not isolated. In the merger-mad '90s, banks expected to lose as many as 15 percent of their customers after a merger. As long as they succeeded in quickly slashing costs and making the deal pay off for shareholders, banks just didn't worry about it. Wells Fargo & Co., for instance, suffered a similar fate when it acquired First Interstate in 1996 and rushed the integration process in its haste to cut costs. The CEO ended up apologizing to shareholders for the bungled acquisition. But First Union and Wells Fargo had the good sense to learn from their mistakes. Both have since engaged in carefully planned, well-executed mergers in which keeping customers happy -- not cutting costs -- was the number-one priority. Wells Fargo beat analysts' earnings per share estimates after merging with Norwest; in contrast, virtually every previous large bank merger since 1995 had failed to achieve earnings targets. First Union merged with Wachovia, and today the combined bank can point to steadily increasing customer satisfaction scores (6.57 out of a perfect 7, according to Wachovia) and a 51 percent jump in stock price since the merger was announced. "Everyone has had to fail once big-time before they got religion," says Tom Brown, CEO of Second Curve Capital LLC, a financial services investment company.

As a new round of megamergers gets under way -- with Bank of America Corp. acquiring Fleet and Bank One Corp. joining forces with J.P. Morgan Chase & Co. -- merging banks would do well to learn from these customer nightmare sagas and convert now to the customer-first religion. Since it costs five times as much to acquire a new customer as it does to maintain a good relationship with an existing one, it's more important in the long run to hang on to your customers during a merger than it is to meet an aggressive deadline for squeezing out excess costs. Keeping customers happy, though, is devilishly difficult. Delivering accurate account balances, having ATM cards that work, and making sure tellers can answer questions and handle transactions efficiently all depend on seamlessly merging the two banks' customer data and systems. Instead of being under the gun to cut costs and convert systems quickly, CIOs at customer-savvy banks are now expected to produce technology conversions so trouble-free that customers won't notice anything beyond the new logo on their bank statements.

Here's a look at how some CIOs are now making it possible for banks to put customers first during mergers -- and why focusing on customers is an approach that merging organizations can take, well, all the way to the bank.

Know what you're getting into

When BankAmerica merged with NationsBank to form Bank of America, BankAmerica was supposed to convert to NationsBank's "model bank" platform for its deposit processing system, generating $500 million in onetime savings, according to Brown, who is also a former Wall Street analyst and cofounder of But had either bank's CEO checked with his IT staff, he would have discovered that the platform was not robust enough to handle the volume from California. Today, that state remains on a separate processing system. If a customer opens an account in Charlotte, N.C., and travels to the West Coast, a California branch won't be able to access her account. An alumnus of Bank of America tells Brown that the bank is now running on five deposit systems -- something that will make integration of FleetBoston into Bank of America's systems all the more difficult.

At Southwest Bancorporation of Texas Inc., Executive Vice President and CTO Buddy Cox tries to avoid such unpleasant surprises by getting involved early in the evaluation process. Just after financial models show that an acquisition would make economic sense, he and his team start looking for any infrastructure compatibility issues that would need to be addressed before the conversion. For example, when the bank was purchasing a three-bank franchise, early due diligence revealed that each bank ran on a different system, meaning that each bank would have to be converted separately to minimize customer impact. Knowing that, Cox built extra time into the merger time line, and the bank was able to account for the added expense in the purchase price. He also looks at such things as whether the candidate has just signed a five-year outsourcing deal with an expensive exit clause. In such cases, he recommends adjusting the deal's purchase price to reflect that. "Having tech teams or leadership involved early in the deal process is a critical component to deal success," says Cox.

Experience is also a great teacher. When it merged with Wachovia in 2001, First Union was still reeling from the disastrous CoreStates merger. And Wachovia had recently fumbled the acquisition of two Virginia banks by attempting to convert both over the same weekend. "We looked each other in the eye and said, 'This time we don't plan to lose a customer,'" says Jean Davis, senior executive vice president and head of IT, e-commerce and operations for the newly merged institution, which took the Wachovia name.

Ken Thompson, previously the First Union CEO and now the new Wachovia CEO, issued a challenge to employees and a commitment to customers and shareholders: The two banks would complete the merger with no customer impact. The bank also went public with its customer service rankings and pledged to hit specific customer service rating targets throughout the merger period.

For Davis, Thompson's challenge had a profound impact on how she approached the monumental task of systems integration. "It wasn't about a time line being as quick as it could possibly be," she says. "It was not about making it as cheap as it could possibly be. It was always, 'What will the customer get?'"

Remove politics from the equation

Deciding which bank's technology to use after the merger happens is a process naturally fraught with politics. Jim Eckenrode, vice president of consumer banking research at TowerGroup, likens IT departments to collections of fiefdoms. "If there's no centralized control," he says, "often inappropriate decisions are made -- decisions that are good for somebody's career, but not necessarily good for customers, the bank or shareholders." To avoid that fate, IT leaders need to be clear about the IT game plan. "A well-defined, clearly articulated IT strategy from the top down is very key," says George Tubin, a consumer banking senior analyst at TowerGroup.

Before Wachovia and First Union began the process of choosing systems, Davis and her team worked with each line of business to draft a target environment design. That meant first defining the desired customer experience and then figuring out what technology would be needed to support that. Each line of business presented its design document to a group of executive committee members for review. "It gave a lot of people a chance to poke at the plan," says Davis. "We got cross-functional input about what was feasible, and what should the experience in the end be for customers."

Davis helped form a team with equal numbers of people from each bank to vet both banks' technologies. Because the banks agreed to merge as equals, they didn't begin with an assumption that one bank's technology was better than the other's. To discourage territorial decision-making, Thompson attended the first meeting about system selection, reminding the assembled troops that even though they came from different banks, now they were on the same team and their task was to make good business decisions.

First Union and Wachovia IT executives systematically evaluated both banks' technologies, considering scalability to support future growth, business functionality, ability to support the bank strategically after the merger and how all the technology would be integrated. Risk, cost and ongoing support requirements also factored into the equation.

Let customer needs drive technology choices

The vetting process revealed that most of their technologies had equivalent functionality, so Davis and her team applied the customer impact litmus test and ended up favoring First Union systems so that fewer customers would be at risk for disruption. But there were a few notable exceptions. Wachovia's image archive system was deemed more advanced, so First Union's archive was migrated to Wachovia's. The combined bank also scrapped both institutions' outdated teller systems in favor of new technology that shaves 25 to 30 seconds off each transaction. But upgrades were considered carefully, since they added time and risk to the integration process. "We needed to make sure we delivered what the customer wanted and didn't get carried away with what would be slick," says Wachovia CIO of Retail and Channel Technology Joseph Monk. In three or four months, the team had made its selections, and of about 100 decisions, only one or two were even contested.

"Just doing a merger is difficult, let alone trying to upgrade systems," says Tubin. "The easiest way is just to stick with what you have. With that type of merger, the acquiring bank just gets big data files of customers from the acquired bank and maps and moves them to its own systems." And in fact, that's exactly what most acquiring banks do -- including Southwest Bank of Texas and Citizens. Citizens CIO William Wray says one set of core systems generally offers no competitive advantage over another, so it makes sense to minimize infrastructure costs by moving the smaller bank to the larger bank's systems.

But bigger is not always better. Fleet was widely criticized for foisting older, clunkier (but already paid for and amortized) technology on BankBoston when the two banks merged in 1999. Although it was a business decision necessitated by the need for speed, that choice annoyed many of the affluent, tech-savvy BankBoston customers accustomed to more sophisticated ATM features. And former BankBoston tellers weren't happy being forced to use branch technology that was older than what they were used to. Tubin, who describes Fleet's approach as pure "acquisition mentality," sums up the logic this way: "What you have is nice, but it'll be a lot easier if we take your customers, move them to our systems and worry about moving to better systems later." Fleet's disgruntled customers went elsewhere as the customer attrition rate reportedly soared as high as 25 percent.

Embrace details -- and test like mad

The integration of two banks' IT systems and the mapping and transferring of the acquired bank's customer data is a painstaking, tedious task. "There are literally thousands and thousands of pieces of data that need to be looked at and touched and evaluated to understand how to merge those systems together," says Dennis Rygwalski, former CIO of FleetBoston and now general manager of financial solutions at Exigen Holdings Inc. That means going through each field in each database and figuring out, for example, what the "average account balance" means on each system.

Experienced acquirers have got the integration process down to a science and thoroughly documented. "We have done enough mergers, so we have a pretty good sense of where problems might occur and a well-planned data-mapping process," says Wray at Citizens. Citizens and Southwest Bank of Texas conduct operational reviews at the end of each merger to look for improvements to the merger process. After a merger in which the volume of customer calls and website visits to check account balances reached the upper range of what had been expected in the first few weeks, the operational review unearthed the idea of tapping into Southwest Bank's disaster recovery facility. By putting that facility into production mode for the first few weeks after a conversion, the bank could avoid paying for extra bandwidth to handle predictable spikes in volume.

Some banks, however, used to skip integration testing. The prevailing mentality on conversion teams, says Tubin, was "f**k it up and fix it fast." Teams used to just go live with conversions and have knowledgeable staff ready to fix problems as soon as they surfaced.

Now that technology has gotten more complicated and banks are striving for no merger-related customer attrition, experts recommend testing each application as well as how individual applications talk to each other. It's also important to run mock conversions before going live. "We knew from bad experience that if we didn't adequately test, our customers would test for us, and our customers would be telling us what was wrong," says Wachovia's Davis. For example, in a previous merger, customers complained that loan payments weren't getting applied to their accounts because a bug in the cross-reference system prevented the system attempting to apply the payment from accessing the customer's newly assigned account number. For the Wachovia and First Union merger, Davis's team conducted six months of testing, running three mock conversions for each of the four deposit system conversions. Through such rigorous testing, they found literally hundreds of errors -- and corrected them before they could affect customers.

Don't skimp on training

Difficult as it is to keep track of every technical detail, people issues -- not technical issues -- are the hardest part of merger integration, says Wray, who has overseen eight of Citizens' 23 mergers. "Technology is necessary; you can't screw it up," he says. "But it can't ensure success. You can have a very clean technical experience but a miserable customer experience if branches don't answer questions properly." He says that even if the technology is working, if branch employees are unhappy -- or simply uncertain -- with the new system, it's tough for them to provide good customer service.

When Fleet merged with BankBoston, Fleet was forced to sell off many of its branches. So the Monday after conversion, most of its branches in the Boston area were staffed by former BankBoston employees struggling on legacy Fleet technology on which they hadn't been adequately trained. "People in branches didn't know how to use it," says Eckenrode. "There were lines out the door. And tellers were complaining that the systems they inherited were slower, older -- a disaster." Second Curve's Brown recalls witnessing a near fight between a frustrated customer and a teller the week after the conversion.

To ensure that tellers get enough training and support to feel comfortable by the conversion date, Citizens puts experienced Citizens employees it calls "branch buddies" into the new branches for at least a week after each conversion. Wachovia went further, permanently moving experienced First Union employees into legacy Wachovia branches a full four months before conversion. In addition to this preconversion "cross pollination," Wachovia sent teams of experienced users to the branches right after they converted. When customer satisfaction data indicated that customer wait times were up, Wachovia increased the length of time that the teams stayed from one week to three.

Think phases, not big bang

The big bang approach to system conversions is popular among acquiring banks eager to slash costs quickly. The Bank of America and Fleet deal, for example, is supposed to wring out $1.1 billion in costs. Although this strategy often works well when a very large bank acquires a smaller bank, it's not recommended for banks with comparable sizes. The bigger the merger, the bigger the risk that something will go wrong when you try to convert all branches to the same set of systems over one weekend. For banks without time for a phased approach, thorough testing and mock conversions are critical, says TowerGroup's Tubin, as is using a project management office to oversee the integration effort. Brown says if you don't have time for a phased approach, don't do the deal.

Because the Wachovia and First Union deal was a merger of equals, the new bank was not under pressure from Wall Street to take draconian measures to slash costs quickly to make the deal pay off. Given the luxury of time, Davis says, the banks were able to plot a "sensible" time line for systems conversion. They divided the project into four regional conversions (Florida, Georgia, the Carolinas, then the mid-Atlantic region), carried out over a 15-month window. Wachovia set up a Y2K-like command center for each regional conversion and used a huge spreadsheet to track customer issues as they arose. For each issue, command center staff labeled it major, minor or medium, noted the number of customers affected, and immediately assigned it to a team for resolution. Most were resolved within hours. Processes were fine-tuned with each successive conversion; by the fourth, Davis reports, everything went perfectly.

CEO Thompson sat in on the final preparation meetings preceding three of the four regional conversions. And Davis held off on merger-related layoffs until after the conversion to ensure that the staff who knew the legacy systems best were there to keep them running until every last customer was converted to the combined bank's systems.

In the end, there were no lines out the door, no headlines about bad customer service. And in a merger, no news is the best possible news.

Customer focus shouldn't, of course, end once the merger wraps up. At Wachovia, Thompson chairs monthly meetings to review the company's customer service ratings and calls on senior executives to explain how they're addressing customer service problems within their groups. And today, even the heads of lines of business are pushing Davis to develop a more holistic view of customers that's defined by customer preferences rather than by lines of business. Monk is at work on the project now.

"The merger has been completed, and we haven't lost sight of the importance of the customer," says Monk. And with Wachovia reporting that for every 100 customers lost, 128 are gained, Wachovia is not likely to change its strategy any time soon.

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