In the past two years, First Niagara Bank, a $31 billion-asset community bank in Buffalo, N.Y., has been on an acquisition tear. It bought the $5 billion-asset Harleysville National, which is based in Pennsylvania, in April 2010. It completed a purchase of New Haven, Conn.-based NewAlliance Bancshares in April of this year, gaining $8.8 billion of assets, 88 branches and 106 ATMs. In July, the bank agreed to buy 195 HSBC Bank USA branches across upstate New York and southeastern Connecticut.
Those deals have kept the team led by chief information officer, John Petrey, more than busy. Petrey isn't looking for sympathy: In a previous job at Bank North, he handled 14 acquisition-related IT integrations in seven years and says that as far as he is concerned, practice makes perfect when it comes to integrations.
"If you're a bank doing a lot of acquisitions, you tend to get into this groove where you just know how to do them, you don't have to think too much about it," he says. "Whereas if you go for five or six years before you do one and then all of a sudden an acquisition pops up, there's a considerable amount of figuring out how are we going to do this, working on making decisions about how to approach it."
First Niagara is now at the point where it has standard templates and project plans for IT mergers that cover about 80% of the work required. "We're able to take those off the shelf and apply them to every bank that we acquire," he says.
Repetition isn't something every bank-IT team has to fall back on, of course. Bank Technology News asked Petrey for a couple of core principles that can make the difference between an effective integration and one that goes awry. One key to First Niagara's model, he says, is a consistent approach to the systems at companies it integrates.
Rip and Replace
One of the basic principles of Petrey's IT merger model is that he always replaces the technology of the acquired institution. "We'll deploy new equipment that meets our standards," he says. "It's not that whatever the acquired institution had was bad or wrong, but we've learned from doing these that if the infrastructure isn't standardized, the risk of having issues pop up on conversion weekend is much higher and risks impacting the customer experience." The bank will save some of the acquired infrastructure for potential reuse later, but not during a conversion weekend.
This rip-and-replace approach is common in North America. "Most banks in America want to maximize their brand and get to a single product set as quickly as possible," says Wayne Busch, managing director of Accenture's North America banking practice. "Globally, you see more multibranded approaches."
First Niagara always converts the acquired bank on to its basic platforms, including its core software from FIS and item processing solution from Open Solutions. "We don't try to pick apart the acquired bank's systems and end up with a hybrid," Petrey says.
However, if the acquired bank has a product that First Niagara doesn't have, it might consider keeping the system that supports it. "Occasionally, we'll find an ancillary system at an acquired institution where we either don't have a corresponding system or where it is significantly superior and replacing it with the First Niagara system would negatively impact the customer experience."
New Alliance, for example, offered asset-based lending and First Niagara didn't, so the Buffalo bank continued to use New Alliance's asset-based lending systems and integrated them into its environment.
First Niagara always keeps on some of the acquired bank's IT staff to help support the added branches, employees, customers, account volume and transaction volume. "The question becomes, do they have the staff you need in the right places with the right skills," Petrey says. "It's not uncommon that many employees become employees of First Niagara, but it's also not uncommon that some may not be willing to relocate if the job requires that and there are instances where there isn't a match between the job they perform and the needs we have."
Pressure To Have Top-Notch IT
The practice of replacing the acquired bank's technology puts pressure on First Niagara to keep its technology state of the art. "Every time we go into an acquisition there are gaps between what we have and what they have," Petrey acknowledges. "We have to look at every one of those and determine what we're going to do about that. If you acquire someone who's leading edge, you're going to have many more gaps that are difficult to close than you otherwise would."
Petrey also admits that First Niagara is not where he would like it to be with all applications and product offerings. "It's a constant moving target. But I think it is fair to say that if you're going to be in the acquisition business, there's going to be additional pressures than there otherwise would be to be more current on technology than you otherwise would," he says.
Frequent mergers also put pressure on a bank's IT scalability, at times giving the bank a 20% to 30% jump in assets, customers or number of branches. "You absolutely have to make sure your environment is scalable, that your apps can handle additional volume, that your infrastructure can handle additional volume and users, and that your network can handle additional transactions flowing over the network and deliver it in the service levels you've established."
They also put push the bank to improve its operational efficiency - centralizing the IT functions that will make an organization more efficient, automating processes that were manual and re-engineering processes that weren't originally designed for post-merger volumes.
Virtualization technology has helped on both these fronts. "Acquisitions drive the desire to do more virtualization because you're growing your data centers and you've got to worry about power, cooling and floor space," Petrey says.
IT monitoring, IT management and data conversion tools have also helped. "Pre-merger, you might have gotten away without automating certain monitoring tasks," Petrey notes. "But when you're scaling up you need more of that," whether that's through acquisition or organic growth.
Data conversion tools help the bank examine the data files it receives that need to be mapped over to its own systems. The files the bank receives from the acquired bank might contain millions of customer records that might be coded differently or contain different entity identifiers than those First Niagara uses. The tools the bank uses perform the mapping and call out the records that have data elements that can't be easily mapped over. They interrogate the files to find and resolve discrepancies in data tags and codes.
Completed Within the Year
First Niagara typically finishes all IT integration work for a merger within eight to 10 months of the announcement. "There's a whole series of things that have to go on in terms of shareholder and regulatory approval, so to some extent you're at the mercy of the regulators and how fast you can get shareholder approval," Petrey says. Once you get shareholder and regulatory approval, you then have an interesting decision, which is, if I have all my approvals in place and I'm not ready to do the conversion yet, do I go ahead and close the transaction by the bank and then run [the acquired bank] on the systems it's been using and convert later, which may be confusing to customers? If it's in a market we're not even in, for example, if we bought a bank in Oklahoma, there's very little likelihood that we'll keep them running on their systems for some time after we purchase them. More often than not, we close simultaneous with the conversion or before."
The most stressful time is conversion weekend itself. "On Friday, all employees at the institution you acquired are using the systems they've been using for a long time," Petrey says. "Then all of a sudden, bang — the next business day they're using something completely different. You've trained them ahead of time and they've worked on the system in a test and training mode and proved their proficiency, but there is that shock, that ripping of the Band-Aid on that moment that you do the conversion."
It's harder on banks that don't impose their own technology on acquisition targets, Petrey shares. They face a massive amount of technical configuration work at all the branches in one evening. "If the bank you're acquiring is going to close at 5:00 on Friday, all that equipment has to run connected to all existing systems," he explains. "Then if they're going to open on Saturday or Monday as the new bank, all that equipment has to be reconfigured and set up completely differently to talk to a whole new set of systems between Friday night and Saturday or Monday morning." The risks of something not working properly are high.
In the case of the 195 branches First Niagara agreed to buy from HSBC, all is going smoothly so far, Petrey says. "One of the risks you run with a partial sale is that the seller may not want to sell so they may not be as helpful to you," he says. "We've had good success with HSBC, they've been terrific to work with." First Niagara is still in the early, product-mapping stages now and is gearing up to start the data mapping over to its system. The conversion has been planned out at a high level through the conversion date, vendors have been engaged and Petrey's team have been conducting branch visits to better understand the HSBC IT infrastructure.
First Niagara is making an effort to protect sensitive data about the merger. The simple fact that the two companies are involved in a high-profile and complex technology project can put them on the radar screens of hackers. And in any merger, there are countless handoffs of data from one system to another, each of which represents a point of potential compromise.
"HSBC wanted to come over and look at our environment and see what policies, practices, tools and technologies we have in place to secure customer information. They wanted to get agreement on what we were going to use to transfer information from HSBC to us," says Petrey, and ensure customer data is never breached.
Asked which is harder, integrating an entire bank or a batch of branches, Petrey says branches. "There are all kinds of issues that come up when it's a partial transaction," he says. "Those are things like, how do you determine which customers are associated with that branch versus another branch? Are there some loans you're not getting? Are you buying deposits that are overdrawn? There are all kinds of issues that come up when it's a partial transaction. On the other side of the transaction, you're dealing with deconverting parts of the customers and accounts off their systems, not everything on their systems. So it's more complicated."
