Thursday, 28 April 2011

Why the ICB recommendations make it more difficult for new entrants to retail banking

The interim recommendations of the Independent Commission on Banking suggest that Lloyds Banking Group should dispose of significantly more than the 600 branches that they have already been instructed  by the EU to sell for taking state funding and that these branches should be bundled together with the sale of Northern Rock to create a really significant competitor to the big 5 banks: Barclays, RBSG, HSBC, Lloyds Banking Group and Santander. Whilst this might make sense in theory, practically rather than making it easier for a new entrant this recommendation, if followed through, would make it far more difficult.

For a start whilst the Commission might think that one retail bank is like another one and therefore one branch from a bank is much like a branch of another, the truth is anything but that. Bundling Lloyds Banking Group's branches together with Northern Rock's make the integration for any purchaser easier nor does it make the integration simply twice as complex, but would make for a more complex integration than anyone has tried before. The branch systems aren't the same, the branch processes aren't the same, the employment contract's aren't the same and the list goes on.

Santander, which has more experience than any other bank in integrating acquisitions, (still completing the final integration of Abbey National, and currently integrating Alliance & Leicester and the branches of Bradford & Bingley) has recently announced that the integration of the mere 318 branches that it bought from RBSG, as a result of the forced disposal RBSG had to make for taking state funding, is proving to be more challenging than originally thought. The deal was announced in August 2010 and, at that time it was stated that the integration would be complete by the end of 2011, 16 months later. The latest estimate is that it will now complete at the end of the first quarter of 2012. This was the integration of only just over half the number of branches that Lloyds has been told to dispose of let alone the additional 'significant' number that the ICB is going to recommend on top of that plus the 70 Northern Rock branches.

It doesn't take much imagination or practical experience to understand how much more difficult the proposed integration would be, not only because of the sheer scale, but also, since none of the current big 5 banks will be allowed to bid for the branches, the lucky winner will have little or no experience of operating this size of bank in the UK, nor are they likely to have an existing infrastructure (unlike Santander) that will scale to handle this size of operation.

Funding is another signifcant issue that the ICB does not appear to have considered. Putting aside the amount of capital that will be required to purchase the branches (not something to be taken lightly), there is a question of financing the gap between the deposits bought and the loans acquired. Just for the disposal of the 600 Lloyds Banking Group branches it is estimated that the purchaser will need between £15-20bn of bridging finance. This is because the 600 branches come with far more loans than deposits. There aren't many new entrants who would want to take on the cost of the capital to buy the branches and a £15bn overdraft. Consider how much more capital and bridging finance would be required for the additional branches and Northern Rock.

By suggesting bundling together the LBG 600 plus the LBG additional branches plus Northern Rock, the ICB is effectively eliminating any truly new entrant and rather opening up the opportunity to only a large foreign bank, which is hardly going to encourage the new competition that the ICB is saying that it is seeking. 

HSBC to quit Russian Retail Banking

HSBC has announced that it is pulling out of retail banking in Russia. This follows on the heels of Santander who exited Russian retail banking in December 201 by selling their consumer lending business to Orient Express Bank and Barclays who announced their exit from Russian retail banking in February 2011 having written down £243m on an acquisition.

HSBC and Santander are two of the most successful Western banks in emerging markets with both being strong players in Latin America, and HSBC being very well established in Asia with Santander building it's presence there. (See ) It is therefore very telling that both of these banks have decided that domestic competition makes it too tough and not profitable enough for them to continue to offer retail banking in Russia. Certainly building a significant presence in Russia, given the vastness of the country and given that most banks still believe that having a physical branch network is key to winning in retail banking, is a significant investment and capital demands from existing markets rising, it is understandable how they might have come to this conclusion.

Interestingly HSBC's and Santander's views are not shared by the French banks, with both Societe Generale and BNP Paribas continuing to invest in and grow their retail banking presence in Russia. Citibank has also built up a strong retail presence in retail banking in Russia. This was under the leadership of Frits Seegers who then moved from Citi to Barclays and repeated, less successfully, the opening of retail branches in Russia.

To date Santander does not seem to have made a strategic error in their expansion plans, so it will be interesting to see how this one plays out.

Friday, 15 April 2011

Deja vu as NAB systems down once again!

National Australia once again had its payments systems crash last night meaning that salaries weren't paid and payments between Nab and the otrher Australian banks are not being made. This comes after a major outage last November which lasted over a week see ,  and . It would appear that the original issue is still not resolved.

As governments around the world look to ring fence retail banking so that should another crisis happen the core banking of paying individuals and consumer deposits are protected, such outages as these should be a higher priority for without the confidence in the resilience of basic banking ring fencing retail banking becomes an irrelevance.

In a reflection of the Bank 2.0 world we live in, NAB did at least inform customers via Twitter and Facebook of the problems and the progress on fixing the problem. All credit to NAB for their use of social media, but a focus on getting the basics right has to be the number one priority now.

Thursday, 7 April 2011

Time for bank CIOs to become CEOs

Whilst banks overall are not great at PR, Bank CIOs make the Bank's PR look good. IT departments are forever the whipping boy for the business, the quoted reason why banks lack agility and respond to changes in the market, forever failing to deliver projects to time and budget and costs continually increasing, when Moore's Law says that they should be rapidly decreasing. It's no wonder there is so much outsourcing to third parties when there is such discontent with the internal IT function.

However it doesn't need to be this way. CIOs need to be getting onto the front foot and taking a business-friendly approach to the way that IT is run and services supplied to the business than the outsourcers who offer to take on the business of IT cheaper, better and with greater resilience.

Without getting to IT cost tranpsarency, how can the business units be expected to have trust in the recommendations and decisions that the CIO makes?

Many other business units of  banks operate P&Ls, but often IT doesn't, rather it is seen simply as a cost centre and there is no granularity about the cost and how that relates to the business units. Having said that, it doesn't mean that it makes sense or is useful to share the detailed costs of IT with the business.

One of the big difficulties for many CIOs when challenged about the cost of the services that they deliver is that they don't have the numbers available in a business-friendly way to enable the business to understand the true cost of providing services to the bank's customers and therefore being able to make intelligent choices about how they want to consume IT services.

Whereas every IT department will have a General Ledger where entries are made, the structure of these accounts is often designed from IT's perspective with categories such as hardware, software, network and people. Increasingly with the changes in the IT industry and alternative ways of delivering, such as cloud computing (Infrastructure as a service, software as a service, private v public clouds), off-shoring, outsourcing and the green agenda, it is becoming essential to be able to compare the costs of delivering these services.

Fundamentally there needs to be a transformation in the way that IT looks at its finances to being more commercial, and in the culture of IT departments to being far more outward looking and customer-centric. This shift needs to be underpinned by taking far more of a management accounting approach to the finances of IT. Bank CIOs  need to become the CEOs of the IT services businesses that they run - an equal with their fellow business unit MDs.

The end game is to have a set of costs that provide the fully loaded cost of  delivering a business process e.g. what is the IT cost for completing a customer's application for a mortgage from initial enquiry to release of funds. This cost would include an appropriate share of the cost of the use of applications, infrastructure (storage, processor, network, power consumption, data centre and office space, etc.), IT staff and overheads.

An example of an organisation that is taking this approach is Bank of America, who with the rolling out of videoconferencing into their branches (see )  is including the cost of not only the hardware but also the Telepresence licencing, the power consumption and the communications cost to work out the cost of sale using this channel.

Many IT organisations have made or begun to make the transition from a service delivery to a service management approach to IT. ITIL encourages this and, for many organisations, the first step along this path is to create a Service Catalogue. However the Service Catalogue really only becomes useful when there are fully loaded costs associated with each service.

However to get to a full financial model involves a significant amount of work and time, so the pragmatic approach is to take small steps towards this. The easiest way to break this work down would be to pick off a product or service such as network or mainframe, however doing that does not bring about the fundamental shift from internal IT focus to business focus, so a better alternative would be to take a single business process. For instance rather than going for something as complex as an application for a mortgage, a balance enquiry could make a simpler way to demonstrate transparency and build trust with the business, particularly if what is modelled is the IT cost of a balance enquiry over different channels e.g. branch, telephone banking, internet banking or mobile.

By changing the dialogue with business, by being able to explain costs in the terms they understand, CIOs operating as CEO of IT Service Businesses will move from supplier to true business partner.

Monday, 4 April 2011

Musical chairs in the UK banking world

It's musical chairs in the banking world. First Joy Griffiths announced that she was leaving Lloyds Banking Group  from her role responsible for Lloyds TSB and Bank of Scotland branches to go to be Managing Director of Experian Analytics. (See )Then Lloyds Banking Group announces that they have hired Alison Britain from Santander to replace Joy Griffiths (see ). Finally Santander have announced that they have hired Charlotte Hogg from Experian to replace Alison Britain. Financial Services in the UK is a tight knit community.

Santander appears to be the big loser here with the greatest outflow of talent, for above the significant number of defections to Lloyds Banking Group, they have also lost a senior executive to Nationwide and now two further ones to Virgin Money. Mark Selby, former COO of Abbey and responsible for the integration of Alliance & Leicester and Bradford & Bingley into Santander, has left to become the COO of Virgin Money and Chris Daniels has left to become Group Property Director for Virgin Money. These are significant moves on the part of Virgin Money as it significantly increases the experience of retail banking operations and specifically branch banking on the executive team. This is an indication of Virgin Money's seriousness about acquiring one of the many retail banking businesses coming onto the market in the UK.

With all the outflow of executives from Santander, some questions must be raised as to the viability of the flotation of Santander UK planned for this autumn.

The music may have stopped for the moment, but it won't be long before it starts again.