EP963: The outlook for M&A in US financial services and the influence of technology

Mac Thompson, Founder & President, White Clay

Consolidation in the banking and finance sector is set to continue. Around 180 bank deals were announced in 2025 and there are going to be more to come in 2026. The pressing need to take advantage of developing technologies is one notable cost factor that may drive smaller institutions into the arms of their larger counterparts. White Clay Founder and President Mac Thompson speaks to Robin Amlôt of IBS Intelligence.

Transcript

SPEAKER_00 0:00

I'm Robin Amler of IBS Intelligence. You're listening to the IBS IViews podcast. With me today, and it's a welcome back to the podcast, Mac Thompson, Chief Executive Officer of White Clay. Our topic for today, the state of MA in the U.S. financial services sector. So where is it? Where's it going to go? What's the outlook for 2026? Because there's a lot of money sloshing about out there. Definitely is.

SPEAKER_01 0:27

I think it's going to accelerate. It's going to accelerate fairly significantly, particularly small small regionals, regionals, that particular space as they consume up community banks and other regionals. But it's going to accelerate. I think Q3 was 50% higher than we've been averaging for the last two, three years. Q4 looks like accelerating over Q3, especially in the size of deals. So it's MA in the US will be accelerating.

SPEAKER_00 0:55

Well, in financial services, and you mentioned it yourself, the community banks, the credit unions, a lot of these institutions are too small to modernize without becoming part of a larger entity.

SPEAKER_01 1:09

100%. It's one of the challenges that they have is the you know the tech stack capital requirements and scale related to that to get the right ROI is very challenging. So if you're in markets that where you're the only bank or only credit union, that might be you serve that market, that might work for you. But if you're in markets where you're competing with the megabanks, the national, you know, it's extremely difficult to compete on the tech stack, just from a capital investment and return perspective. From 2015 to 2024, community banks and small regionals and credit unions lost about 13% of the prime of customers that have the primary check in there in terms of market share. It's a dramatic shrinkage. It's gone mostly to the nationals, some to the large regionals.

SPEAKER_00 2:01

Well, what's actually happened with technology, of course, is that it's created a complete open marketplace. If I was a credit union in, you know, if I was the first national bank of the land that time forgot, I'd have the market to myself. But nowadays, with the technology reach, I'm fighting against everybody.

SPEAKER_01 2:22

100% true. I think it's going to get worse. Or more competitive. Better if you from another perspective, if you think about it, because I think the end experience can be better. It's not necessarily always better because of technology. I think the balancing of the technology improvements and the human experience together makes a great banking experience. And I I'm challenged as we go through these M ⁇ As, can they continue as the banks get bigger and bigger? Can they deliver on that human experience part? I think they've proven they can improve the technology significantly. I just don't know if the because money is very personal, it's very emotional. And can they deliver on that aspect? And if they can, they're gonna it will work. And if they can't, uh those yeah, mergers sometimes don't work out the way that they were intended to.

SPEAKER_00 3:13

So that's a polite way of putting it because you brought me on to my next subject. The dirty little secret about MA activity is that a lot of it's driven by human beings, it's driven by ego. And that's a bad way to unholster your wallet because a lot of these acquisitions don't actually turn out to work.

SPEAKER_01 3:36

I actually I think there's probably more I used to be in on the banking side of this. I used to work on the MA stuff. So there's probably more discipline than you inferred there, but uh there is a side, you know, in the U.S., if you're a large regional trying to compete with the nationals, there's a group of large regionals that are trying to build a larger competitor. Is that ego or is that scale uh debatable? That said, the success of mergers has been challenging for many. The integration of cultures, technology, customer bases, and the complexities that go with that is a very challenging environment. And to successfully navigate that and get to the other side is something most banks struggle with.

SPEAKER_00 4:22

So what we're going to see from what you've been saying in 2026 is an increase in MA activity in financial services because that's already growing. We've already got evidence of that, which you cited. Yep. So we're going to see an increase in merge and acquisition activity because it is going to take that scale. It I was perhaps a little mischievous in what I was saying about mergers a m a few moments ago, but it is going to take that scale to be able to embrace the technology to be able to compete, whether you're competing with other regional entities or whether you're competing with the national banks.

SPEAKER_01 4:59

Yep, 100%. I do think there's some there's some new players. So when you talk, you know, if uh if it's uh $200 billion bank merging, they probably have some experience doing this. They've done a number of them already. I think one of the fun or interesting aspects of this is going to be fun for the people going through it, is you have a lot of smaller regionals, yeah, 10 billion, 20 billion, that are really starting to get into signific, you know, you're not just acquiring a community, a billion-dollar community bank with one market with eight branches, right, or something like that. You're acquiring another small regional complex. They have not been through, they don't have teams of people that have been through these complex mergers. And they don't have that skill or muscle memory of how to go execute this. So I think as you see those small regionals and even some of the regionals going through these merger activities, I think they're going to be increasingly more challenged than say the large regionals or nationals that are doing some of these things. Just because they have teams of people that have been doing these for decades, the smaller ones, it may be their first time doing a complex deal, a complex integration across markets they may not be super familiar with. That's going to be probably something that's a little different than it's been for a while. And I think I think that's going to create opportunity in some markets and uh some challenges for the banks executing on it.

SPEAKER_00 6:17

Well, it's going to create challenges because not only have the banks got to do that, but they've then got to get into the technology aspect.

SPEAKER_01 6:24

But we're getting into it, just think about this. The technology questions you have to deal with is a $5 billion small regional, right? And the technology aspects you have to get into, if you've grown that to a $30 billion regional, either this different, it's on a different scale. It's a different set of questions. The vendors become start becoming different. How you have to think about it is different. Uh, and if you're going that fast, you probably aren't trying to solve for 30, you're probably trying to solve for 50 or 100. Because if you are if if you're going down that path, generally speaking, you're not going to stop. And that tech that tech difference is just, you know, at 5 billion, you can almost know most of your major customers. Once you get to 30, you probably can't. And you're how you have to deliver to all these is just a logarithmic difference in scope and thinking, um, that I think is going to be something people don't anticipate. They think it's more linear and it's not. It's logarithmic.

SPEAKER_00 7:26

Some of it's logarithmic, some of it's seismic, I would say, because the way things have changed in the last two or three years in terms of the technology that you people now say you've got to transform. Transformation is not about a nice to have, it's about business survival. But what are you transforming into? Because the answer to that question two years ago is not the same answer now.

SPEAKER_01 7:53

I I would say that cycles annually almost, maybe faster. And it's it's almost continuous. The technology aspect you can wrap your head around, maybe. What gets lost, I think, is the process changes. You can't keep doing the same process you've been doing for the last 20 years, throw some technology on it to make it look different, and get that true transformation. You actually have to transform not only the technology, not only the process, but the culture of how your people understand how to use all of this to deliver value to your customers. It's a continuous change. And I that is probably, you know, you see, one of the reasons for mergers is I think management teams, either from succession or from just they're getting tired of this continuous change and evolution. But if you aren't evolving that fast, you're gonna get left behind. And that's where we play. But that's the world even outside of banking in reality, right? Evolve or die. Yeah. I wouldn't even go before evolve or create, right? One of the two. And they're kind of the same thing. Create, you might be creating, you might be accelerating faster than the market evolution. But that core competency is not something banks have historically built out as part of their cultures. I think there's some out there now in the industry that are really focused on trying to be build that muscle memory in a muscle around that. But they it's that risk, you know, bankers generally are fairly risk adverse. And we're in a world where you have to start taking different kinds of risk than they're used to. They're used to credit risk, they're used to some operational risk, but you're gonna have to take some technological technology, some innovation risk that you're probably not used to. The large nationals have been doing it for a while. Because they they got a situation, yeah, the same situation they're in now, it's evolve or die, but they've been in more in that space for a bit than I think some of the small regionals can, because they were smaller and they kind of hid from that. But with the customers following the technology and that experience, they're gonna have to compete with everybody. And that includes fintechs, third-party players out there, other approaches to all of this. It's only going to accelerate the competitive environment, and it's gonna create what's funny is it's kind of a circular discussion, right? That can that increase in the competitive environment is going to drive more MA as people don't aren't ready to compete with it.

SPEAKER_00 10:22

So to sum up, it's actually inevitable that the sector is going to hollow out, that we're going to be looking at a much smaller grouping of larger institutions, whoever those survivors are.

SPEAKER_01 10:39

I I think so. Um I do think that there's two parts that you might see some growth on the small side. I think that there might be people that enter the market trying to serve the market in a different way than the nationals are. They may be using the same tech stack the nationals are using, or I might say nationals, larger banks are using, but they might try to go after either niche markets or deliver an experience in a different way. And I think you're gonna see a number of bank creations from that. I did I just think that that's gonna continue. I think that's gonna accelerate because people are gonna see it as a way to build value for their shareholders and value, you know, for the customers potentially. Uh, the other piece of this is there's still markets out there that community banks will and credit unions will serve because they're too small for the larger ones to try to get into from a logistics standpoint. Uh but your comment earlier, that that's becoming not quite as important as it once was. But it's gonna be a fun time in banking, for sure.

SPEAKER_00 11:39

Two concepts that don't normally go together a fun time in banking. Mike Thompson, Chief Executive Officer of White Clay, thank you very much. Thank you, Robin.