Tuesday, 20 December 2011

Is the Northern Rock decision good for banking?



With the recent announcements that Northern Rock is to be sold to Virgin Money is this decision good for banking and good for the consumers?

The decision, from the Government's perspective, is not only about recouping some of their investment (not as much as they would have liked), but also about increasing competition in the retail banking sector.

Whilst the National Audit Office has launched a "value-for-money" study into the sale of Northern Rock to Virgin Money, this will not halt the sale. Virgin Money will take the keys to Northern Rock at the beginning of January. We have to begrudgingly admire the move  by the serial entrepreneur and self-promoter, Sir Richard Branson, that once again he gets all the credit and press attention for a deal but actually puts little of his own funding into the deal and will rapidly get his money back when he gets access to the excess capital in Northern Rock.

Putting aside the potential bargain that Northern Rock represents for Virgin Money, what is its potential for shaking up the retail financial services market?

With the branding and the products that make up the Virgin Group the potential for Virgin Money to disrupt the retail banking market are high - certainly a lot higher than the other players who looked at purchasing Northern Rock. The continued convergence of telecommunications and banking driven by the consumer demand for mobility, combined with the increase in gaming and  the expectation of entertainment, Virgin Money has the opportunity to present a real alternative to the much discredited high street banks. Appealing to a younger, more tech-savvy customer base, the future high earners Virgin Money could have a long term impact on the profitability and growth of the traditional high street banks. By creating a physical presence on the high street, something Virgin Money has not had to date, this will allow it to move into financial products where customers still need the reassurance of the face-to-face experience to purchase, but doing it in a physical outlet that reflects the Virgin brand. Whilst the banks have tried to provide a new branch experience they have always been held back, and will continue to do so, by their brand and what it represents.

Of course whether Virgin Money lives up to this potential is down to the execution of the integration with  and transformation of Northern Rock and this shouldn't be underestimated. But Virgin Money finally has the opportunity with this deal to do what it has always set out to do and that is be a real consumer-centric alternative to the high street banks.

Thursday, 24 November 2011

Wanted: CEO for UK Retail Bank


With the news that the RBS Retail Bank CEO, Brian Hartzer is to return to his native Australia to take up a similar role with Westpac and to be groomed as Gail Kelly's replacement, he is but just one more executive to leave UK Retail Banking. He follows Deanne Oppenheimer (Barclays returning to her native Seattle - see http://www.itsafinancialworld.net/2011/09/resignation-of-deanna-oppenheimer-end.html ), Helen Weir (Lloyds Banking Group - left when Antonio Horta-Osorio joined as CEO), Lynne Peacock (NAB), Joy Griffiths (Lloyds Banking Group - left retail banking to become CEO of Experian Analytics - see http://www.itsafinancialworld.net/2011/02/joy-griffiths-leaves-lloyds-banking.html ) and Andy Hornby (HBoS - though whether this was a loss for Retail Banking is far less apparent).

Without resorting to the over-used Oscar Wilde quote, to lose this many Retail Banking CEOs does not look to be just chance. What is it that is driving these talented executives to leave UK Retail Banking?

Certainly retail banking in the UK is becoming one of the most heavily scrutinised and regulated banking sectors anywhere in the world. This is leading to executives spending more and more of their time talking to regulators and politicians rather than spending their time on running their business. The ability for talented executives to make a difference, to reinvent the industry and to service their customers in a way that they deserve to be treated is becoming increasingly difficult.

The leadership of the banks is also changing. Whereas the likes of Lloyds TSB, Barclays and HSBC used to be led by executives, such as Sir Brian Pitman, who had risen through the ranks of retail banking and understood the industry, the UK banks are now all led by former investment bankers, who are not passionate about retail banking, for whom serving the consumer and the small business is not second nature and whose vision for their banks is articulated in terms of aggressive ROI targets, which leaves the traditional retail banking executive spending large proportions of their time educating and managing their bosses about the business of retail banking rather than being able to focus on their customers.

It is also true to say that not many people nowadays would want to admit at social events that they are a banker, not if they don't want to end up on their own for the evening! The prolonged pillorying of bankers undoubtedly has an impact on individuals however thick-skinned they may be. In other geographies the role of the banker is far more respected and prestigious.
For the ex-pats who have joined the UK banking sector, and even for many British citizens, the changes in the bonus systems and the introduction of the 50% income tax band have all made the UK a far less attractive place to work and therefore, where there is a choice, moving abroad or back home can be very attractive. Whilst only a few years ago the tax regime in Australia appeared to be more onerous than the UK that situation has been reversed and for both Brian Hartzer and, even more so for Deanne Oppenheimer, going home has significant financial advantages.

Brian Hartzer isn't going to be leaving RBS for a while but who are the potential candidates to replace him? Already the speculation has started.  Will a UK-based candidate be found? Could we see the return of Mark Fisher from Lloyds Banking Group back to Edinburgh? It is very unlikely that we will see the return of Helen Weir, Lynne Peacock, Deanne Oppenheimer or Joy Griffths. Of the up and coming executives Nigel Hinshelwood, COO of HSBC UK, must be in the running, but given the nationalised, increasingly UK-focused nature of RBS would that be an attractive option?

Given that any UK-based executive knows what the UK retail banking market has become maybe the easiest option for RBS is to look abroad and for their next Retail Banking CEO.

Barclays COOs/CIOs joined at the hip? ANZ doesn't agree

In an interesting move Barclays Global Retail Banking COO, Shaygan Kheradpir, has announced that the COO and CIO of each of the business units within the Global Retail Bank ( Barclaycard, UK Retail Banking, Barclays Africa and Western Europe) will jointly run their businesses and report to their CEO as well as to the GRB COO. This is sending a very clear message that, for retail banking, IT is as important as operations and that only by jointly working together can they succeed.

One can only assume that this is a move to change the behaviour often seen in banks where IT is seen as the whipping boy of Operations, the department that holds back the business from evolving and competing and the recipient of a lot of finger pointing.

In many banks and other financial services organisations IT reports into Operations and is not represented on the Executive Committees of their business units. This move by Barclays firmly places IT at the top table. It represents just how much more banks are dependent upon IT to be competitive.

Commonwealth Bank has gone one step further and has their CIOs reporting directly to the CEO, such do they see the significance of technology to the success of their banks.

Too often recently there have been tales of how IT has stopped the business working. You only have to look at the woes that National Australia has been enduring and the impact on the business of systems not working.
See http://www.itsafinancialworld.net/2011/04/deja-vu-as-nab-systems-down-once-again.html Interestingly NAB has a structure whereby they have split responsibility for IT between effectively BAU (Business As Usual) and New Technology with Adam Bennett as CIO and Christine Bartlett, the executive programme director of the NextGen technology upgrade programme.

However Barclays is clearly demonstrating how technology can help lead a business. First out with the tap and wave debit card in the UK and first out in the UK with the mobile wallet on a phone with their joint venture with Orange (see http://www.uswitch.com/news/communications/orange-and-barclaycard-launch-mobile-phone-payment-scheme-800550966/ )

For this joint responsibility to work effectively requires a special type of COO and a special type of CIO. The head of Operations will need to have far more than just an appreciation of IT than has traditionally been the case. Equally the CIO will need to have a deep understanding of how the business works and how IT can enable the bank to compete. Traditional CIOs who have come from an IT Service Delivery, focussed on keeping the lights on, may struggle to perform this role. The type of CIO required for banks is clearly evolving. This is discussed further at http://www.itsafinancialworld.net/2011/10/new-type-of-cio-is-required-for-todays.html
This dual leadership can only be seen as a temporary measure until enough executives emerge who can really master both banking and technology - people like Shaygan Kheradpir, whose last role was CTO at Verizon, and is an example of the Renaissance Man which is needed to manage banks in the 21st century.

In a move against the trend ANZ has announced that Anne Weatherston the CIO will no longer report directly to the CEO, Mike Smith, but will now report to Alistair Currie, the new COO, whilst still retaining her position on the management committee.

Shortly after the ANZ announcement Westpac has followed suit in going against the trend and has announced that they will not only introduce one COO but two and have a CIO reporting into each one, removing the CIO responsibilities even further from the CEO and the board.

Only time will tell whether either ANZ's and Westpac's or Barclays' and CBA's models are right. It will be interesting to see and costly for the banks that have got it wrong.

Monday, 14 November 2011

Are those annoucing the death of the branch false prophets?




The death of the bank branch has been predicted more times than sightings of Elvis Presley have been announced since his death.  It started with the introduction of ATMs or cash machines, was reiterated with the arrival of call centres, declared to be inevitable with the emergence of the internet and the giant leap forward of Web 2.0 has been welcomed by many commentators and consultants as the final nail in the coffin. But as like in all the good horror movies since the pale, thin, mud strewn  hand of Sissy Spacek shoots up from the grave in ‘Carrie’  no sooner is the bank branch declared dead than it springs back to life, reinventing itself whether it is by becoming a coffee shop, a children’s nursery, an airline lounge or, more recently, an amusement arcade or, in the case of Metro Bank, a Las Vegas casino.
So are the soothsayers, the banking visionaries, correct that branches are dead and that anyone who suggests otherwise is either a dinosaur, very, very stupid or should be taken away by the men in white coats?
Sitting in New York writing this blog it would appear to be anything but true with so many shopfronts on so many streets being new or refurbished branches with their glistening self-service machines, their comfortable sofas, their bright colours and lighting these do not look like the last desperate gasps of an endangered species. Indeed there are also lots of unreformed branches with poor lighting and high screens, so the so-called death of the branch seems to have been prematurely called.
So why is there so much written about the fallacy of bank branches and the call for them to be assigned to a museum?
Certainly there are more and more ways that customers can interact and transact with banks than simply talking to a teller or an advisor in a physical branch.  The increasing ubiquity of devices that provide digital access  that has gone from dumb terminals through laptops, netbooks, mobile phones, smart phones, tablets, NFC-enabled cards and NFC-enabled phones can lead to the conclusion that digital channels will totally replace physical channels.
This perspective is further strengthened with the almost daily emergence and evolution of  different ways of connecting in the digital world whether it be using email, SMS, Facebook,  Twitter or some other increasingly enclosed environment.
However the reality is that, whilst the take up of these new ways of communicating and living our lives is accelerating, most of these have not  yet become mass market nor have they become a way of life for the majority of people.  On the other hand for many of  the people who  make a living out of predicting the future of banking the use of these tools has become second nature, as indeed it has for most of the people within their circles.  The reality is that they are not representative of the mass market and that, whilst they may quote figures that show that the take  up of new technology is faster than it has ever been before, they talk about banking as seen through their own lens and not necessarily that of the majority of customers.


Does this mean that these forecasters should be ignored? Absolutely not - for what they say makes a lot of sense and is highly appropriate challenges to the existing banking fraternity. It cannot be disputed that for a long time the most powerful voice in a retail bank has has been that  which belongs to the owner of the branch network. It is the branch network that has absorbed the majoirtiy of the discretionary investment funding for the banks. The agitators are arguing that this economic inbalance between branches and other voice and digital channels needs to be addressed and there needs to be a recognition that branches already are just one of the channels and ways for banks to service and transact with customers. That doesn't mean that branches will go completely away, because there will always be some customers that want to transact with a real person in a physical space that is private and away from distraction. For some segments this desire to transact in person is stronger than for others. For instance the branch-centric, locally empowered model that Handelsbanken operates in the UK focussed on SMEs and mid-corporates is highly successful both in profitability and customer satisfaction (see http://www.itsafinancialworld.net/2011/06/forget-virgin-money-or-metro-bank.html ).


These cries for revolution and major change in the distribution of economic power in retail banking should be listened to by branch-based banks, welcomed as a wake-up call and acted upon, whilst recognising that a balance between branches and digital for most main stream banks will be the right answer for some time to come.

Tuesday, 1 November 2011

The world awaits the birth of a new banking platform

Across the world, bank CIOs are watching closely the activities in the delivery rooms in Melbourne, Sydney, Swindon and Frankfurt. There is much pacing up and down and the carpets are well worn as these babies are seriously overdue. There is so much attention being paid to these four cities because CIOs across the world are holding back their own decisions until they are sure live birth is possible.

It shouldn't be underestimated just how significant the decision and, even more importantly, the delivery of a new core banking platform is. Commonwealth Bank of Australia made a Stock Exchange Announcement, not to say that they had finally delivered their banking platform, but simply to update on progress. That is how seriously it is taken; enough to move the share price of a bank.

Replacing the core banking system is the equivalent of a full heart, lungs and brain transplant, with all the risks inherent with that, and this is why no major bank has actually done this since the 1970s. Sure, there have been cases of banks being migrated from one legacy system to another , examples being NatWest's systems onto RBS's banking platform , Lloyds' systems being migrated onto TSB's, but migration onto a modern, new, agile system for core retail banking just hasn't happened.

If it hasn't happened is that because there is no good reason to make the move? It is certainly true that most established banks of scale across the world are working on systems that were initially developed in the 1960s and 1970s, when the use of punch cards and batch processing was state of the art. Many of these systems were never architected or designed with the future in mind, have little documentation and most of the original developers have either retired or gone to that great punchroom in the sky. This has left a legacy of systems which are creaky, unflexible and often have a DND (Do Not Disturb) sign above them because no one is quite sure what happens when you make a change to them. You only have to look at the week plus outage that National Australia suffered last year to see how challenging these old systems are to maintain and keep running. So when new products, channels or technologies come along it takes a lot of money, time and effort to force these creaking platforms to adapt. The business gets desperately frustrated with the CIO and complains that IT is holding back the business. You only have to look at how slow the banks have been to respond to social media and the overall digitial agenda to see how the systems are holding them back.

The challenge for every CIO facing the problem of moving to a new core banking platform is how to make the business case. Using CBA as an example, the original budget for the core banking replacement progamme was AUD$580m ($580m, £355m), which no small amount. This has now soared to AUD$1.1bn (£675m) and late last year it was announced that it was going to be another year late. They're not alone with having these challenges, Nationwide in Swindon, UK are having similar problems (though being a mutual they don't have to announce their numbers to the Stock Exchange) with the programme running far behind schedule and multiple changes of integration partners. In Frankfurt, where the programme was originally designed for Deutsche Postbank, its scope has beenextended to Deutsche Bank's retail bank following the latter acquiring the former. And still no one has the full solution out there.

The challenge with spending such astronomical numbers (particularly at a time when capital is increasingly important to the banks) is what the payback period is. Based on the numbers Commonwealth Bank quoted this week, which was that the new system would repay AUD$300m (£184m) over three years, then that suggests that the payback period is at least 11 years. If you're sitting there as the CEO or the COO of a bank and comparing an investment that pays back in 1 to 2 years versus one that no one else has succeeded in delivering and pays back in 11 years, you can see why not many banks have embarked on this journey. Brave man Mr Ralph Norris, CEO of CBA. When the average tenure of a CIO has fallen to a mere two and a half years, then it is no wonder that there aren't many CIOs brave enough to bring forth the case for replacing their core systems.

Since 2008 National Australia has been working on installing Oracle's i-Flex core banking solution. Whilst they have a live greenfield implementation in their UBank operation they will only have a foundation release  implemented in 2012 -  four years after making the decision. Costs continue to soar with infrastructure costs up a whacking 56% YOY 2010/2011 to AUD 719m (£465m), with most of that increase being attributed to the Next Generation Banking Platform.

Which brings us back to why the world looks on as the brave CIOs of NAB, CBA, Nationwide and Deutsche Bank  pace nervously back and forth in the delivery rooms waiting for their new arrival. Stock up well because, even now, it could still be a long time coming!

Friday, 21 October 2011

Is Verde just a game of 'Call my bluff'?


As the date for bids for Lloyds Banking Group's Verde continues to be extended and still there is only one bid on the table - a question that springs to mind is whether a very smart game of the TV panel show 'Call my Bluff' is being played by Antonio Horta-Osorio, the CEO of Lloyds Banking Group.

There is only one bid on the table at the moment and that is from Lord Levene's NBNK. The price being offered is considerably below what the government and Lloyds Banking Group shareholders were wanting or expecting. NBNK has also been allowed (the NBNK CEO, Gary Hoffman, was prevented from bidding for Northern Rock for twelve months after he'd left his post as its CEO) into the bidding for Northern Rock early. A move on the part of Northern Rock probably to create more competition and, hopefully, push up the price for the Newcastle-based bank. From an NBNK perspective combining both the Northern Rock business with the Verde business would ease some of the working capital concerns about acquiring Verde, since Northern Rock is deposit heavy and loans light, whereas Verde is the other way round, and it would provide NBNK with a platform to migrate Verde onto. It would also make NBNK even more of a competitor to the established banks with over 400 branches. However it would require NBNK to raise even more capital from its investors, complicates the acquisition very significantly and increases the complexity of the integration execution. Even if NBNK were to acquire Northern Rock the price being offered to Lloyds Banking Group or Verde may not be sufficient for shareholders.

This leaves the other contenders for Verde that have not put in a bid yet. Hugh Osmond, the pizza restaurants to pubs operators entrepreneur best known for Pizza Express and for paying over the odds for the Pearl Insurance business, and his Sun Capital Partners business are allegedly looking at ways to re-shape the Verde deal so that it is less capital intensive. This could mean that the pace at which the Verde accounts are transferred to the acquirer is slowed down or indeed reduced so that the funding gap is not so great. The challenge for any bid from Sun Capital Partners will be whether it is seen as enough of a 'strong challenger bank' to meet the ICB requirements for whoever acquires Verde.

The third contender is the Co-operative. With no shareholders to call upon for capital, the Co-Op would have to go to the markets to raise the capital, which is even more challenging for a mutual than a equity-based company. With liquidity in the markets extraordinarily difficult it is no suprise that there has been no bid from the Co-Op yet.

With question marks over all three contenders the final option that Antonio Horta-Osorio has is to float Verde, which has been suggested/threatened before. But how realistic is that given the markets going cold on investing in banks and capital being hard to raise. If the float could be got away would it be at an acceptable price?

Lloyds Banking Group has until 2013 to dispose of Verde, but Antonio Horta-Osorio has said that he wants clarity by the end of this year. Is this in anyone's best interests given the state of the prices for banks. Or is this all part of the elaborate game of 'Call my bluff' where having gone through both the sales and the flotation process Antonio Horta-Osorio can turn to the regulators and say that he has tried to do everything possible to meet their requirements to dispose of Verde, but there were no viable buyers, so can't I just keep them?

Update: The game has got even more interesting with Antonio going off on sick leave for the rest of the year. Now where does that leave Verde in the meantime, with an acting CEO with no vested interest in the long term future of Lloyds Banking Group?


Friday, 14 October 2011

HSBC goes back to its roots

HSBC announced its return to its roots as a bank that supports international trade in the strategy announcement on May 11th. Stuart Gulliver, the new CEO and former investment banker, has firmly changed the emphasis back to becoming 'the leading international bank concentrating on Commercial and Wholesale banking in globally connected markets'.



Stuart Gulliver

Whilst the words may be modern, this is what the bank was first set up for in Hong Kong in 1865. Supporting international trade alongside the Taipan at Jardines. 'globally connected markets' are the twenty first century words for what is essentially trade routes, though expanded beyond commodities and goods to include money. So when you look at the US and Mexico or Germany and Turkey, as well as the large amount of trade flowing, you see large quantities of money flowing across borders sent by entrepreneurial immigrants back to their families, the strategic value of being in these geographies makes abundant sense.

'Becoming the world's leading international private bank' is also a return to the original roots. Support the international trading companies and support their owners - again what the original HSBC was set up to do for the taipans living on The Peak. In addition with the focus on Wealth Management HSBC is ensuring that as the entrepreneurs acquire their wealth there is a route to climb up to the exclusivity of the Private Bank.

The real change of focus is on 'limiting retail banking to those markets where we can achieve profitable scale', but who can argue with the cold logic of that? What it does mean is that questions are undoubtedly being asked as to whether the use of the strapline that has been so successful and has won so many awards, 'The World's local bank',  will still be valid, unless of course your definition of 'the world' is restricted to the number of focus countries, considerably less than the 80+ countries that HSBC currently operates in.
With the announcement of the sale of its Hungarian retail banking operations to Cofidis Magyarorszagi Fioktelepe, the sale to Itau (the Brazilian bank) of its Chilean retail operation and discussions underway for the sale of its small (11 branch) South Korean retail bank, the strategy of withdrawal is in full execution.

However it is not all about withdrawal. In Australia HSBC has opened its 31st retail branch as it builds its presence there. Whilst there is an increasingly large and affluent Asian population which HSBC will be attractive to it is difficult to understand how this fits in with HSBC's strategy to focus on markets where it can grow a significant presence given the dominance of the 'Four Pillars' - Nab, CBA, ANZ and Westpac in Australia. 

HSBC has clearly made some diversions from its original path along the 146 years that it has been running, not least of all the move into the subprime market with the acquisition of Household in the US (the remains of which is now subject to review and may results in the selling of all or part of the cards and retail banking businesses), but it is to be welcomed the statement of intent to move to a 21st century version of what it was originally set up for.


Monday, 10 October 2011

A new type of CIO is required for today's banks

Traditionally CIOs in the banks have come from one of two backgrounds with a third one emerging.
Firstly there are those who started out as system programmers or maybe COBOL programmers who have risen through the key roles such as either Service Delivery Manager or Development Manager to finally make it to CIO. Their experience has been garnered from working for many years for one or more banks. They will have learnt about how old, fragmented and undocumented the systems are and will have had it hammered home to them how absolutely critical it is that the systems are up, available and working for customers. During their careers they may well have seen colleagues losing their jobs due to a system outage such as the ATM network crashing or systems in branches not being available. They see their role as defending the systems from change. As a consequence  and with the fragility of the systems in mind any changes required to the systems from the business are robustly challenged and when agreed to are implemented with great caution. These CIOs pride themselves on systems availability and cost reduction through minimising change. CIOs with this background can be described as ‘Technocrats
The second type of CIO is those who have come into their role by knowing how to work the system, how to manage the politics both within the IT function and with the business. Typically they may have come into the role from a non-traditional IT role such as IT Audit, Risk Management, strategy consultant, management consultant or even from an operational role within the bank. Whilst they do not have an in-depth knowledge of IT built from the experience of carrying out IT roles they are excellent at managing the relationships and politics of the banks. Like the ‘Technocrats’ they will typically be risk averse and a defender of the status quo. They can best described as ‘Bureaucrats’.
A new and emerging third category of CIOs come from one of the Indian  IT off-shoring companies. They will have been hired by the bank because of  the admiration that is held for the way that the Indian off-shore companies deliver software and services. With their adherence to CMMI and ITIL standards way above the level of most Western IT shops they are seen by many Bank Executives as the new way of delivering IT. They understand how to get the best out of the offshore suppliers and how to shake up and transform the internal IT functions. Their focus is on quality delivery of what they have been asked to deliver and no more than what they have been asked to deliver. Generally speaking they have little interest in the business – they might as well be delivering IT for a washing-up liquid manufacturer as a bank. They  see time spent on building positive, constructive relationships with the business as non-productive.  What they will do is take what the business asks for and deliver it – precisely. For those types of CIOs there is no need for business relationship managers but rather order takers and change managers. Their total focus is on delivering change using industry standards and to a high quality.  For them there is only one way to deliver IT and that is their way. They can best be described as ‘Delivery Ayatollahs’.
Whilst each of these three models of CIO have their role to play, a new type of CIO is needed for the banks. The reality is that there is far more significant changes in the banking industry than there has ever been before and the banks need to be able to respond to this. Never have the banks been under more scrutiny from governments, the regulators, businesses and the consumer.  Never has competition been so fierce and not just from traditional players. No longer can the banks be complacent about their customers when the fundamental basis for competition has shifted away from product pricing to the quality of the customer experience that is delivered and when the expectation of the customers has been raised so high by other players in the market such as Google, eBay, Apple and Amazon. No longer is it acceptable for a CIO to be simply focussed on the length of the batch window but now the businesses are looking to IT to help them work out the role of the bank in the online, real time, digital world. No longer can the CIO measure his or her success in terms of the size of their IT department when so much of it is delivered in an outsourced manner. These changes require that the CIO for the new banking world has to demonstrate a  number of characteristics.
Firstly they have be the CEO of an organisation delivering IT services to enable the business to serve its customers . As such they need to understand the impact they have on the bottom line of the bank of delivering those services, not how much it costs to run the datacentre, not how much it costs to operate the network, but the cost and revenue from processing a mortgage application and for producing a digital statement.  They need to manage the P&L for IT, much as their peers in marketing, operations, channels and products do for their businesses.
They also need to excel at supplier management. Since so many of the services that they ultimately are responsible for delivering to the business will be delivered by third parties both on-shore and off-shore then they need deep experience of sourcing, negotiating and delivering outsourced services. They have to be commercially very astute at understanding how to structure an arrangement that gets the maximum out of a third-party in the long term, which doesn’t mean just squeezing the supplier so hard that the deal hurts.
They need excellent relationship skills with their customers, the business. They need to be as passionate about the business results of the bank as their internal customers with the added expertise of understanding how these can be enabled through the smart use of technology. The CIO needs to be able to persuade, coach and lead the business – operate as a peer of each of the business heads.
They need to be as up to speed with the innovations in the banking and other industries as they do of what the latest technologies can do for the business. They need to be able to bring new ideas to the business in a way that the business can understand.
With all the regulations that are constantly changing and evolving the bank CIO needs to understand the implications of these on both the technology and the customer experience and be constantly looking at ways that the regulations can provide competitive advantage rather than holding the business back.
In short the new type of CIO that is required for the banks is the ‘Renaissance CIO’.  Just as with the Renaissance the new CIO has to be multi-dimensional, not just service-delivery, development, relationship focussed but all of those plus more.
Banks are beginning to seek out the Renaissance CIO – the introduction of Shaygan Kheradpir as the Global COO of Barclays Retail and Business Banking and the changes he has made is a step in the right direction (see http://www.itsafinancialworld.net/2011/05/barclays-cooscios-joined-at-hip.html ). However banks across the globe should question that given the ever increasing dependence on IT to deliver their services to their customers do they have the right type of CIO to lead their business forward?

Tuesday, 4 October 2011

NAB to exit UK?

All the signs have been there for some time. Cameron Clyne, CEO of NAB, talking of NAB Europe dragging down the results of the Group, Lynne Peacock, CEO of Europe deciding to 'retire' just as NAB were claiming to be interested in the Lloyds Banking Group branches. Lynne Peacock, the CEO who had tirelessly changed the image of both Yorkshire Bank and Clydesdale Bank, built a real contender for the SME banking market with some really innovative approaches would hardly 'retire' if NAB was committed to take on the Lloyds Banking Group 632 branches, Intelligent Finance and Cheltenham & Gloucester would she? So NAB expressed an interest in the Lloyds Banking Group branches - wouldn't any self-respecting competitor like to have a look under the covers if they had a chance?

Looking at the situation from Melbourne, the logic about exiting the UK is clear for all to see. As the UK Government goes out of its way to make it more expensive and less profitable to operate as a retail bank, with the situation only deteriorating with the publication of the Independent Commission on Banking (ICB) recommendations, banks across Europe seeing their valuations plummet and the Euro environment only getting worse, when a well-funded organisation comes along and asks to buy your business, you'd have to be mad not to consider it, take the money and run back to Australia.

So if the logic is there for NAB is it there for NBNK? Certainly on paper there is sense to it. Acquiring the NAB businesses would give NBNK the advantage of no longer being seen as a new entrant which should reduce both the cost of capital and the amount that has to be retained. The acquisition of NAB should also reduce the funding gap (estimated to be £30bn) between the loans being sold and the deposits/current account balances. It would also give NBNK a set of infrastructure and platforms to migrate the Lloyds Banking branches and brands onto as well as giving it an additional 340 branches. It would also give NBNK an established FSA- approved team (though that could also be bought from Lloyds Banking Group).

Where the concern should be for investors in NBNK is the execution risk. The separation of the disposal from Lloyds Banking Group is undoubtedly one of the most, if not the most, complicated de-mergers to execute on in Europe. Separating it and leaving it still running on a copy of the Lloyds systems and infrastructure is difficult enough, merging it into the NAB infrastructure adds even greater complexity. That assumes that the NAB infrastructure is worth merging into given that NAB Europe has been starved of investment for many, many years. The increase in deal risk by bringing NAB into the mix for NBNK can't be underestimated, however it can be done, it is just a question of whether it should be. The emerging story of the largest de-merger in UK banking continues.

Update 04/10. Despite having suspended the NBNK shares while conversations were underway, the deal has fallen apart. The NAB Finance Director made it clear that with bank shares prices at the bottom and with uncertainty around regulation it would be a disservice to shareholders to sell the UK operation at this time. He reiterated the NAB strategy for the UK being that of organic growth. The cynics could have interpreted this as trying to negotiate the deal price up, however that doesn't appear to be the case, which leaves NBNK asking the question is NBNK on its own going to be sufficient to meet the requirements of the ICB that Lloyds Banking Group sell to a 'significant contender'? See  http://www.itsafinancialworld.net/2011/09/is-nbnk-alone-going-to-be-enough-for.html

Thursday, 29 September 2011

Resignation of Deanna Oppenheimer - the end of an era for branch banking?



The announcement of the resignation of Deanna Oppenheimer as Head of UK & European Retail Banking at Barclays marks the end of an era for branch banking much as the end of shoulder pads marked the end of the Thatcher era.

Deanna Oppenheimer, ably supported by her husband, John, with his background in hospitality, fundamentally changed the world's view of what a bank branch should look like. It was Washington Mutual where the first bank branches with coffee shops inside (Starbuck's) and play areas for children were seen. It was these branches where the screens came down, the decor brightened, the lighting changed and the desks went from rectangular to free form.  It was at Wamu where branches became 'stores' and the experience of visiting the bank became pleasurable rather than a chore. Wamu became unique for a bank in winning retailing awards. In 2003 US Banker recognised Deanna as one of the top 5 most powerful women in banking. Many banks tried to copy the Wamu 'Occasio' concept design, including Abbey National (prior to being taken over by Santander) with its Costa Coffee tie-up, but none managed to match it.

Deanna was hired by Barclays to re-create that Wamu effect with the UK retail bank and has, to a very large extent, achieved that. However the bank customer has moved on from that and so Deanna bowing out now makes a lot of sense.

The era is coming to an end because customers have changed what it is they want from a bank. Almost since banking was invented the branch has been the most powerful channel for banking. This is where the investment funds have been focussed on. Where the money was came the power. Whoever was in charge of the branches was the most powerful person in the retail bank. However with a decline in the use of the branches, whatever Metro Bank might say, the power and the investment is moving away from the banch network and the branch-focussed directors and mangers are losing their influence and ability to drive the direction of retail banking. No longer does it make sense to invest millions of pounds and dollars in having the smartest and coolest branches - often a case of style over substance. There is a recognition now that the investment needs to be in the substance - providing a far better customer experience whether it is digital, contact centre or face-to-face, and recognising that increasingly the physical experience is far less important than it used to be.

Deanna Oppenheimer is just the last of the branch-centric powerful  female retail bankers to leave the UK industry. Over the last year the UK retail banking industry has seen Helen Weir (Lloyds Banking Group), Lynne Peacock (National Australia and formerly The Woolwich) and Joy Griffiths (Lloyds Banking Group, Wells Fargo and Westpac) all depart.  On top of this, with the sad premature death of  Terri Diall, formerly head of the Retail Bank at  Wells Fargo, Lloyds TSB (where she changed 'branches' to 'stores') and subsequently Citibank, it really is the end of that era.

Emerging to replace these phenomenal women are a cadre of women, and men, who really understand what it is to serve customers digitally. They will become the Deanna Oppenheimers of the digital banking world.

Monday, 26 September 2011

Is NBNK alone going to be enough for ICB?

When the Independent Commssion on Banking (ICB) Report was published earlier in September very little detail was given as to their recommendations for creating more competition in retail banking, however they did specifcially refer to the Lloyds Banking Group Verde deal (selling the 632 branches including the Lloyds TSB Scotland branches, Intelligent Finance and Cheltenham & Gloucester) and said that  'The Commission therefore recommends that the Government seek agreement with Lloyds to ensure that the divestiture leads to the emergence of a strong challenger bank.' The Commission stated that it felt that the 4.6% share of the personal current account market along with the funding challenges of the existing deal  was insuifficient to meet this criteria abd that the deal needed to change, but did not prescribe how.

When NBNK announced that they were in discussions with National Australia about buying their UK operations a solution appeared to be emerging, however following comments from NAB to the effect of why would they sell their assets as the bottom of the market, it looks increasingly likely that this opportunity to increase the share of personal current accounts and the easing of the funding requirements (by virtue of the NAB UK deposit base) has gone away.

Whilst NBNK argues that they have improved the attractiveness of their proposition by including a major IT organisation in their syndicate, it would be extraordinary if this was seen to compensate for the loss of an existing bank to their offer.

Certainly any new entrant to the retail banking market would not wish to inherit the legacy Lloyds Banking Group systems for any length of time, since they have been built over twenty to thrity years and as the often quoted Irish joke goes 'you wouldn't want to start from here'. Any new entrant in order to be competitive would be wise not to own all the infrastructure and IT applications but rather buy services from an  organisation who's core business is IT and who can manage the peaks and troughs of demand whilst ensuring the lights are kept on.

However this does not address the demands of the Independent Commission on Banking on whoever acquires Verde. Indeed this leaves the ICB's preferred option being the flotation of Verde with a different mix of current accounts and deposits. See http://www.itsafinancialworld.net/2011/06/flotation-most-likely-outcome-for.html

The question that should be generated in the minds of the general public and the Government, as shareholders in Lloyds Banking Group,  by the NAB decision to withdraw from disucssions with NBNK is whether the haste with which Verde is being pushed through is in the best interests of either the shareholders or consumers. Selling a bank at a time when bank prices are at an all time low and encumbering a new entrant with excessive debts may not be in anyone's best interests.

Thursday, 15 September 2011

Lloyds Banking Group celebrated September 11th

No Lloyds Banking Group hasn't gone to the dark side, despite what many people think about the banks. It isn't the destruction of two towers that the bank celebrated on September 11th, but the bringing together of two giants - Lloyds TSB and HBoS. For September 11th marked the formal end of the integration of the two banks three months early, below the original cost and with higher synergies achieved. However Mark Fisher, Director of Group Operations, didn't make the George W. Bush mistake of saying 'Job Done' on September 11th, even though he and his team are entitled to receive significant bonuses for delivering Integration early, as he knows that there is still Simplification (the delayering, streamlining and further platform consolidation of Lloyds Banking Group) and Verde (the separation of the 632 branches, Intelligent Finance and Cheltenham & Gloucester from the mother ship and transfer to the acquirer or floatation) still to do. However Integration is something to celebrate.

The integration of  Lloyds TSB and HBOS was the largest  banking integration in Europe. To have achieved it ahead of time, under budget and having over-delivered on the synergies is no mean feat. To give an idea of the magnitude of the task this involved bringing three brands Lloyds TSB, Halifax and Bank of Scotland (and you could argue Lloyds Bank Scotland) onto a single set of IT platforms, moving 8000 ATMs and 3200 branches onto a single coherent set of systems. Training all the staff to use these systems and new processes and to do this without interrupting service to customers represents an enormous success. When it is considered that during the period of integration Commonwealth Bank (a much smaller bank) has not still not managed to fully move onto a new banking platform nor has Nationwide Building Society, though both have been trying, gives the magnitude of the achievement some context.

This massively complex programme has been achieved at significant cost to the staff of Lloyds Banking Group, not only in terms of the long hours and weekends spent (for the window for testing much of this in the live environment is only when the banks are closed) by hundereds of staff, but also the numbers of staff who have lost or will lose their jobs as a result of the integration. However the number of staff put out of work would have been far greater if HBoS had been allowed to fail.

So should Lloyds Bankig Group  have been allowed to celebrate September 11th? Absolutely!

Footnote: Some of the gloss was taken off when some Halifax and Bank of Scotland online customers could not see the full details of their accounts following the September 11th weekend, but in the grand scheme of things this was a minor hiccup.

Monday, 5 September 2011

Should basic bank accounts be subsidised?

Nationwide, the UK's largest building society, has entered the fray about the recent announcement by RBS that basic bank account holders will only be able to use RBS ATMs. See http://www.itsafinancialworld.net/2011/08/one-more-step-towards-end-of-free.html  RBS followed Lloyds Banking Group who made a similar move for their basic account holders. Mark Renison, the Group Finance Director has said that  the company was “very concerned” by the move which will create an “unsustainable position” for cash-machine users.

Citizens Advice Scotland CEO has also commented  “This is an extremely worrying development. Basic bank accounts are used by people who have difficulty managing their money. That’s the whole point of these accounts. It is still only three years since the banks were bailed out of their own self-inflicted mess by taxpayers’ money."

The concern is that some people with basic bank accounts will have to travel some distance to find an ATM that is operated by their bank. This is, of course true, particularly those living in more rural areas. What this does bring once more into focus is the role that the banks play in society. Are they commercial organisations or are they part of the social services fabric of this country?

With all the furore following the financial crisis there is both a call for the banks to be standalone profitable businesses with no call on government funding and to have greater clarity over the fees they charge for providing services, but also to be part of the social system subsidising the low-paid and providing bank services in unprofitable rural and urban areas. Clearly these two requirements are not fully compatible.

This then leads to the vocal extreme to call for all banks to be nationalised or mutualised, which of course makes no sense, but as the Independent Commission on Banking puts the final touches to the report coming out on September 12th 2011, it would be hoped that amongst the 350 plus pages they go some way to addressing what the role of retail banks should be in the future and how this is compatible with being commerciallly attractive businesses.

Monday, 22 August 2011

Capital proposal doesn't go far enough to make LBG disposal attractive

Whilst the discussions that Lloyds Banking Group are having with the Regulator, if successful, about easing the capital burden for whoever acquires the 632 branches it is disposing of would help they still don't go far enough to make this an attractive deal for shareholders nor give the purchaser the chance to be a real contender in the short term. The argument that Lloyds Banking Group is putting to the regulator is that because whoever acquires the business will get a senior and experienced banking team the risk should be lower and therefore the need to hold more capital than existing banks should not be necessary. Whilst this might reduce the amount of core capital the new bank would need to hold by around £1.5bn this is a mere drop in the ocean in comparison to the £25-30bn bridging loan that the buyer will need due to fund the gap between the deposits and the loans that the buyer will acquire.

The impact of having such a mismatch between the loans and the deposits is that the increased cost base to service the bridging loan will put the new bank at a significant disadvantage to the incumbants, so the aim of creating a new challenger to the Big 5 banks may well not be achieved.

To overcome some of this challenge Lloyds Banking Group could look at persuading the EU that either the timescales of the transfer of the loans be extended so that initially there is more balance between loans and deposits and also a slower ramp up of the need for wholesale funding, which could result in the cost of that funding being lower, or argue that in the interests of making the new bank more competitive less loans should be transferred. The danger with making these proposals to the EU could be that it would backfire on Lloyds Banking Group and the EU could insist that more deposits are transferred to the purchaser to significantly reduce their funding needs; something  Lloyds Banking Group would not want to do.

In terms of shareholders, given how low bank valuations currently are, given the funding issues and the lack of serious competition to buy the branches rushing through the sale at this time will not result in the best price being paid and in the long term does not represent good value.

Thursday, 18 August 2011

One more step towards the end of "free banking"

The announcement by state-owned RBS (Royal Bank of Scotland) that it would join minority state-owned Lloyds Banking Group in restricting the access of its basic bank account customers to only its own ATMs is yet one more step on the road to the end of so-called "free banking" in the UK.

Basic bank accounts are, as the name implies, a checking account where no overdraft is allowed and only a debit card can be used. They were introduced as part of a government initiative to reduce the number of unbanked and all the major banks were leant on to provide them as part of their contribution to society. Without access to more profitable products such as loans and overdrafts and amongst the high users of branches for transactions (attracting further costs for the banks) these are unprofitable accounts for the banks to run and have little potential to move towards profitability. In a pure commercial world these are the types of customers that banks would encourage to join other banks. It is therefore no surprise that neither RBS or Lloyds Banking Group would not want to incur interchange fees for these customers using non-RBS or Lloyds Banking ATMs, particularly as they are not able to pass those costs on to their customers.

With the increasing clamour for more transparency around bank charges it is almost inevitable that the concept of so-called 'free banking' will end and it will be the less well off, such as basic bank account customers, who are currently subsidised by those who hold large balances in their current accounts, will be disproportionately impacted by the introduction of fees.

As the Independent Commission on Banking finishes off its report they need to be aware of the implications of getting what they are asking for, particularly on the least well off.

Monday, 15 August 2011

Why Northern Rock is the smart option for Virgin

With both the Lloyds Banking Group 624 branches and the Northern Rock 70+ branches on offer, the Northern Rock option seems the smarter move for Virgin Money.

The key difference between the two deals is the amount of capital that will be required to make the deal work and the time it will take to break even.

With Verde there is a misbalance between loans and deposits, with far more loans than deposits. This means that whoever gets the deal will need to find somewhere around £30bn of bridging capital. With capital costing an all-time high this could prove to be very expensive and, as a result, significantly extend the payback period for the deal.

With Northern Rock the misbalance is the other way round with more deposits than loans. For a business that is focussed on lending, as Virgin Money is, this is the perfect situation. Having access to low cost funding, i.e. customer deposit balances, will enable the acceleration of the growth of loans. In addition Virgin Money would get 70 branches, which is sufficent to provide a high street presence, but not such an overhead as 624 branches. Ultimately not having too many branches is going to be an advantage since the fall off in both sales and servicing through branches is continuing to accelerate due to greater use of internet banking, call centres and mobile banking. As branch-based servicing and sales drops then branches become increasingly expensive to run, increasingly irrelevant and more importantly a drag on the business.

Whoever acquires Northern Rock is going to have to invest significantly in the Rock's digital presence. The current internet offering is basic and outdated at best, and does not provide a good customer experience. This is where Virgin has real strengths with both its focus on delighting customers across all its brands and its investment in new technologies including the internet and mobile. By combining the assets and experience of Virgin Mobile, Virgin Media and creating a rewards programme based around the other Virgin offerings, such as Virgin Atlantic, Virgin could be position itself as a truly different alternative to the traditional banks, particularly as there is increasing convergence between the banking, telco and payments industries.

Whilst much has been spoken and written about the airline-style branches that Virgin will open, it will be the creation of this experience in the digital world that will increasingly be key to the success of Virgin Money as a bank. Having a differentiated digital strategy for the bank defined including what the digital  experience with the human touch is going to be is going to be critical to compete.

A second critical requirement will be speed of execution. The buyer of Northern Rock will have significant  potential time advantages over the buyer of Verde, which will need to be exploited. Verde is undoubtedly far more complicated to execute with the separation from Lloyds Banking Group and the integration into the buyer's infrastructure. This will be a multi-year, complex programme. For the buyer of Northern Rock, there will be no mother ship to separate from , it is a far simpler organisation and therefore, whilst not being completely straightforward, it provides the opportunity to be out in the market with the new differentiated offering for some considerable period of time before the new Verde can be launched.

The undue haste with which the Northern Rock sale is being rushed through, in parallel to the Verde disposal, also makes the deal better for the buyer. With bank valuations having crashed and two eager sellers it is a buyer's market, so whoever buys Northern Rock is going to be able to purhase it at a keen price and is unlikely to pay any more than £1bn, around two-thirds of what the Government had been expecting to receive.

Of course Virgin Money is not the only organisation seeing the true potential of the acquisition of Northern Rock . JC Flowers, backed by funding from CIC, the Chinese state investment fund, is a serious contender. With Kent Reliance Building Society as their foundation for financial services in the UK, JC Flowers does have experience of the UK market, however, on the face of it, is not as well placed as Virgin Money to compete against the Big 5 banks should they win. However JC Flowers is no pushover when it comes to doing deals. It should be an interesting contest with a lot to play for.

For Virgin Money buying Northern Rock could be the transformational deal that could turn it into a real contender.

Wednesday, 10 August 2011

HSBC withdrawing from US Retail - another UK business sturggling with the US

HSBC announcing that it is to sell its $30bn US cards book to Capital One comes hot on the heels of its annoucement that it has sold 195 branches to First Niagara Bank. The new CEO Stuart Gulliver in his strategy statement had made it clear that he would either sell HSBC's US Cards and Retail Services business or close it down. He has chosen to do the former.HSBC will continue to grow its Premier retail banking business in the US, for the meantime.

Indeed it was Midland Bank's disastrous acquisition of Crocker Bank (perhaps the name of the bank should have been sufficient a hint) that weakened its postion to such an extent that it resulted in HSBC acquiring Midland Bank, so the lessons were there for HSBC to see, however they were not heeded.

HSBC acquired Household in 2003. At that time Household was renowned for being a subprime lender and had had several legal cases to answer for scalping (charging exorbitant interest rates). At the time the Chairman of HSBC, John Bond, reassured investors that Household's questionable history was behind it and that it was moving up into prime lending. One of the reasons that HSBC gave for acquiring Household was for the risk modelling tools, that were regarded as being market leading and would ensure Household had superior low default levels. This could be seen as a Gordon Brown moment (the end of boom and bust) for HSBC, particularly in retrospect when the billions of bad debt that has had to be written off as a result of Household are taken into consideration, for Household had not given up on the subprime market and continued to sell into that market for the high margins that could be charged.

HSBC is not the only UK bank to have had a painful lesson trying to become a major retail banking player in the US. Both Lloyds Bank and Barclays have had their fingers burnt in the past and neither seem keen to re-enter the US  retail banking market.

NatWest (now part of RBSG), racked up $1bn of losses on bad property deals when it acquired Bancorp in 1979 selling the business in 1995 to Fleet. RBSG went on to acquire Citizens Bank and Mellon under the leadership of Sir Fred Goodwin. Whilst the merged US operations have been seen to be slightly more successful, there is general agreement that the price paid for both of these was too high. It is also interesting that these two banks are more focussed on business than retail customers.

HSBC is just the latest of many UK businesses that have struggled to make it in US. Marks & Spencer acquired Brooks Brothers selling the business in 2001 for a third of the price it paid for it in 1988. Tesco, the UK's most successful retailer continues to struggle with its Fresh & Easy brand in the US having lost £800m since its loss in 2007.

So what is it with UK businesses and the US? As George Bernard Shaw observed the US and the UK are "two nations divided by a common language". This is as true now as it was when he said it. The challenge for British firms going to the US is that they are led into the false assumption that because the same language is spoken that what customers want, how they purchase andhow the markets work are the same as the UK. This is simply not true for retail or for retail banking. In banking the regulations vary from state to state, there are far more constraints on what retail banks can do, there is far more competition and the whole approach to securitisation of mortgages, as well all know now, is so very different from that in the UK.

It seems that when UK businesses go to the US, unlike if they were going to a country that they were unfamiliar with, they leave their commonsense on the airbridge before they go through immigration.

Monday, 8 August 2011

Bank strategies are all the same - execution is the difference

With the relatively recent changes of leadership of Santander (UK), HSBC, Barclays, Lloyds Banking Group and even RBSG (though Stephen Hester has been  in the role longer than his peers) and with a relatively dismal set of interim results to publish, all the CEOs  have been to keen to lay out to investors and the wider audience what their strategies are for their businesses and where they will be in five years time.

The strategies are remarkably alike and with few surprises. Indeed it would be a good party game for the very sad to strip the brand names out of each of their strategies and see whether anyone can guess which bank the strategy belongs to. We can only hope for shareholders' sakes that none of the CEOs spent large amounts with highly paid Strategy Consultants to put these strategies together, given that they are so alike.

Broadly speaking all the strategies focus on improving return on equity (ROE) for the banks and their individual business units to between 12-15%, getting the cost:income ratio down below 50% ( "positive jaws" now slipping into the common vernacular to the point where even children can explain what it means), selling/closing down business units that are non-strategic i.e. markets or segments that the bank cannot or doesn't want to dominate, focus on corporate banking which supports global trading along the primary and emerging ttrading routes, reduce customer complaints, rebuild customers' trust by improving the customers experience so they buy more, whilst driving out costs (mainly by laying off staff). Of course on top of that each of the banks in their strategy will emphasise the need to meet both international and local regulation, which will mean further rises in costs, which in turn will mean further reductions in staff.

So with all the banks pursuing fundamentally the same strategy (which raises the question of whether more players in the market will actually make customers feel there is more competition or just more of the same) the opportunity for differentiation is all in the execution. The bank that can execute on this strategy the fastest (assuming that each of the banks will execute it to the same standard) should come out as the winner.

However to execute on these strategies quickly and effectively will require a fundamental change to the way that banks organise and go about delivering.

The leadership of banks needs to fundamentally change. (see http://www.itsafinancialworld.net/2011/01/why-leadership-of-banks-needs-to-change.html ). From a culture of hierarchy and fear, where making a mistake results in  instant dismissal to a far flatter organisation where employees are encouraged to take more risks. It is ironic that at a time when the banks have been castigated for taking too many risks that to arise from the ashes the banks need to encourage their employees to take risks. Not financial risks, but more with the rapid pace of change in our society, brought about by the internet and for ever faster communications, the culture of banks of only releasing something to the customers when it is perfect and complete has to be changed to one where getting something out into the market and learning from it (even if the learning is that it wasn't a very good idea) has be part of the culture of the winning banks in the future.

This change of culture requires a different type of leader, particularly to breakdown the barriers that traditionally exist between the business and IT. Whilst Barclays has made the first step, by making the COO and the CIO of their businesses jointly responsible to the CEO for the business (see http://www.itsafinancialworld.net/2011/05/barclays-cooscios-joined-at-hip.html ), ultimately banks need to rcognise that their dependency on IT is total and every executive should understand the language of IT just as they understand the language of banking, and IT-literate COOs, CMOs and CROs will run their business with a much smaller, probably outsourced IT function. To be more radical CIOs should not have a seat at the table, there should be no CIOs. What the banks should end end up with is a small team of IT experts who are commercially and technically savvy who manage the relationships with the organisations (that has as their sole focus IT) who supply the IT services to the bank, and report to the COO.

Antonio Horta-Osario, the CEO of Lloyds Banking Group in his strategy statement has declared his intention to de-layer LBG, and he is to be praised for this, however there is even more radical change that is needed. It is not just the horizontal layers that need removing, but many of the vertical boundaries. With increasingly more business and transactions coming into banks not through the branches, the structure where the bank is structured by channels, where the branch typically has the largest budget and the loudest voice needs to be abandoned and replaced by a structure based around customer segments or brands. Product organisational units need to be either blown up or significantly shrunk as increasingly products are just subcomponents of a customer proposition. To be excellent at delivering change organisational barriers need to be literally brought down and far more co-location brought into play.

The concept of having standalone businesses based around products such as mortgages or cards needs to be abandoned given the stated intent of the CEOs to provide customers with a single, joined up view of their relationship with the bank, as well as by so doing releasing huges amounts of cost locked up in preserving the separation of the product businesses.

Product or proposition launches need to have their lifecycles shortened dramatically. When you look at what Zara has done to the fashion industry (moving from Catwalk to high street in 15 months to 6 weeks), then the banks need to be aware that if they don't address their time to launch then someone else will. With retailers such as Tesco coming into the market that retail mentality is not far away. This requires a fundamental shift in the ways that the banks operate internally with far more collaboration between the brands, marketing, operations, the channels, risk and compliance than is seen today. What is required is a fundamental shift toward a far more incubator mentality approach to product development - something that requires a fundamental cultural change for banks today.

The bank that has the courage to think and execute on fundamental change will ultimately come out as the winner. Some banks are better positioned to do this than others. Some banks are distracted by government shareholdings, forced disposals, crises overseas, etc. but these distractions will not always be there, so the question is whether there is the leadership in the banks who are ready to grab the opportunity and create clear blue water between themselves and the competition.

Friday, 29 July 2011

No end date for cheques is a big mistake

The commuting of the death sentence on cheques made by the Payments Council annouced early in July is both disappointing and a strategic mistake.

The original decision to set a target date for the end of cheques in 2018, with a final decision to be taken in 2016 to confirm or deny this, was taken in 2006 giving more than enough notice for the industry to prepare and come up with an alternative solution. By removing a date by which the cheque will finally stop the Payments Council has significantly relieved the pressure on the banks to find an alternative means of making Person-to-Person (P2P) and Person-to-Charity payments, the primary source of cheques today. In the long term this is not going to be to the advantage of either charities or small businesses.

Whilst currently personal customers who write cheques don't explicitly pay a charge for the cost of the processing of their cheques due to so-called 'free banking', with the increasing pressure that consumer groups, politicians and the Independent Commission on Banking are putting on the banks for greater transparency in charging, then it is almost inevitable that 'free banking' will end and customers will start being charged for the services they use. With the volume of cheques in the UK declining by 11% per year then inevitably the cost of processing cheques will inevitably rise, since the infrastructure required to process cheques is still going to be required despite the drop in volume. This will result in less of the donation to a charity actually going to good causes. For small businesses it will mean that they will either have to try and pass on the costs to the customer or, more likely, they will have to absorb the costs as their competitors stop accepting cheques. Either way this is not good news.

The consumer groups, the Federation of Small Businesses and the charities, rather than lobbying for the extension of cheques and Canute-like denying the inevitability of the demise of the cheque, should have been applying maximum pressure to the banks to come up with a viable, cost-effective alternative, rather than, as they have, letting the banks off the hook. In the short-term this is a seen as a populist move - in the long term it will be seen as a grave mistake.

Wednesday, 6 July 2011

EU and ICB 20th Century thinking hampering LBG disposal programme

The intent of both the EU and the Independent Commission on Banking by forcing Lloyds Banking Group to sell branches was to create greater competition in the UK banking market, however their 20th century thinking has made the possibility of this happening highly unlikely.

Both the EU and the ICB have defined the disposals in terms of market share and branches. By not understanding or not recognising the impact of treating the reductions in market share in deposits and mortgages as separate and unrelated topics they have given any new entrant an almost impossible task. They have made this task even harder by tying it to a large number of physical branches, whilst not recognising that increasingly branches are becoming irrelevant and a high capital burden for any organisation to take on.

Indeed, for example, indications are that NAB whilst interested in acquiring the customers sees the deal as far less attractive if they have to acquire the branches as well. A similar argument could almost certainly be made by Tesco.

To get an understanding of the impact of the mismatch between the deposits and the loans - it is estimated that there will be an initial £35bn cash shortfall between the deposits and the loans that the acquirer will have to deal with. Bidders will have to find a way to fund this. This £35bn makes the asking price of £2.5bn look like loose change. Whilst the Information Memorandum shows how the funding gap will reduce to between £14 and £17bn over time, that is still a significant amout of money. Building that into the business case for a new entrant means that the time to get to breakeven for any new entrant is going to be a long time, maybe too long for investors.

Add to this that the audit firms are warning that any bidder who puts in a bid  for the assets could lead to the auditors not being able to sign off on their accounts.

The FSA is also not helping to get this deal away by warning about the operational risk associated with migrating off the Lloyds systems. Even the CEO of Lloyds Banking Group, Antonio Horta-Osorio, agrees that what is being sold is not a good as it could be. In his strategy announcement at the end of June he laid out the need to significantly improve the efficiency of the Group's IT systems, the same IT systems that the buyer would be acquiring. Inheriting inefficient systems will hardly put the acquirer in a strong competitive position, let alone the costs, risks and complexity of migrating onto a new set of systems.

The combination of the funding gap and the operational risk could result in the buyer being required to hold a Tier 1 capital ratio  of almost 20%, double the level of the Big 5 banks. This would put the new entrant at a significant competitve disadvantage to the existing incumbants; hardly a way to increase competition!

Had the EU and the ICB understood the UK Retail Banking market in the 21st century they would have proposed a disposal based on matching deposits and loans and based on numbers of customers, and had branches as optional, giving a new entrant a far better chance of competing with the Big 5. However they didn't and the process is being forced through at pace for good reason on the part of LBG. By ensuring that  the bidding process is well underway before the ICB reports in September, it makes it far more difficult for the ICB to make the case to add further branches as their interim report suggested.

By the end of the second week of July first round bids need to be submitted. By the end of July the second round bids will need to be in. It will be extremely interesting to see how many, if any bidders, remain at that stage.

The reality is that the most likely outcome will be a floatation, a floatation of a cloned mini-Lloyds Banking Group. Given that it will be led by senior executives from Lloyds Banking Group, using the processes and systems of that Group, but hampered with more expensive funding and without the level of investment that Antonio Horta-Osorio has indicated in his strategy review, it is unlikely that this new player will do much for competition in the UK banking market.

For more detail see http://www.itsafinancialworld.net/2011/06/flotation-most-likely-outcome-for.html

Monday, 4 July 2011

Banks taking different approaches to advice

HSBC in the UK announced last week that they would be axing 450 advisors for the branch as a result of the regulation to ban commission and make customers explicity pay for advice, The Retail Distribution Review, RDR. This would still leave them with 1500 advisors in the branch network. The timing of this announcement on the day that Lloyds Banking Group announced its strategy including reducing staff by a further 15,000 could be coinicidental, but cynics would suggest otherwise.

HSBC is only the latest of the banks to indicate the impact of RDR on the way that customer's can expect advice to be offered following the implementation of the regulation.

There is no consistent approach to the way that the banks and the building societies see the post-RDR world.

Whislt the HSBC strategy is to be neither fully in the branch-based advice market or out of it in the post-RDR world (a rather half-pregnant position to take, some might suggest) Barclays was quick out of the blocks to announce that they would be withdrawing advice-based services from their branches for all but the most wealthy. See http://www.itsafinancialworld.net/2011/02/will-rdr-see-end-of-advice-in-bank.html.

Prior to their agreement to merge with Yorkshire Building Society, now Britain's second largest building society, Norwich & Peterborough Building Society announced that they were transferring their branch-based IFAs to Aviva, thus relieving themselves of the costs associated with bringing their IFAs up to the professional standards required by the regulation and gaining the scale advantages a bancassurance relationship with one of the world's largest insurance companies brings. There has been no annoucement by Yorkshire Building Society that they are reversing this decsion.

As part of the strategy announcement made by the CEO of Lloyds Banking Group, Antonio Horta-Osorio, at the end of June, he made it clear, in contrast to Barclays, that Lloyds Banking Group is committed to providing bancassurance to its customers through its ownership of Scottish Widows and a fundamental part of the growth for the Group is expected to come from significantly increased cross-selling of insurance and investment products to customers, however he did focus was on execution only and investment platforms, rather than branch-based advice in his announcement.

RBS/Natwest have announced that they will be offering the simplifed approach, which fundamentally means a limited set of products that they can sell, so caveat emptor - buyer beware!

Outside of the UK shores some very interesting experiments about how to deliver cost-effective advisory services are underway with banks as diverse as Bank of America and Bank of Moscow (see http://www.itsafinancialworld.net/2011/03/is-videoconferencing-answer-to-rdr.html ). Both of these banks are looking at the use of video-conferencing. The outcomes of these pilots are being closely watched by banks and mutuals across the globe.

What is clear is that there isn't total consensus on what the the post-RDR world will look like. What there is consensus on is that for the less well off there will be less access to advice and as a result many customers will be left unprotected and under-invested for their retirements at a time when the length of the average retirement and the amount of money needed to support yourself during that retirement is increasing.

Thursday, 30 June 2011

Banks enjoy Insurers turn in the spotlight

There will have been a collective sigh of relief from the banks that for once the spotlight has moved off them and onto the insurance companies. For so long the insurance companies have been vocal about how they weren’t responsible for the financial crisis and weren’t like the banks and therefore they shouldn’t have to face tougher regulation and scrutiny just because they are in the Financial Services sector. However what is emerging from the investigation into referral fees paid by claims companies to the insurers demonstrates that some of the behaviours demonstrated by the banks can be seen in the Insurance industry as well.
The high premiums for Payment Protection Insurance  subsidising and artificially depressing the true cost of personal loans (see http://www.itsafinancialworld.net/2011/05/ppi-sign-of-mad-bad-world.html), is seen to be replicated in the world of car insurance. Referral fees paid by claims companies to the insurance companies have artificially depressed the premiums for car insurance. Though whereas with PPI successful claims against the policies were very low (until the intervention of The Banking Ombudsman), claims companies have been far more successful in making the insurance companies pay out, particularly for spurious claims for unprovable whiplash, resulting in car insurance premiums rising, though not as much as they should.
Having been caught sharing customer information with the claims companies, AXA has set the example by declaring that they will stop the practice (though they have said that if the rest of the industry doesn’t follow suit they may have to restart).  The parallels with PPI continue with the new CEO of Lloyds Banking Group, Horta-Osorio, breaking from the other banks and agreeing to pay compensation for mis-selling. The other banks followed and AXA must be hoping that the other insurance companies will also follow.
The initial reaction from the Coalition Government has been that this practice is all right as long as the insurance companies declare it up front. However after strong opposition to this from the likes of Jack Straw, the former Justice Minister, the Coalition’s position appears to be shifting towards banning the practice.
The insurance companies are not entirely to blame. UK consumers are obsessed with cheapness and therefore implicitly encourage companies to appear to be selling products cheaply. Whether it be cheap personal loans, cheap car insurance or cheap flights. Indeed the charges made for the use of credit and debit charges (not related in any way to the cost of the transaction to the airlines) to depress the perceived price of the flights is only yet another example this collusion between the UK consumer and businesses.
To date this has been wilful self-deception on the part of the consumer. The banks, insurance companies, budget airlines and all the other organisations that participate in this game would be doing everyone a service if they moved to a transparent system where everybody is charged the full price for the service or product they are purchasing. On that basis customers would be able to really compare, but then those businesses who aren’t the best wouldn’t want to do it, would they?

Tuesday, 7 June 2011

A flotation the most likely outcome for Lloyds Banking Branches?

                         

                              Chelltenham & Gloucester Mortgage Quote                                                       

When it is reported that Lloyds Banking Group is to dispose of 632 branches it's important to be  clear as to what that actually means.

The number of branches being sold need to result in a reduction in Lloyds Banking Group's share of the current account market by 4.6 percent. These branches need to have average footfall, i.e. it can't be the least successful branches, and they can't be in the grottiest areas.

When the Information Memorandum (IM) is issued to potential purchasers it will contain a list of the branches. As Santander found out when they bought the 316 branches that Royal Bank of Scotland had to sell  as a result of their receiving state funding, bank customers don't like being sold by one bank to another like slaves in a market in Ancient Rome. There was a very vocal outcry and many customers decided to move their accounts elsewhere rather than be forced to become customers of Santander. What is not clear is what will happen if after the IM document comes out and customers find that they are to be sold if large numbers decide to move before the sale, thus diluting the reduction in market share by Lloyds Banking Group. Will Lloyds have to put more branches up or is the deal based on the impact of the market share reduction on the day that the IM is released or have Lloyds built in sufficient contingency in the number of branches they are selling to account for the defectors?

Whilst the talk is of selling the Lloyds TSB branches, there is more than just branches bundled in the offer.

For instance there is Intelligent Finance, the direct bank set up by Jim Spowart, which has no branches.

There is also the Cheltenham & Gloucester branches as well as the Lloyds TSB Scotland branches.

Certainly for the medium term it will have to include the infrastructure to support those branches - systems, data centres, processing centres, back office and staff. The buyer will need to bear in mind that whilst what will be retained will have been through a process of simplification and rationalisation as part of the integration of Lloyds TSB and Halifax, the parts that were never going to be retained e.g. C&G and IF will not have been through that process.

Once the process of acquiring this bundle of retail banking assets is complete there will have to be the multi-year programme of separating the purchase from the mother ship and, potentially, integrating it to the new owner, depending on who buys it and whether they have any infrastructure to integrate it to. This is clearly not a simple task and far more complex that the Santander acquisition of the RBS branches where not only was it one brand of branches but also Santander has a single, scaleable banking infrastructure already in place and experience of integrating many acquisitions across the globe.

Beyond the purchase of a large scale bank,  the issue for any acquirer will be funding the bank. Above the potential £3-5bn price that the disposal will cost there is the question of funding. With the expected mix of branches there will be significantly more loans (largely because of the Cheltenham & Gloucester branches being included where mortgages are the dominant product) than there will be deposits and therefore the purchaser will be expected to need bridging finance which is estimated to be in the region of £10-15bn.

The questions for any potentiall acquirer are how can they put together the funding, will their investors be prepared to wait for the many years before such a venture can break even and how can they assemble a team with enough experience to be able to pull this off?

Of course there is already one team already in place who knows more about the branches, the systems, the funding requirements, the staff and the challenges involved in separation and integration, and that is the team that Lloyds Banking Group has put together to run Project Verde, the disposal of the 632 branches.

In its leader, Paul Pester, you have the experience of setting up Virgin Money, the experience of separating the Bradford & Bingley branches from the rest of the former building society, the experience of integrating Alliance & Leicester into Santander and, most recently, as Managing Director of Consumer Banking and Payments at Lloyds Banking Group.

His COO is Helen Rose. Helen has led the integration of the retail banks of Lloyds TSB and HBoS, so there can be few people who know any more about the challenges involved in that and the details of the systems and infrastructure required to achieve this. Her previous role in the Lloyds TSB retail bank means that she knows the staff and has deep experience of how the bank works.

The combination of Paul Pester and Helen Rose are the dream team not only to sell the business, but also to run the new bank.

Given all the challenges just laid  out, and the fact that Antonio Horta-Osorio, the CEO of Lloyds Banking Group, wants to get the disposal of the 632 branches away as fast as he can, (for the very good reason that it will make it more difficult for the Independent Commission on Banking's recommendation that Lloyds Banking Group should be forced to sell significantly more to be acted upon), the prospects of the outcome being a flotation, rather than selling to a new entrant, look increasingly likely.