Mergers and acquisitions (M&As) have always been a key growth driver for the banking and financial services sector. The last few years saw some cautious dealmaking as the macroeconomic environment remained fraught. But while 2025 began on an optimistic note, there is uncertainty yet again on the M&A front, because of the Trump administration’s unprecedented tariffs and escalating geopolitical tensions. Banks must reconsider their inorganic growth strategies and balance opportunity against new risks and operational realities.
A Strong Start Derailed by Tariffs
The first quarter of 2025 saw 34 bank deals in the U.S. at a combined value of USD 1.61 billion. This is the highest first quarter aggregate deal value since 2021.1 But on April 2, 2025, the USA announced 10-145 percent tariffs on goods imported from almost all countries in the world, with China bearing the highest burden.2 This unprecedented move triggered a bitter trade war with China hitting back with 125 percent tariff on American goods. It also resulted in market volatility, and the IMF downgrading its economic growth forecast from 3.3 percent to 2.8 percent, with the U.S. economy expected to grow only at 1.8 percent instead of 2.7 percent.3 It also expects the U.S. to face a significant recession. This market disruption and turbulence has also started to impact cross-border confidence and risk modelling. As a result, M&A activity dipped by 13 percent in deal volume in April. For banks this means delayed due diligence for cross border, or tech-heavy acquisitions, and increased regulatory review.4 It also translates into conservative post-merger financial projections.
A Focus on Digital Scale
Industry experts are holding out hope for this volatility to be temporary and for M&A activity to pick up again. This year, M&As are expected to focus strongly on digital scale and technology transformation. This is in direct response to increasing competition from digital native fintechs, neo banks, and tech giants who are expanding beyond payments to offer loans, insurance, and other financial services. M&As are a good way for banks to accelerate their digital capabilities and reach a larger customer base in a comparatively cost-effective way. Banks are actively looking for digital capabilities that complement or supplement their own and deals are increasingly motivated by acquiring tech talent or platforms.
Core Banking Conflicts Can Derail Post-Merger Synergies
But banks acquiring digital native entities have been increasingly reporting another challenge – technology integration. Merging two banks or financial services organizations means merging two disparate, complex, and critically important systems – core banking platforms, payment engines, data warehouses, online, and mobile banking applications. Often these are built on different technological platforms, adding to the difficulty of this task. Merging two systems can be risky, time consuming, and disrupt business as usual. And this can lead to dissatisfied customers who may even decide to take their business elsewhere. A recent bank merger saw the combined customer satisfaction index across both organizations drop by a whopping 55 percent as a result of issues and glitches during the integration phase.5 This level of customer attrition just proves that core interoperability and consistent digital experiences are business critical in a merger.
One System or Two? The Tough Tech Choice Post-Merger
The challenge is that many traditional banks are still running on legacy core banking systems that were not designed to be interoperable. At the time of the merger, leaders must make some tough decisions. Should they unify the two systems into one? Or should they run two separate core systems in parallel. The first option can be an extremely long drawn and expensive process and can be risky as well. And the second one will result in duplicate processes, products, and data silos, which will impact agility, scalability, and the ability to innovate. Core interoperability is now a key point of consideration during the M&A process.
Bridging Legacy and Innovation with Cloud-Native Middleware
Banks are now choosing to deploy robust, cloud-native, interoperable middleware platforms to sit over their legacy cores instead of trying to modernize or replace those systems. These platforms serve as a flexible integration layer that can separate customer-facing products and processes from the underlying core system. A robust middleware platform can easily integrate and rationalize pricing, product catalogs, and offerings across both entities to offer a unified operating strategy.
It is too early to tell how the M&A sector will evolve over the coming months. But despite the larger economic volatility, they remain a sound inorganic growth strategy that can help banks achieve digital scale, reach new customer segments, and accelerate growth. Banks must now focus on implementing the right technology foundation to ensure interoperability and a smooth post-merger transition.
