Banks play an important role in the economy. They offer individual loans and provide customers with a haven to deposit their savings. Commercial banks, which include the typical banks people use daily, are also a big business, racking up huge profits and providing jobs to thousands of office staff. Some commercial banks consider merging with other banks to grow, boost efficiency, scale and acquire more branches. But why?
The main reasons why the commercial banks banks may merge are: to boost efficiency, scale, improve income, or acquire new branches and expand.
The banking industry is filled with multiple banks that underwent a merger. While some understand the purpose of the merging, many people out there lack insights regarding a bank merger. If you are among such individuals, this article is for you. In this article, we’ll look at what a bank merger is, the advantages and disadvantages of merging, and the reason why commercial banks may want to merge.
Roles and Functions of Commercial Banks
Why Commercial Banks May Want to Merge?
Before we consider why commercial banks may want to merge with another bank, let’s look at what a bank merger is.
What Is a Bank Merge?
A bank merger is when two banks join their liabilities and assets to become one bank. Banks plan to merge with another bank to grow their reach and gain new customers. Aside from that, merging helps a financial institution grow faster and achieve massive credibility in the market.
A merger gives a bank more capital to work with and grow the geographic reach in which they serve. If a little bank wants to achieve financial goals pronto, merging is the perfect way to go about it. One of the most important benefits of a bank merger is that it lessens the vulnerabilities and gets the market’s competitive edge.
In the merger process, the merging banks share information related to tech, cash, resources, data, etc., with each other. There are many examples of banks merging in the United States, like NBT Bank, Key Bank, Old National Bank, etc. Having understood what a bank merger is, let’s consider the benefits of a bank merger.
Benefits of a Bank Merge:
- Efficiency: Bank mergers make the banks more efficient, especially in business operations. Every bank has its unique infrastructure, technology, risk assessment, employees, and working principles. When two banks merge, their infrastructure, tech, etc., becomes one, thus increasing their efficiency.
- Business Gaps Filled: One of the most important benefits of merging is that it fills the business gaps due to lack of funds, tech, and poor infrastructure. Acquiring a small bank that boasts of good services but needs funds to survive is sometimes easier than creating a bank from scratch. When a bigger bank merges with a smaller bank, the business gaps will be filled effortlessly.
- Talent and Team Upgrade: Every bank benefits from a merger because of an expanding talent team. When a merged bank gets experienced and professional managers and employees, their productivity and customer satisfaction rate will reach a new level. Being merged by the new bank brings a sense of stability that a weaker bank requires for survival.
- Scale: A bank merger helps a merged bank scale up fast and cater to the rising demands of the new customers. If a small bank wants to achieve growth goals faster, merging is the best option.
- More branches: one of the main reasons banks merge is to obtain new branches and expand geographically. Merging means that a bank takes on new locations, including local branches in states, cities, and neighborhoods it might not currently serve. This is far more cost-effective than opening the same number of new branches. It also benefits customers who will find more places to make a deposit, get cash and perform other banking activities conveniently.
Advantages and Disadvantage of Bank Merge:
A merger is a big step, and sectors beyond the financial world are affected by such a move. Everything comes with advantages and disadvantages. That said, let’s review the advantages and disadvantages of bank mergers.
Advantages:
- When another bank acquires a bank, its balance sheet and lending powers are improved.
- After merging, these banks would compete with big competitors and lend huge money to individuals.
- The merger would help in the better management of banking capital
Disadvantages:
- Many banks have a regional audience, and a merger can eliminate the idea of decentralization.
- Mergers put huge banks under pressure due to smaller banks
- Coping with the new staff remains the biggest challenge of the merger
Having understood the advantages and disadvantages of bank merge, let’s consider the main purpose of this article. Why will a commercial bank decide to merge?
One of the main reasons banks merge is to acquire new branches and expand geographically. Merging means that a bank takes on new locations, including local branches in states, cities, and neighbourhoods lacking its presence. This is far more cost-effective than creating new branches in these areas.
Reasons Why Banks Merge:
If you are very conversant with news regarding the banking industry, you must have come across one or two bank mergers. For those who haven’t, a bank merger is a situation whereby two banks merge to become one. If you are quite inquisitive, you may want to know why banks merge.
Banks merge for several reasons. One of the most common reasons is to obtain new branches and expand their operations. Another reason why banks merge is to bridge the business gap, scale, and achieve greater efficiency.
Bank mergers are very common thanks to their immense benefits. Mind you; a merger isn’t only limited to banks alone.
