BBVA USA has been known over the years for its investments in forward-looking technology, including a $362 million real-time core system, its $117 million acquisition of the neobank Simple, and investments in the digital business bank Azlo and open banking initiatives.
But now BBVA is being sold to PNC Financial Services Group, and PNC has indicated that it's planning significant cuts from BBVA's expenses, particularly in technology. Question, which technology will PNC keep and what will it jettison?
The $445 billion-asset PNC announced in mid-November it had agreed to buy the U.S. unit of Madrid-based BBVA for $11.6 billion. BBVA USA has $104 billion of assets and is headquartered in Houston.
PNC, of Pittsburgh, expects to achieve cost savings in excess of $900 million, or about 35% of BBVA USA's annual noninterest expenses, by 2022, largely through operational and administrative efficiency improvements. Technology is one area where PNC expects to find significant savings, Robert Reilly, its chief financial officer, said during a Nov. 16 investor call.
It’s normal for an acquirer to fold a seller’s technology into its infrastructure, said Sam Kilmer, senior director at Cornerstone Advisors.
In the investor call announcing the merger, PNC Chairman and CEO William Demchak said the combined company will run primarily on PNC's infrastructure. For instance, PNC is expected to keep its existing core system and it is not buying BBVA's data centers.
“We’re going to be able to onboard virtually all of what they do into our technology platform,” Demchak said. “We literally are going to lift and shift into a scalable PNC platform that effectively takes that total cost down to nothing. On the application side, with few exceptions, we'll port the data onto our applications."
Acquiring companies tend to think their technology is better than that of the company they’re buying, said Peter Wannemacher, principal analyst at Forrester. He also surmises that PNC wants the technology integration to happen quickly.
“You don't want to do it so quickly that it violates compliance or things like that,” Wannemacher said. “But it may be that PNC is thinking it's better to integrate fast and then upgrade as they need to.”
Demchak said BBVA USA has some client-facing technology that would be worth keeping. Though he didn’t specify which applications these were, the front-end applications he referred to may include Simple, which BBVA bought in 2018, and Azlo, the digital bank for small businesses that was developed within BBVA USA and is majority owned by it. A BBVA USA spokeswoman confirmed that PNC will acquire Simple, Azlo and Open Platform.
“They've been heavy investors in technology, largely on the digital side,” Demchak said. “On the front-end side to clients, they have some really attractive products that probably haven't been brought to scale yet that we can help with. Those products will come over into our environment. But that's an easy lift and shift as well.”
Asked for more specific details about post-merger technology plans, a PNC spokeswoman said, “It is just too early for us to be able to comment on these specific details as the transaction is subject to customary closing conditions, including regulatory approval, before it is completed. We expect the transaction will close in mid-2021, with many steps to go in the process.”
Dropping the Alnova core
The fact that PNC is bringing BBVA USA’s data into PNC’s applications strongly suggests that PNC won’t be using the real-time Alnova core system BBVA co-developed with Accenture and deployed in 2012. At the time, it was heralded as one of the very few real-time bank transaction engines in the U.S.
Todd H. Baker, a senior fellow at Columbia University’s Richman Center for Business, Law & Public Policy, said that dispensing with BBVA USA’s core systems makes sense given PNC’s cost-cutting goals.
“Once you make the decision that you're going to retain your own core systems and not theirs, then you have to evaluate everything that ties into that core and say to yourself, 'I'm going to have to convert this to interact with my core; is that worth doing?' ” Baker said. “PNC didn't buy BBVA USA for its technology. There were some nice things like Simple and Azlo that they might be able to make more valuable across the larger footprint. But they didn’t buy the bank because they thought that its software was better."
The Alnova core enabled Open Platform to be built on top of it, said Shamir Karkal, who at the time was in charge of Open Platform, a unit of BBVA USA that provides application programming interfaces and help to companies that want to embed banking services in their offerings. This would include technology companies that want to offer electronic payments, for example. (Karkal was also one of the original co-founders of Simple and is now the CEO of Sila, a fintech he co-founded that helps other fintechs quickly develop technology for Know Your Customer and Know Your Business compliance, as well as other services.)
The Alnova core is unusual in that it supports real-time, rather than batch transactions. This can be helpful in providing an accurate picture to customers of where their funds are and in offering real-time payment services, such as the ability for insurance companies to disburse funds to disaster survivors immediately.
But Kilmer pointed out that many banks don’t support real-time transactions and are fine with that.
“They’ve figured out a way to fake it,” Kilmer said, with memo posting and other methods of communicating about transactions during the day, even if the transactions are processed in a batch overnight.
And many banks don’t want their commercial banking transactions to clear instantly because they need to go through a review process, Kilmer said.
What’s the future for Simple and Azlo?
With Simple and Azlo, BBVA ran into the challenge many banks face when they introduce digital-only brands: fear of cannibalizing their existing business lines.
“It's very hard within an organization to build support for products and processes that essentially undercut existing cash-cow businesses,” Baker said. “Companies know those cash cows aren’t going to last forever,” but in the meantime they fuel the earnings that deliver executive bonuses.
“Simple was the leading neobank when it was bought by BBVA,” Baker added. “It’s still a good app and it provides a lot of capability ... but unless it’s freed to pursue an independent path to profitability, it's going to be hard for Simple not to fall into the same kind of limbo land at PNC that it ended up in at BBVA.”
The challenger banks that have been successful, like Chime, have a few things in common, Kilmer said.
“They typically have a dedicated entrepreneur, their own identity and their own marketing,” he said. “It’s not a technology problem at all. It's a cultural problem and it's predominantly one of accountability and energy.”
For digital-only brands to work within banks, they need to be separate entities with independence and leadership, Kilmer said.
“Digital is not a channel to Chime or Varo, it's what they do,” Kilmer said. “In any U.S. bank, the digital channel is one of many things they do.”
PNC has its own digital bank offering, Virtual Wallet, and it may want to support that app more heavily than Simple.
Some industry observers say Simple, Azlo and Open Platform are valuable assets for PNC and, with the right support, any one of them could grow to be worth more than BBVA USA itself. For instance, if Simple could expand its user base into the millions, the way Chime has, it would be profitable.
“Chime is at a $15 billion valuation,” Karkal noted. “That's more than BBVA [is being] acquired for. The thing for PNC to think through, I think, is that the old world is dead. Nobody's walking into branches. Are they going to come back in droves in 2021? I doubt that.”
