Wednesday, 17 September 2014

Where have all the global retail banks gone?

Where have all the global retail banks gone? The banks that had the ambition to become truly global retail banks. What happened to HSBC and ‘The World’s Local Bank’? (see HSBC goes back to its roots ) It isn’t only HSBC that has lost the appetite to be a global retail bank but also Citibank, Standard Chartered, Barclays and RBS amongst others have made it clear that they no longer have that aspiration. Each of them has and continues to be in the process of selling off or closing down selected retail banking operations across the globe.

So what made some of the largest banks in the world consider becoming a global retail bank?

Myth 1: Banking is the same all over the world

For a long time the myth has been actively peddled by consultants and banking applications salespeople that retail banking is the same the world over. After all a loan is a loan, a mortgage is a mortgage and a savings account is a savings account wherever they are in the world – aren’t they?

On the surface this appears to be true. The definition of a residential mortgage is fundamentally the same wherever you are in the world. However the process to take out that loan, the regulations that must be complied with and how the bank treats the mortgage asset is unique to each country. For example in the UK most loans are not securitised whereas in the US Fannie Mae or Freddie Mac play a role in almost every mortgage. The role that notaries play in the sales process in Spain is quite different from that which solicitors perform in the UK. Santander found this out to their cost when they replaced Abbey National’s banking platforms with Partenon, the Santander European retail banking platform. Significant parts of the banking platform had to customised to meet the different way that business is conducted in the UK compared to Spain. The ease with which Partenon could be implemented was a core part of the business case for the acquisition of Abbey by Santander. It turned out to be a lot more expensive and took a lot longer than envisaged.

 Likewise Bradford & Bingley and Barclays both found out separately that implementing a US mortgage application in the UK market was nigh on impossible with both writing off the complete cost of the implementation after many years and millions of pounds being spent trying to modify the applications to meet the local requirements. They had wanted to believe what the mortgage platform sales person had told them.

Both Citibank and HSBC decided to address the problem a different way by building their own custom global retail banking platforms. Neither of them succeeded in delivering a single core banking platform that has been rolled out to all their retail operations but hundreds of millions of pounds (if not billions) were spent trying to achieve that. Neither programme was completed.

As has previously been mentioned, Santander has come the closest to achieving this is. The Santander Partenon platform has been implemented for their European and parts of their US operations. For their South American operations Santander recognised that bending and force fitting Partenon was not going to be a viable option. Instead they needed to develop a different platform Altair but even this needs significant customisation for each new implementation.

Even when looking to implement in only one different country and with more modern architectures than HSBC, Citi or Santander were working with, one of the world’s largest platform vendors, SAP, has found it far more difficult and expensive to implement a core banking system than was envisaged as has been illustrated by the troubled programmes at Commonwealth Bank (Australia), Postbank (Germany) and Nationwide Building Society (UK). Commonwealth Bank has achieved the implementation and is now reaping the benefits (see CBA proves case for core banking replacement)  

Myth 2: Retail Banking is highly profitable

Politicians and consumer lobbyists across the world continue to complain that banks make excessive profits. When the total profit that the large banks make is looked at the numbers can seem very large but when you look at the margin being made it presents a very different picture. Retail banking is only really profitable when operated at scale. It is for a very good reason that in most countries the retail banking market is dominated by a small number of large banks. The costs of capital, of meeting global and local regulations, setting up branch and back office infrastructures, of putting in place the IT systems, of either creating or joining the payments infrastructure are huge. The risks and returns for large banks entering a new market and building a customer base from scratch are very unattractive. This and the myth below are two reasons why the large global banks have been selling or closing their operations in many countries – they simply didn’t have the scale and couldn’t see a way to get to the scale to make the business attractive.

Myth 3: Global brands matter to retail customers

The global banks that have entered local markets have been under the misapprehension that the power of their global brand would be sufficient to make local customers change their primary banking relationship to them. HSBC is the bank that spent the most money in trying to make this true with their ‘The World’s local bank’ campaign. Despite all that money being spent they discovered that it wasn’t true and have and are withdrawing from countries where they could not build enough scale. Citi discovered this to their cost in countries such as Spain, Germany, Poland and Turkey where they could not get local customers to move to them. (see Citi in Europe). The reality is that the majority of customers want to bank with local banks with all the perceived benefits of local and national regulation and the knowledge that the bank is not going to disappear if Head Office decides that the operation in that country is not making enough money.

What of the future of global retail banking?

So does all this mean the end of global retail banks? In terms of a Barclays UK customer walking into an Absa branch in Capetown and transacting as if they were a local customer or a Santander UK customer walking into a branch in Sao Paulo then that is not something that the banks are willing to invest in, nor do they see sufficient demand to justify it. In terms of banks having significant retail presences in other geographies then there won’t be too many banks that will do that – HSBC and Santander being the exceptions.

Santander stands out as the leader in global retail banking particularly given that it is a  Spanish bank where the profits from its retail bank in the UK exceed those of its local market. Despite the death of Emilio Botin it doesn’t appear that that strategy is going to change with Ana Botin fully supporting the direction he set with ambition to expand further globally particularly in the US and Poland.

Monday, 18 August 2014

CBA proves the case for core banking replacement

CBA (Commonwealth Bank of Australia) has delivered record profits of $8.6bn AUD (£4.8bn, $8.0bn USD) for the year to June 2014. With a return on equity of 18.7% (versus typically 5-7% for US/UK banks and less for European banks) and a cost:income ratio of 36% for the retail bank (42.9% for the bank overall), this puts CBA amongst the most profitable banks in the world. It is also one of the banks with the fastest growing profits. This is despite fees paid by customers going down. The profit is being driven a combination of growing the revenues outperforming their competition and by increases in productivity. The CEO, Ian Narev, is clear that a major factor in the high performance of the bank is due to the major investments in technology, including the replacement of their core banking platforms.

For many banks the idea of replacing the core banking platforms is the equivalent of performing a full heart and lungs transplant while running a marathon. However, whilst most banks have not had the courage to embark on such a challenging endeavour, in 2006 CBA decided to. CBA made the task even harder by rather than choosing to replace their old legacy systems with proven technology they chose to be one of a very few pioneers with the new SAP Banking platform that, at that point, was largely unproven.

CBA have not been risk averse in adopting new technologies. They were one of the first banks to outsource their internet banking infrastructure to Amazon Web Services (AWS). See CBA and Amazon

The journey to their new banking platforms was not straight forward, bumps were found along the way and the costs rose above original estimates but there were releases along the journey which released business benefits and they have succeeded in delivering a completely new set of platforms to drive their business from. This has given them significant competitive advantage.

One consequence of simplifying their IT landscape has been a dramatic decrease in the number of high impact system impacts from 400 in FY2007 to a mere 44 in FY14. Considering the number of major outages that some of its competitor banks have had and the damage to the brand this is a significant achievement. It will undoubtedly have contributed to why CBA is #1 for customer satisfaction amongst Australian banks.

Among the benefits that the bank and the customers have experienced is a dramatic reduction in the time it takes to get innovations into production – two recent examples of this are Lock & Limit (allowing customers to block and/or limit the size of transactions) and Cardless Cash (customers being able to withdraw from ATMs using their mobile phones) which came to market in May 2014 ahead of competitor offerings.

CBA has also seen a significant increase in self-service with the percentage of deposits completed via an Intelligent Deposit Machine going from 10% to 37% over a twelve month period. With the launch of online opening of accounts (savings and current accounts) customers can now open accounts in less than 60 seconds.

None of the big UK banks has embarked upon a core banking platform replacement programme. Lloyds has consolidated and simplified its systems based on the legacy TSB platform. Santander has a single platform, Partenon, which is based on a banking package but it is legacy technology.  HSBC embarked on developing a single system for the Group, One HSBC, but that programme was stopped after a number of year. Nationwide Building Society is some way down the journey of implementing SAP Banking and is beginning to see the benefits with reduced times to launch products and propositions.
One of the key architects and sponsors of the technology transformation programme at CBA was Michael Harte. He is shortly to take up the role of COO with responsibility for IT at Barclays. There can be little doubt that his experience at CBA was the major attraction for his recruitment. The benefits that CBA is reaping following this six plus years journey are clear to see. The question is with all the challenges that Barclays faces, the size of the investment and the length of the return on that investment, the decreasing margins in banking and the amount of work needed to keep up with the regulatory burden whether Barclays will have the appetite and the staying power to embark upon what can be a highly rewarding but hazardous journey

Wednesday, 6 August 2014

Creating competition in retail banking

With the recommendation by the UK CMA (Competition and Markets Authority) to conduct a review of competitiveness in the current account banking market, what are some of the areas that they may consider to increase competitiveness?

Breaking up the banks. This is the Labour party’s big idea - creating a set of competitor banks by splitting the big banks. The primary focus for this would be the Royal Bank of Scotland and Lloyds Banking Group. However this isn’t a new idea and is already being tested with the creation of TSB from Lloyds Banking Group and Williams & Glyn’s from RBS. However already there are lessons to be learnt from this process.

While there was initial interest from a number of players the list of serious bidders rapidly shortened when the complexity, the capital required and the price being sought became clear. The initial two successful bidders the Co-op (Lloyds) and Santander (RBS) after lengthy negotiations and detailed planning withdrew their bids.

Separating the bank’s technology whether cloning (TSB) or migrating to a new platform is proving to be enormously complex and very expensive.

The payback period is very long and without the subsidy and support of the selling bank would be even longer. TSB for instance does not expect to break even for many years and that is despite being helped by Lloyds lending the new bank a book of loans.

While breaking up the banks will mean that there are more places to have a current account there is no guarantee that this will ensure better deals for customers, particularly given that the easiest option for the broken up banks is to be clones of the original banks just simply without the scale advantages. With little to differentiate them having more players in the market doesn’t result in real consumer benefit.

Creating a payments utility separate from the big banks. One of the often heard complaints from new entrants is that the big banks have an advantage because they own the payments infrastructure and the cost for new entrants to use that infrastructure is a barrier to entry. One option would be to create a separate payments utility not owned by the banks. However that does not mean that it will necessarily be cheaper for new entrants. For a start there is the cost of acquiring and separating the infrastructure from that of the banks that currently own it which would need to be paid by customers of the utility. There is also the question of how to charge for the use of this utility. The charge would need to reflect the significant cost of running, maintaining and investing in modernising the infrastructure – it is not simply the cost of using the infrastructure because otherwise what is the incentive for whoever ends up owning the infrastructure to invest in it to make it not only continually available but also suitable for new innovations as they come along? Commercial reality dictates that for banks with high transaction volumes that cost per transaction should be lower.

Portable bank account numbers. Many of the challenger banks are supportive of the concept of portable bank account numbers. They look at the mobile phone industry and see the way that customers can take their phone numbers with them. However before recommending this change the CMA needs to research just how big an inhibitor to switching bank accounts for customers is the change of account number. Given the Seven Day Switching Service where the banks guarantee no interruption to direct debits and standing orders and given the limited numbers of times customers actually have to know their account number in order to transact, would portable bank account numbers really open the floodgates of customers switching bank account numbers?

Ending ‘free when in credit’ banking. In the UK customers have got used to so-called ‘free banking’ where as long as a customer remains in credit, whilst they get little or nothing for the balance that they retain, they don’t pay charges. A number of the challenger banks have complained that this gives the incumbent banks an advantage as it is difficult (but not impossible) to compete on price and because it gives banks offering current accounts a distinct advantage over those who don’t in terms of the low cost of all those balances when it comes to lending. It will take a brave politician to move to compel the end of free banking. Of course to attain transparency then the cost of each transaction e.g. cost of an ATM withdrawal, the cost of paying in a cheque, the cost of a direct debit, etc, would need to be made clear to customers and, the challengers would argue, that that would enable customers to choose between banks. However looking at a market where this is the way banking is conducted, Australia, then not only is there a greater concentration of current accounts held with the Four Pillars (Nab, Westpac, CBA and ANZ) than with the equivalents in the UK, but Australian banks are amongst the most profitable retail banks in the world. Despite that there are not lots of new entrants fighting to get a slice of the pie. For customers Australia is also one of the most expensive countries to bank. It would appear that ending ‘free banking’ alone would not solve the perceived competition problem.

Set a maximum market share for current accounts. On paper this would appear to be the solution. The big banks could be given a period of time over which they must reduce their share of the market to for instance to no more than 15% of the market each leaving the challenger banks to fight over the remaining 40%. The banks would need to be told the mix of customers they must dispose of, just as Lloyds was instructed for the disposal of TSB. However what does this do for consumer choice? Not all customers were happy to be told that they were moving from Lloyds to TSB without an option. Given that the CMA investigation is about creating competition and making it easier for customers to switch banks this does not appear to be the solution.

Make it even easier for new challengers to enter the market. Measures have already been put in place to reduce the capital required, shorten the process and allow challenger banks time to grow into being a full scale bank. The benefits of this are already being seen with the likes of Atom Bank being announced. It is difficult to see what more could be done in this area.

Make retail banking more profitable to encourage more new entrants. There is little chance of this being one of the recommendations of the CMA. The reality is that with increased regulation, increased scrutiny and rising costs for compliance retail banking is becoming less and less attractive a sector for investors. As JC Flowers have recently remarked with Returns on Equity going from double to single digits there are more attractive sectors to look at investing in.

Is the CMA looking to solve a problem that customers don’t see as a priority? With the advent of Seven Day Switching the number of customers changing banks has risen – over one million customers have chosen to do that. The biggest beneficiaries have been TSB, Santander and Nationwide Building Society. There more than a handful of challenger banks out there – Tesco, Marks & Spencer, Metro Bank, Co-op Bank, Handelsbanken, Aldermore and others with current accounts on the way – amongst them Atom Bank and Virgin Money. Despite that the market share of the large high street banks hasn’t changed significantly. The question is why aren’t customers changing banks? Is it simply because they see banking as a utility, that each of the banks are pretty much the same, that for most customers (unlike bankers, politicians, financial journalists and consumer champions) banking doesn’t enter their consciousness unless they have a bad experience. In the grand scheme of things for most customers they have far more important issues to think about than whether they should switch their bank accounts.

Perhaps it is time that the CMA focused on something of more day to day importance to consumers.

Wednesday, 2 July 2014

Interest rate rise will be the litmus test for challenger banks

Banks don’t like periods of stable interest rates and the rates in the UK have been stable for a long time now. The reason that banks like to have the interest rates changing frequently is because each change is an opportunity to improve the net interest margin, to squeeze a bit more profit out of the customer.

With the Governor of the Bank of England, Mark Carney, indicating and then soft shoe shuffling away from the position that interest rates could go up as early as the end of 2014 savers shouldn’t get too excited as firstly the rise won’t be large and secondly banks usually don’t pass on the full amount to customers but keep a bit back for themselves. Bank business plans are built on the assumption that they won’t pass on the full benefits to the customer. With bank profitability squeezed by regulation and low interest rates this is why the banks are looking forward so much to greater interest rate volatility.

So the question is whether the challenger banks will back their branding of doing banking differently by not following the herd and instead passing on the full amount of the rate rise? After all it isn’t as if they are incurring additional costs (other than typing into the computer the new interest rate which is not exactly difficult) when the rate rises so there is no justification for taking a slice of the interest rate rise.

Most of the challenger banks find themselves in the position where they have more deposits, whether from savings accounts or from balances on current accounts, than they need. A sure fire way to lose money as a bank is to be paying out more to customers in interest than you are receiving back in interest and fees. This is why you won’t find the likes of TSB, Metro Bank, Aldermore or Handelsbanken appearing in the best buy tables for savings accounts. They want you to like them but they’d rather not attract too much of your money, particularly at a high cost.

TSB, the spin off from Lloyds Banking Group, is in the worst position. So bad is the situation for TSB that Lloyds has had to pad out TSB by lending it a book of loans to soak up some of the excess savings for the next few years. Not only that it also has an infrastructure (branches, back office and IT systems) which is larger than it needs for its existing customer base. It is like a new boy at school where its mother has bought it a uniform that is a few sizes too big to allow for growth. This means that for TSB passing on the full interest rate increase will only extend the loss making period of the bank, which it is unlikely shareholders will support.

Equally you won’t find the challenger banks topping the lending price tables. They want to lend you money but, given their cost of acquiring deposits they can’t in the long term price aggressively. This is where the incumbent banks have a significant advantage. Their cost of funding is far lower. Having large numbers of current accounts with large balances for which the majority of customers are paid no interest they can afford to lend at far lower rates than the challenger banks if they chose to. Instead of passing this advantage onto customers they choose to make a larger profit whilst still charging competitive prices to win new business.

When it comes to existing customers the challenger banks don’t appear to be backing their customer focused words with actions. A primary source of profits for banks are made from customers whose fixed rate or discount deals and have ended and have been moved onto the bank’s Standard Variable Rate. This is always higher than what a new customer could get. If the challenger banks really are focussed on long terms relationships with their customers and with providing good value for money then when the end of a fixed rate or discount period is coming up rather than just telling the customer that they are going to move onto the SVR (which the banks wouldn’t tell them if they weren’t obligated to) they would be offering them a new fixed rate or a new discounted rate. However most banks don’t do this because they want the additional profit they make from having customers on the higher interest rate. Instead they mark the customers as DND (Do Not Disturb), waiting until a customer threatens to move their mortgage before considering making them a better offer. Only at that point and only for certain customers do they then offer them a better deal to keep them. The message this sends to customers is that there is no reward for loyalty. Instead their loyalty is a means of subsidising the price of loans to new customers.

For challenger banks that have started from scratch, rather than from acquiring another business or a book of loans the jury is still out as to their attitude towards existing versus new customers. They have not yet been tested by a large volume of maturing customers and have not had the chance to demonstrate whether they really want to do banking differently from the incumbent banks.

However the challenger banks that have been spun off from another bank or have grown by acquiring mature mortgage or credit card books and have seen customers offers mature have had the chance to demonstrate that they are doing something different but have not taken it.

When the first base rate rise is announced customers will have the chance to judge the challenger banks by whether they pass on the full rise to savers. This will tell customers whether these challenger banks are really serious about taking on the legacy banks, genuinely have a different attitude towards treating their customers fairly, and are putting their money where their mouths are or whether it is all just marketing hype.

Thursday, 12 June 2014

Tesco Bank launches a current account - finally!

The news that Tesco Bank has finally launched its current/checking account six years after its split from RBS was announce must come as a great relief to Benny Higgins, CEO, and the rest of the team at Tesco Bank. Like expectant fathers they have been pacing the corridors of the maternity ward far longer than they would have liked. The delays have been numerous but principally down to getting over the regulatory hurdles and, more recently, ensuring that the IT systems fully work the way that they are meant to before being unleashed on real customers. Delaying the launch of the current account until the systems were thoroughly tested, while it was frustrating for those anxious to see Tesco Bank becoming a real challenger to the sector, should be recognised as absolutely the right decision for the CEO to take. The embarrassment and reputational damage caused to banks such as RBS and National Australia from having serious outages in their core banking systems far outweighs the benefits of launching earlier.

The announced current account is paying 3% on balances and only charging a monthly account fee of £5 if less than £750 is paid into the account. This is a competitive offer. There are added advantages for Tesco customers who will also receive loyalty Clubcard Points on all spending using the Tesco debit card.

Marks & Spencer beat Tesco out with a current account, having both free and fee-charging versions of their accounts. As with Tesco there will be benefits of being both a customer of M&S and its bank in terms of rewards. There will be some overlap between customers but the big difference is that Marks & Spencer Bank is owned by HSBC and therefore cannot really be seen as a challenger bank.

The launch of the current account by Tesco Bank should represent a real challenge to the big five banks (Barclays, Lloyds, HSBC, RBS and Santander). As an aside, Santander likes to position itself as a challenger but being owned by one of the largest banking groups in the world, coming from the consolidation of building societies (Abbey National, Alliance & Leicester, Bradford & Bingley being the main ones) and with a less than perfect reputation for the service it provides it quite rightly deserves to be clumped in with the other big 4 banks as being just another legacy bank.

There are many reasons why Tesco Bank should be seen as a real challenge to the established players. For starters it is not a small bank – it already has over 6 million customers using its insurance and lending products. All of these customers are potential customers for their current account offering. It also already has a large physical distribution network through its supermarkets. As they are available to savers today customers will be able to make deposits in 300 stores. However this account has been designed to be opened online and customer support will be available on the phone. The bank being designed for digital differentiates it from the likes of TSB, Metro Bank, Virgin Money and Williams & Glyn, which have all come from a traditional branch centric design.

Not only has Tesco Bank been designed from the start with digital in mind, Tesco also has many years experience of running large scale digital operations through its own website as well as operations like Tesco Mobile. This gives it a much better chance of delivering a reliable good customer experience than other challenger banks, particularly the small scale contenders such as Metro Bank, Aldermore and Atom.

Tesco Bank also has the added advantage that through its Clubcard programme it not only has vast amounts of data on both its existing and potential customers but it also has years and years of experience of using that data to drive business. Unlike the new start ups and the established banks so-called ‘Big’ data is not a new topic for Tesco. This should give it significant advantages given its customer insight in terms of providing customised propositions to its customers.

Tesco Bank is also not weighed down by legacy. They don’t have the reputational problems from the mis-selling of PPI and the high levels of complaints which the Big Five banks have. They can position themselves as truly a new entrant. While TSB and Williams & Glyn may have the liability for the past retained by their parents (Lloyds and RSB respectively) many of the executives who made the decisions to sell PPI, set the aggressive targets and the staff who delivered them are working for these ‘challenger’ banks.

They are also not weighed down by legacy systems unlike the Big Five banks, those spawned from the Big Five (TSB and Williams & Glyn) and those challenger banks who have been created by the acquisition of former building societies such as One Savings Bank (Kent Reliance Building Society) and Virgin Money (Northern Rock). While it may have taken Tesco Bank longer to get to market with their current account it is being delivered on (at least relatively) modern systems.

What the launch of Tesco Bank’s current account means is that there are now two sizeable challenger banks that are not tainted with the legacy of the financial crisis and that are serving their customers using modern technology platforms designed to work in the digital mobile world – Nationwide and Tesco.

Does this mean that the Big Five banks are quaking in their boots worried about their future? Clearly any bank executive should be aware of and taking into account what the competition is doing. The reality though is that for most customers banking is not that interesting, it is a commodity not worth spending a lot of time thinking about and that despite Seven Day Switching making it easier, they have better things to do with their time than switch bank accounts. This means that there will not be a flood of customers leaving the Big Five banks to sign up with Tesco or Nationwide.

The launch of the Tesco Bank current account is to be welcomed as a new force in the retail banking market, but no one should think that this is going to bring about a seismic change to who customers bank with.

Wednesday, 28 May 2014

New NAB CEO faces challenge of what to do with Yorkshire and Clydesdale Banks

With Cameron Clyne leaving National Australia to spend more time with his family, incoming Group CEO, Andrew Thorburn, will have to face the perennial question of what to do with the bank’s UK businesses. For many years Yorkshire Bank and Clydesdale Bank have been seen as albatrosses hanging around the neck of the incumbent Group CEO of National Australia. With NAB’s focus on growing in their domestic market and Asia the two banks have long been seen as non-strategic.

During the financial crisis NAB had to invest nearly £1.5bn of capital into the business to shore up the balance sheet. There have been challenges with non performing loans as well as redress for misselling of PPI to add to the woes. As part of a plan to improve the performance of the business there has been a significant cost cutting exercise that resulted in the removal of 1,400 jobs and the closure of 29 banking centres. There has also been a withdrawal from London and the south of England.

However for many years both banks have been starved of any significant investment to improve them and to make them better able to compete in the UK market. It is not since the Brit John Stewart was Group CEO and fellow Brit Lynne Peacock was running the UK operations that any significant effort was put into innovation and growing the businesses in the UK. Indeed large parts of the strategy for the UK banks set out by Stewart and Peacock were reversed during the cost cutting exercise. (Recent news that Clydesdale Bank is to issue Britain’s first plastic £5 note hardly counts as innovation).

NAB in Melbourne have for a long time been very open about the fact that Yorkshire Bank and Clydesdale Bank are seen as non-strategic. The market has been sounded out for interest in acquiring the business. At one point it was rumoured that Santander was interested in acquiring the business but no deal has emerged. A key on-going challenge for the NAB Group CEO has been that there has been a significant gap between the value that the UK operations are held on the balance sheet and the price potential acquirers are prepared to pay. This situation has deteriorated even further since the crisis in 2008 with both bank valuations dropping and the interest in acquiring banks disappearing. For NAB, either no Group CEO wanted to take that write off on their watch or the Board wouldn’t let him.

There is no doubt that there has been and continues to be a lot of dissatisfaction from analysts and investors about the financial performance of NAB in its local domestic market. It is seen as the laggard of the Four Pillars. The challenge for Andrew Thorburn is to turn around that perception. Whilst the UK operations are definitely not the highest priority in terms of fixing the business they are seen both as a distraction and requiring significant capital that could be better deployed elsewhere.

So as Andrew Thorburn starts his role as CEO in August 2014, will he do something to resolve this issue and what are his options for the UK operations?

The ideal outcome for the new CEO would be to sell the UK operations and minimise the write off. The question though is who would want to buy them?

On paper Yorkshire Bank and Clydesdale Bank could be challenger banks. They both have strong brands with loyal customers. The Yorkshire brand stretches way beyond the county boundaries. Clydesdale is seen very much as a Scottish bank and one that has managed to maintain its reputation far better than either Royal Bank of Scotland or HBoS, its two main rivals. This could make it attractive to Private Equity firms, for instance JC Flowers might wish to merge it with its OneSavings Bank. It could also be attractive to other Private Equity firms looking to establish a foothold in the UK retail banking market. However the timing for One Savings Bank is not good as they have already announced that they are to float and that is where their focus in the short term will be.

The challenge for anyone evaluating Yorkshire and Clydesdale is, apart from their customer base, what is there of value to acquire? Between the Yorkshire and Clydesdale they have 322 branches, a very similar number to the branches that Williams & Glyn (the challenger bank being created from the forced disposal RBS has to make) will have. However, as is becoming increasingly apparent to both established and challenger banks, the use of branches by customers is declining and therefore the value of having an extensive network of branches is reducing. As both RBS and Lloyds found out finding buyers for their branches was not easy with both, respectively, Santander and Co-op withdrawing their offers after long protracted negotiations. The additional challenge with the Yorkshire and Clydesdale branches is that significant investment by the buyer would be required to bring the branches up to  a standard customers expect today due to the lack of investment by NAB over the last few years.

If a new entrant was looking to acquire the NAB UK operations and they wanted to initially use the NAB IT platforms then if they wish to be competitive they would need to invest very heavily over the medium term on new platforms, as the NAB  UK platforms are old and in need of retiring.

With a cost income ratio of 76% there is a lot of efficiency gains to be driven out by the right owner, but the question is the level of investment to achieve this and over what time period.

Given the level of investment that any new entrant would need to make in order to use the UK operations as a platform for competing in the UK retail banking market, the price that they would be prepared to offer is highly unlikely to meet the amount sitting on the NAB balance sheet.

Given Nab’s situation it is easy to understand why a couple of years ago Santander were rumoured to be interested in acquiring the UK operations. Santander has its own platform, Partnenon, and has a track record of being able to migrate bank accounts onto its systems – Abbey National, Alliance & Leicester and Bradford & Bingley. The challenge for NAB is that Santander is a distress purchaser and never knowingly overpays.

If NAB can’t sell Yorkshire and Clydesdale at an acceptable price then what about a flotation? Timing is a real challenge here as there has never been a time when more banks are coming onto the market. TSB, Aldermore, OneSavings Bank,William & Glyn, Virgin Money, Metro and Shawbrook have all announced intentions to come to the market over the next eighteen months. Investors are spoilt for choice. Along with the recent disappointing flotations (Saga, JustEat. AO, etc), albeit in other sectors, there will be a downward pressure on prices and consequently the amount of capital that will be raised.

Another option is to do nothing and let the two brands continue to operate as they are today, continue to reduce costs and improve performance with minimal investment and allow the business to slowly decline as customers move away to competitors when they are attracted by better offers.

There is no immediate need for Andrew Thorburn to make a decision about the future of the UK operations particularly given the uncertainty with the Scottish Referendum occurring in September 2014. The UK operations operate under a Scottish banking licence and a ‘Yes’ vote could create a long period of uncertainty and have a significant impact on the value of the UK operations.

However as a new CEO there is a grace period during which there is an opportunity as the new broom to look with fresh eyes at all the problems. It is an opportunity to announce write offs, set the bar and expectations low and then over-perform. Thorburn should take full advantage of this initial period of goodwill to be quite clear what his plan is for Yorkshire and Clydesdale to end the uncertainty for customers, colleagues and investors.

Friday, 16 May 2014

RBS forced to sell Citizens ending the most successful UK retail banking foray into US market

British businesses don’t have a great track record in breaking into the US retail market. You only have to look at the disastrous foray that the Marks & Spencer acquisition of Brooks Brothers was, Tesco’s humiliating and expensive attempt with the Fresh & Easy brand and, most recently, the failure of Yo Sushi! to realise how difficult it is for firms with strong brands in their domestic markets to make it across the pond.

The retail banking track record is no better with Barclays, Lloyds and Natwest all quitting the US in the late 1980s and 1990s. Losses from the acquisition of Crocker drove Midland Bank into the arms of HSBC. Even HSBC has not been immune to the problem with the disastrous acquisition of subprime Household continuing to hurt the bank to this day.

It is quite ironic then that RBSG is being forced to exit the one reasonably successful move into retail and commercial banking that British banks have made in the US. Whilst Fred Goodwin, the former CEO of RBSG, has been criticised for much of the way that he ran the global banking group (particularly paying over the odds for ABN Amro just as the wholesale markets were closing down) his strategy for building a presence in the US retail and commercial banking sector should be heralded as one his smarter moves.

Rather than trying to take on the large US retail banks where they were, at that time, competing aggressively with each other in New York, California, Texas and Florida, Goodwin decided to build his beachhead in the Mid-Atlantic by the acquisition of Citizens Financial Group. A series of small but strategically significant acquisitions followed that expanded it into New England and the Midwest. Citizens is now the 15th largest commercial banking organisation in the US. Whilst there have been challenges including writedowns following the acquisition of Charter One and recent issues with the way that capital is planned, overall Citizens is a highly capitalised and profitable bank. Yes its capital is under deployed but that is addressable. Indeed its reputation with its customers is far better than RBS’ in its own domestic market.

It is a great shame then for RBSG that due to having to take state intervention and becoming largely nationalised, primarily due to the acquisition of ABN Amro and the disastrous business in Ireland, that RBSG is being forced by the EU to dispose of its ownership of Citizens by the end of 2016.

As the first step of moving towards this in January 2014 Citizens sold off 103 branches in the Chicago area to US Bancorp.

 It has been announced that the next step will be to float or sell 20-25% of its share of Citizens. A flotation is more likely as there have been few signs of interest from potential buyers. However for Canadian, Japanese or Spanish banks that want to significantly grow their presence particularly in the Midwest and given that it is a forced sale it could be an interesting opportunity.

The flotation will help to rebuild its balance sheet, but the sale is what is really needed as that could release more than $3bn of capital, which would help RBSG reduce the government holding in the bank.

This is all a sad ending to what could have been had RBSG scaled back its ambition to be global investment bank.

As a footnote, British banks should not give up on being able to build a presence in the US retail and commercial banking market. RBSG has shown that it can be done. Barclays is having success with its Barclaycard US operation building scale to take on the other cards providers, however this is a monoline not a full service retail banking offering.

The British banks can also look to the Spanish banks, Santander and BBVA which with respectively the acquisition of Sovereign Bank and Compass Bank, are demonstrating that it is possible for Europeans banks to build a presence in the US retail banking market. It takes time, patience and recognition that whilst both the US and European markets have the words ‘retail banking’ in their names that they are quite different.

Thursday, 24 April 2014

The challenges facing the next RBS CIO

With the news that Mike Errington, CIO of RBSG, is retiring the bank will be looking for a replacement. The new CIO will have an overflowing inbox, so for those considering taking on the role what are some of the challenges that he or she will have to face?

The immediate on-going work is to ensure the stability of the existing systems. Having had a number of serious, customer-impacting outages over the last few years (including a problem with Ulster Bank ATMs on the day this was written), the work of applying patches to and building resilience into both hardware and software needs to continue. RBS is not the only bank that in earlier times avoided doing maintenance as a way of saving costs and subsequently is feeling the impact of doing that in terms of reliability of systems.

The second tactical exercise is the simplification of the IT infrastructure. However this is far easier said than done as the IT systems have evolved over many decades, creating great complexity and the number of people who understand the older systems and how they interrelate is rapidly declining both as the result of retirement and cost cutting within the bank. Simplification is about retiring and rationalising systems and infrastructure. Given the complexity that exists this is alike disarming a booby-trapped Second World War bomb requiring both high levels of skills and nerves of steel.

Both of these steps are akin to re-arranging the deckchairs on the Titanic, given the ages of the systems. There is no doubt that there has been significant underinvestment in IT since way before the RBS/Natwest integration. Whoever is the new CIO they should use the opportunity of as part of their taking the role to negotiate a commitment to a wholesale replacement of the core retail banking system as the likes of CBA (Commonwealth Bank of Australia), Nationwide Building Society and Deutsche Bank have carried out. However this would involve spending measured in the low to mid billions of pounds and a programme taking 3-5 years to execute. This is where making such an essential change becomes particularly difficult specifically for RBS as RBS is not just any bank, it is a state-owned bank. Such is the political pressure to see the bank returned profitably to the private sector and within the first couple of years of the next government i.e. almost certainly by the end of 2018, that it is highly unlikely that the funding for such a major investment programme will get approval from the key shareholder. However that is what both the CIO and the CEO should be looking for if RBS is to once again become a truly competitive UK bank.

There are however other major transformation programmes that the new CIO will have to pick up, drive and deliver.

Having negotiated an extension of the deadline to the end of 2016 for the disposal of the 308 branches that RBS was forced by the EU to sell as a result of receiving state aid, creating a separate clone of the RBS systems for the new Williams & Glyn’s bank to run on is another top priority for the new CIO. This is not dissimilar to the exercise that Lloyds Banking Group had to perform to create the platform for TSB to run on. However the Lloyds Banking Group platforms were in a far better state than the RBS systems benefitting from coming on the back of creating a single set of systems for the Lloyds TSB/HBoS merger. Even having that advantage for Lloyds Banking Group creating the separate TSB platform was not simple or easy with the eventual cost being in the order of £2bn. Delivering the William and Glyn’s separation to the 2016 deadline will be a major achievement.

This is not the only separation programme that the CIO will have to oversee. The IPO of the Citizens business in the US in Q4 2014 and the complete disposal by the end of 2016 will also need to be executed. This will entail the disengaging of Citizens from the Group systems.

In addition there is the question of what to do with Ulster Bank. The preferred option is to dispose of it by selling it to one of the challenger Irish banks e.g. Permanent TSB, Danske Bank. If that is to go ahead then the new CIO will have to look at the separation of Ulster Bank from the Group systems and supporting the clone until it is integrated into the buyers' systems.

One of the core strategies of RBSG is to scale back the investment bank, reducing costs to be aligned with the smaller bank and to return the bank to be more focused on the UK and supporting UK businesses. This will inevitably require changes to the investment banking platforms as businesses are closed or sold off. To achieve the reduction in costs and the required flexibility as volume drops will almost inevitably mean looking at further outsourcing of platforms and operations to third parties.

On top of the RBSG specific initiatives the new CIO will also face the plethora of transformation programmes and projects that will need to be implemented as a result of regulatory changes. One of the core ones will be the implementation of ring-fencing once that is fully defined. This will mean a significant change in the governance of RBSG and there is a question as to whether the role of Group CIO can persist under the new rules, requiring in a significant restructuring of Group Operations.

All of this will need to be delivered whilst digital, mobile and the use of data analytics for both competitive advantage and risk management continue to move at pace in an increasingly competitive banking market.

The new RBS CIO will need to face up to this hugely challenging environment all within the constraints of  a bank operating very much in the public spotlight, with the need to rebuild trust and the financial constraints imposed by  having the government as the largest shareholder. Only the bravest should apply.

 

 

 

Tuesday, 25 March 2014

Should the CIO be on the Executive Board?


The news that the CIO of Co-operative Group (which has a minority holding in Co-operative Bank), Andy Haywood, is to move off the Executive Board but to remain Group CIO brings a further spotlight onto what is the role of the CIO going forward and, whilst not directly related to the demotion of Mr Haywood, specifically what is the future role of CIOs in banks.

The reporting lines of CIOs have evolved with the increasing use of technology in organisations. Even the title of the person responsible for IT has evolved alongside the technology.

When computers were first introduced into banks their sole purpose was to act as a giant calculator and move what was held in physical ledgers onto computers so that the bank’s financial position could be calculated. The person responsible for making that happen would have had one of a few titles including EDP (Electronic Data Processing), MIS (Management Information Systems) or simply Computer Manager. The role would have reported to the Finance Director or Chief Accountant as that was the department that was primarily serviced by computers. Indeed today in many organisations today IT continues to report to the CFO.

As automation started impacting the back office operations of the banks and IT started being used outside of Finance, the Head of IT or CIO may have found the reporting line moving to the Chief Operating Officer. For many banks today that continues to be the case.

However with the rise of digital, IT has increasingly permeated beyond the back office and accounts departments and an increasingly large proportion of IT expenditure is being consumed by Marketing.

Banks in particular, where fundamentally the vast majority of their commercial, money-making operations are conducted electronically and not in the physical world, IT is increasingly seen as the lifeblood of a successful business. You only have to observe how little a bank can actually do when its IT systems crash and customers cannot access their bank accounts or their card transactions are not processed to see how important IT is to the operation of a bank.

There have been some interesting experiments in terms of what the right organisation structure for IT should be.

For instance at Barclays when Shayghan Kheradipir was Chief Operating and Technology Officer, he had a model where the COO and CIO of each business unit jointly reported to the CEO of that unit. (See CIO/COO joined at the hip). This meant that IT had a voice at the table for the key strategic decisions for that business unit rather than merely being represented by the COO.  With Mr Kheradipir leaving Barclays to be the CEO of Juniper Networks, it will be tempting for Barclays to revert to the more traditional model.

Commonwealth Bank of Australia has gone further than Barclays did by having the CIO reporting directly to the CEO. It is interesting to note that subsequent to that organisational change Commonwealth Bank has spent significantly more as a proportion of overall costs than other banks on refreshing its IT but as a consequence has one of the most advanced IT architectures and platforms of any retail bank of size globally. It is now being able to exploit that new platform to launch new products and services far faster than its competitors.

However with IT increasingly being outsourced, (whether it by the traditional route of selling IT assets to an outsourcer and buying back services or through the use of the cloud), the demands of digital and increasingly Business Intelligence and data analytics, there is a bigger question as to whether there is a role for the traditional CIO at the Executive table? If it isn’t the traditional CIO then who should be providing the strategic input of the role that IT can do to both lead and serve the bank? The skills are far more aligned with a business savvy enterprise architect who has no vested interest in building an internal organisation but is more interested in providing a pragmatic solution, wherever it is sourced from, who knows how to form strategic alliances, both within the bank and outside and who is driven by the desire to use technology to deliver the best value to both internal and external customers.

That doesn’t appear to be what the latest announcement from the Co-op regarding the role of the CIO is saying, indeed the organisational change sounds like a regressive step. But then the Co-op has far bigger problems to address than how to more effectively exploit IT.

Friday, 7 March 2014

This is not just any fee-free current account, this is a Marks & Spencer fee-free current account

Marks & Spencer have announced that they are to launch a fee-free current account. The account will have no overdraft fees, the first £100 of which is interest free and a (relatively) low interest rate for overdrafts of 15.9%.  For those who transfer their main banking account to M&S they will receive a £100 gift card. A key attraction for M&S customers will be the loyalty scheme where points are earned for debit card spending in M&S stores and online. It also passes the critical requirement of allowing customers to bank online as well as on the phone or in store.

A key differentiating feature is not charging a transaction fee for ATM cash withdrawals made with the debit card abroad. For both Metro Bank and Nationwide the lack of transactions fees when abroad attracted customers; however that feature was withdrawn and both now do charge fees for transactions abroad.

On the face of it this is a competitive offering and should be attractive to to both M&S and non-M&S customers alike.

This is not a new market entry for Marks & Spencer (they launched their fee-charging account with a similar loyalty scheme in September 2012) but rather a change of their positioning re. free banking. M&S claims that their fee-charging account has been successful with M&S customers, so this does raise some questions as to why they should launch a fee-free product and at this time.

One of the dangers to M&S of having similar current account products with one offering a fee and one not is self-cannibalisation. Will customers of the current fee charging account be happy to see that whilst they are paying a fee other customers are not paying one for what seems a remarkably similar product? Will some of those customers look to switch to the fee free product? M&S is allowing these Premium Customers to switch their accounts to the free one and will even give them a £100 gift card if they switch their main account to M&S.

Of course this is not just a current account this is an M&S current account. Except it isn't. It is actually an HSBC current account as it is HSBC that is not only behind M&S Bank but owns 50% of the bank. While M&S may position itself as being good for current account competition in the UK market, with HSBC behind it the impact on the market share of the Big Four banks will be none.

Another question that M&S will, hopefully, have considered is what types of customers will be attracted to this account? With no mandatory minimum monthly amount that needs to be paid into the account, customers may only open this account for the loyalty scheme and maintain minimum balances or, as Nationwide found with its credit card, only use the card for cash withdrawals abroad. For a current account to be profitable for a bank it is important for it to become the primary customer account where the customers salary is paid into and the mortgage and other core regular payments come out of it. Without high current account balances or large overdraft fees (which the account does not charge) current accounts for banks are loss leaders. For M&S they need to demonstrably see the customers of their current accounts spend significantly more in M&S stores and online than non-current account customers for the bank to be deemed a success.

For those championing an end to so-called free banking, the launch in September 2012 by M&S of fee-charging current accounts was seen as setting an example to others that would help to accelerate the end of so-called free banking. For those championing an end of free banking, this recent news from M&S that they are launching fee-free accounts will be seen as a step backwards delaying the end of free banking further.

So why have M&S made this announcement at this time? There are already successful non-Big Four banks, particularly Nationwide, Metro Bank and Santander (with their 1-2-3 account) as well as HSBC-owned First Direct who have been taking advantage of the delays and the problems that other challenger banks have been facing in getting their current account propositions right. Now however with Tesco having announced that it will (finally) launch its current account offering this summer and Virgin Money expected to launch its basic bank account later this year, M&S is clearly keen to get to the potential switchers ahead of the others.

But why have M&S decided to launch fee free products given the issues and risks discussed above? It can only because of the need for volume. Running a profitable current account business with all the investment in infrastructure such as contact centres and IT, in personnel and marketing requires scale. Clearly M&S, despite their protestations, haven't achieved this with their fee charging accounts and they see this as an opportunity to build a bigger customer base which will reduce the marginal cost of running a bank.

It will only be some months after the launch of the both the new M&S fee-free accounts and the Tesco current account that it will be clear whether this move was good news for M&S' beleaguered shareholders and customers or not.