Banks and bank boards have long understood that scale is a necessity when it comes to bank profitability.
Banks though have really started to face some increased challenges as it comes to how do they scale and how they think about their strategies enabling their scale. Increased regulatory scrutiny, increased cost of capital, and also challenges that are coming from array of different competitors are making it much more challenging for banks to be able to scale in ways that they have done traditionally.
The reality is that the ability to scale quickly could involve M&A. M&A is one of many strategies that banks should consider. However, in a world that is dynamically changing and requiring digital and technological advancement, solely considering how you're going to multiply yourself in similar ways through direct or bolt on acquisitions is not the only strategy that banks should be considering. Banks should also be considering means of partnering, ecosystem strategies, and other methods of creating differentiated experiences for their customers, wherein they can create complementary growth ambitions that that go beyond just what an m and a could provide. It's also important that banks recognize each m and a event itself is something that will run multiple years, require a significant amount of financial and human capital, and really driving the synergies out of the deals is not a one size fits all outcome.
Mid size banks need to be forward thinking in how they're framing their strategies.
They need to think beyond traditional strategies and also think about what are the macro trends that are changing the overall banking environment, what are some of the tech innovations that they can be delivering, and how have customer expectations changed such that they need to adapt the bank to be able to meet those expectations.
Regional banks really need to be able to adapt at pace and presently being able to do that all through building capabilities is not a successful recipe.
As a result, regional banks need to look at how do they mine partnerships and how do they think about third parties who can add value to their business and to their customers. Part of this is setting more of an ecosystem dynamic and how they think about the types of capabilities that they'll bring to the table and becoming very adept at managing strategic partnerships and third party relationships in a unique and differential way.
Many of our banking customers had begun to think about embedded finance journeys And then as regulatory scrutiny increased on models that were less secure, banks started to move away from investing in embedded finance. The reality is embedded finance is here to stay. It's moving into areas of distribution channels and heightening verticalization in the way banks provide direct seamless experiences both to commercial and consumer customers.
As a result embedded finance can provide unique opportunities for banks, but they have to be very thoughtful in how they're going to structure those propositions, and what embedded finance might mean for them as an institution.
As we work with many different banks and looked at how they think about verticalization, it's been proven that you can amplify growth if you really lean into the verticals and into the sector specific areas where you have an adept capability and you can provide a unique value proposition to your customers. Any more verticalization is becoming a must as banks think about tailoring their strategies.
Regional banks recognize that technology is a central aspect of their strategies. However, many regional banks are also laden with lots of tech debt and a need to be able to adapt their current core banking platforms.
As a result, banks need to think about technology as a core piece of how they're framing overall strategy and figure out ways to move at the speed that technological innovation is occurring.
When working with LEK, we work hand to hand with our clients. We are in the trenches with them thinking through their most challenging problems. We recognize that a strategy is not something that's one size fits all, and we think very uniquely about how we'll tailor our strategies to fit where the bank is, the bank's value proposition, and how it can grow.