Saturday, 23 June 2012

RBS pays the price of underinvestment as systems fail



It was for good reason that Fred Goodwin, the former CEO of Royal Bank of Scotland, was nicknamed Fred the Shred. Slashing costs and running a lean bank was what he was famous for. However the retail bank was not just lean, it was positively anorexic. RBS was very proud of the way that the merger with Natwest was delivered on time and below budget. They were also very proud of the fact that they had the lowest cost:income ratio amongst Western banks. However it is not difficult, in the short term, to have a good efficiency ratio if you starve the business of investment. In the longer term this lack of investment will come back to bite the organisation.

The impact of the lack of investment is being realised at RBSG (which owns the RBS, Natwest and Ulster Bank brands) as the bank has had one of the worst customer visible, publicly embarassing technology problems a UK bank has had in recent times. Many customers have not been able to access their accounts online and balances have not been correct due to 'technical problems'. Branches have had to extend hours both at the beginning and the end of days and even, shockingly, opening on Sundays. It couldn't have happened at a worst time of the month as this is the time when many salaries are being paid in and bank balances are typically at their lowest.

RBS, Natwest and Ulster Bank share the same systems. This was a significant part of the business case for the merger of  RBS and Natwest. The merger was based on migrating the Natwest systems onto the RBS platform. One of the reasons that the merger was completed on time and below budget was because of the no arguing approach that regardless of whether the Natwest IT was better it would be migrated onto the RBS platforms. This reduced costs which could have resulted from extended debates between the two banks as to the virtue of the systems. This philosophy came about following the Lloyds Bank and TSB merger where, after lengthy debate and two years pursuing a strategy of migrating onto Lloyds Bank's platforms, the decision was reversed and the Lloyds' platforms were migrated onto the TSB ones, which were far more modern and flexible than Lloyds'. The RSB management were determined not to make the same mistakes as Lloyds TSB had made.

The consequences of RBS, Natwest and Ulster Bank all being on the same platform is that the technical problem has impacted all three banks, albeit Natwest has been hit the most. The extent of the impact is further evidence of the lack of investment in re-architecting what are very old systems to give them greater resilience.

The impact of the lack of investment in RBS systems has not only caused the very public problems for customer service but also major delays in the handing over of the branches that Santander has acquired from RBS as a consequence of the forceed sale that RBS was required to make following taking state aid to stop it going under. Where the transfer of the branches was meant to take place in 2011 it is now projected to be completed in 2013. Not only is RBSG going to incur signifcant additional project costs for the separation, but also the amount that Santander will eventually pay for the branches will be substantially reduced due to the fall in bank valuations in the meantime. Separating the set of branches from the mothership has proved to be far more difficult than expected due to the archaic nature of the systems. These systems, many of the designers of which retired some time ago, were designed in a monolithic fashion rather than in a modern, modular way, meaning that it is the equivalent of removing a part of a limb from a live body nerve by nerve, vein by vein.

RBS is not alone in facing the symptoms of having creaking, old, underinvested systems. Nab (National Australia Bank) and CBA (Commonwealth Bank of Australia) have had a number of very public systems failures over the last couple of years, see http://www.itsafinancialworld.net/2011/04/deja-vu-as-nab-systems-down-once-again.html , however the difference is that both Nab and CBA have had major programmes underway for several years to replace their core ageing systems. Neither of these replacement programmes have gone smoothly, both are significantly late and over budget, but they will emerge with better systems, designed for the 21st Century and able to deliver a customer service designed with the digital age in mind.

The reality is that most of the major banks across the globe are facing the same problem of ageing systems and a reluctance to spend the money necessary to replace them. These are major programmes and for many CEOs will take longer than their tenure at the top of the bank, so there is little incentive for many CEOs to do anything about it.

Antonio Horta-Osorio, the Lloyds Banking Group CEO has recognised the challenge. On completing the merger of Lloyds TSB and HBoS he immediately kicked off a major simplification programme. He recognised that having all the brands on a single set of applications was only the first step towards making the bank ready for the 21st century. However simplification is not a core banking replacement programme, which is actually what is needed. It could make some difference. However it could simply be an exercise in rearranging the deckchairs on the Titanic. Simplification is like putting a patient with chronic coronary heart disease on a better diet and exercise routine rather than giving them the heart transplant they require.

Horta-Osorio came to LBG from Santander where the importance of the core banking system is recognised as being key to delivering the bank's strategy. Santander has its Partenon platform that has been instrumental in enabling the success of many of Santander's takeovers of banks across the globe including Abbey National, Alliance & Leicester and Bradford & Bingley.

Out of the public humiliation of RBS and the financial impacts of the delay in transferring the sold branches to Santander it is to be hoped that some good will come. Stephen Hester, the RBSG CEO should take this opportunity to take a long hard look at the investment that is needed to get RBS the banking systems that it needs to service its customers in the 21st century.

Friday, 8 June 2012

M&S to take on high street banks



UK retailer Marks & Spencer is to launch M&S Bank, rolling out 50 branches over the next two years. A 50:50 joint venture with HSBC with current (checking) accounts to be launched in the Autumn and mortgages 'later'. This gives M&S a head start on Tesco who has had to delay the launch of its current accounts until 2013. Ironically these two 'new' retail-based banks are frequently adjacent neighbours on retail parks across the UK, where the big four high street banks are rarely to be found, so it maybe that they find themselves competing with each other rather than taking on the big boys.

Of course neither Tesco or M&S are really new entrants into Financial Services both have been offering products for some time. M&S first started offering FS products in 1985 and has the successful &more credit card, but this will be the first time it is calling itself a bank.

The timing of M&S's announcement is good. Not only does it come after a set of disappointing results for its retail business, it comes at a time when the high street banks are both unpopular and mistrusted. This can only be good for M&S with it's slightly older, more affluent and loyal customer base.

With the opening hours of the branches being the same as the retail stores and the initial prototypes of the branches looking very retail, calm and sophisticated and, as they are keen to point out, with fresh flowers, this will, to coin their phrase, not be any bank it will be a Marks & Spencer Bank.

But will it really shake up competition in the banking sector? Fifty branches over two years is not that many. Given that Virgin already has 75 branches (since its acquisition of the 'good' Northern Rock), Yorkshire Building Society has 227, Handelsbanken (the least well known, but the bank with the highest customer satisfaction) has over 100 branches and whoever (Co-op, NBNK or a flotation) acquires the Verde branches, that Lloyds Banking Group has to dispose of, will have 632 branches, just like Metro Bank with its 12 branches, this is not going to be an immediate threat to the high street banks.

Certainly in the short term it will not make a significant difference to the M&S share price. However it has every chance of being a success that will build over time. M&S has decided not to take the route that Tesco is finding to be so challenging of going it alone without a bank behind it. M&S by partnering with HSBC is able to stick to what it does best - retailing while HSBC can focus on managing the banking operations. The CEO of M&S Bank, Colin Kersley, was with HSBC for 30 years, so he knows the bank extremely well. The UK CEO of HSBC is Joe Garner, who spent his early career with Dixons. The two organisations have worked together for a number of years (HSBC acquired M&S Money) and understand where each is coming from, so this has to be a significant advantage.

Overall from a consumer perspective this move by M&S is to be welcomed. Whilst Joe Garner is quoted as saying that this is 'the most significant innovation that HSBC has carried out since First Direct' only time will tell whether he is right.