Showing posts with label Nab. Show all posts
Showing posts with label Nab. Show all posts

Monday, 18 August 2014

CBA proves the case for core banking replacement

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

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

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

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

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

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

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

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

Wednesday, 28 May 2014

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


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

During the financial crisis Nab had to invest nearly £1.5bn of capital into the business to shore up the balance sheet. There have been challenges with non performing loans as well as redress for misselling of PPI to add to the woes. As part of a plan to improve the performance of the business there has been a significant cost cutting exercise that resulted in the removal of 1,400 jobs and the closure of 29 banking centres. There has also been a withdrawal from London and the south of England.
However for many years both banks have been starved of any significant investment to improve them and to make them better able to compete in the UK market. It is not since the Brit John Stewart was Group CEO and fellow Brit Lynne Peacock was running the UK operations that any significant effort was put into innovation and growing the businesses in the UK. Indeed large parts of the strategy for the UK banks set out by Stewart and Peacock were reversed during the cost cutting exercise. (Recent news that Clydesdale Bank is to issue Britain’s first plastic £5 note hardly counts as innovation).
Nab in Melbourne have for a long time been very open about the fact that Yorkshire Bank and Clydesdale Bank are seen as non-strategic. The market has been sounded out for interest in acquiring the business. At one point it was rumoured that Santander was interested in acquiring the business but no deal has emerged. A key on-going challenge for the Nab Group CEO has been that there has been a significant gap between the value that the UK operations are held on the balance sheet and the price potential acquirers are prepared to pay. This situation has deteriorated even further since the crisis in 2008 with both bank valuations dropping and the interest in acquiring banks disappearing. For Nab, either no  Group CEO wanted to take that write off on their watch or the Board wouldn’t let him.
There is no doubt that there has been and continues to be a lot of dissatisfaction from analysts and investors about the financial performance of Nab in its local domestic market. It is seen as the laggard of the Four Pillars. The challenge for Andrew Thorburn is to turn around that perception. Whilst the UK operations are definitely not the highest priority in terms of fixing the business they are seen both as a distraction and requiring significant capital that could be better deployed elsewhere.
So as Andrew Thorburn starts his role as CEO in August 2014, will he do something to resolve this issue and what are his options for the UK operations?
The ideal outcome for the new CEO would be to sell the UK operations and minimise the write off. The question though is who would want to buy them?
On paper Yorkshire Bank and Clydesdale Bank could be challenger banks. They both have strong brands with loyal customers. The Yorkshire brand stretches way beyond the county boundaries. Clydesdale is seen very much as a Scottish bank and one that has managed to maintain its reputation far better than either Royal Bank of Scotland or HBoS, its two main rivals. This could make it attractive to Private Equity firms, for instance JC Flowers might wish to merge it with its OneSavings Bank. It could also be attractive to other Private Equity firms looking to establish a foothold in the UK retail banking market. However the timing for One Savings Bank is not good as they have already announced that they are to float and that is where their focus in the short term will be.
The challenge for anyone evaluating Yorkshire and Clydesdale is, apart from their customer base, what is there of value to acquire? Between the Yorkshire and Clydesdale they have 322 branches, a very similar number to the branches that Williams & Glyn (the challenger bank being created from the forced disposal RBS has to make) will have. However, as is becoming increasingly apparent to both established and challenger banks, the use of branches by customers is declining and therefore the value of having an extensive network of branches is reducing. As both RBS and Lloyds found out finding buyers for their branches was not easy with both, respectively, Santander and Co-op withdrawing their offers after long protracted negotiations. The additional challenge with the Yorkshire and Clydesdale branches is that significant investment by the buyer would be required to bring the branches up to  a standard customers expect today due to the lack of investment by Nab over the last few years.
If a new entrant was looking to acquire the Nab UK operations and they wanted to initially use the Nab IT platforms then if they wish to be competitive they would need to invest very heavily over the medium term on new platforms, as the Nab platforms are old and in need of retiring.
With a cost income ratio of 76% there is a lot of efficiency gains to be driven out by the right owner, but the question is the level of investment to achieve this and over what time period.
Given the level of investment that any new entrant would need to make in order to use the UK operations as a platform for competing in the UK retail banking market, the price that they would be prepared to offer is highly unlikely to meet the amount sitting on the Nab balance sheet.
Given Nab’s situation it is easy to understand why a couple of years ago Santander were rumoured to be interested in acquiring the UK operations. Santander has its own platform, Partnenon, and has a track record of being able to migrate bank accounts onto its systems – Abbey National, Alliance & Leicester and Bradford & Bingley. The challenge for Nab is that Santander is a distress purchaser and never knowingly overpays.
If Nab can’t sell Yorkshire and Clydesdale at an acceptable price then what about a flotation? Timing is a real challenge here as there has never been a time when more banks are coming onto the market. TSB, Aldermore, OneSavings Bank,William & Glyn, Virgin Money, Metro and Shawbrook have all announced intentions to come to the market over the next eighteen months. Investors are spoilt for choice. Along with the recent disappointing flotations (Saga, JustEat. AO, etc), albeit in other sectors, there will be a downward pressure on prices and consequently the amount of capital that will be raised.
Another option is to do nothing and let the two brands continue to operate as they are today, continue to reduce costs and improve performance with minimal investment and allow the business to slowly decline as customers move away to competitors when they are attracted by better offers.
There is no immediate need for Andrew Thorburn to make a decision about the future of the UK operations particularly given the uncertainty with the Scottish Referendum occurring in September 2014. The UK operations operate under a Scottish banking licence and a ‘Yes’ vote could create a long period of uncertainty and have a significant impact on the value of the UK operations.
However as a new CEO there is a grace period during which there is an opportunity as the new broom to look with fresh eyes at all the problems. It is an opportunity to announce write offs, set the bar and expectations low and then over-perform. Thorburn should take full advantage of this initial period of goodwill to be quite clear what his plan is for Yorkshire and Clydesdale to end the uncertainty for customers, colleagues and investors.

Monday, 21 January 2013

Crunch time for Clyne as Santander considers NAB bid


According to the London Sunday Times, Ana Botin, the CEO of Santander UK, is considering a bid for National Australia Bank's UK businesses Yorkshire and Clydesdale banks.

This comes after Santander withdrew from their bid for the Royal Bank of Scotland 316 branches late in 2012 (see http://www.itsafinancialworld.net/2012/11/for-sale-316-bank-branches-must-go-by.html ) giving the reason the state of the RBSG technology.

Santander in the UK is in the awkward position that having received £4.5bn of capital to complete the acquisition from RBSG from Santander Group in Spain and putting it on the UK balance sheet, the FSA has refused to allow the money to be sent back to Spain. This means that Ana Botin needs to decide what to do with it as Santander in the UK has one of the best capital ratios of UK banks.

Acquiring the UK operations of NAB would make a lot of sense for Santander. Yorkshire and Clydesdale banks would bring business banking market share, which aligns with Botin's ambition to grow a strong business banking business in the UK to take on the big four banks. Santander in the UK has a good track record for successfully acquiring and integrating UK banks starting with Abbey National and more recently Alliance & Leicester and Bradford & Bingley. There would be clearly significant costs savings to be had from Yorkshire and Clydesdale both from moving back office operations into Santander centres and from migrating customers onto Santander IT platforms. Santander has already invested in upgrading their systems to handle business banking in anticipation of the RBSG deal going through so this would be one way to get a return on that investment.

Cameron Clyne, the CEO of National Australia has on many occasions made it clear that he does not see the northern hemisphere operations as part of the long term strategy for the bank. Both Yorkshire and Clydesdale have been starved of much needed investment for many years. However Clyne has, up to now, been reluctant to sell the banks for the prices that buyers want to pay, not wanting to realise the inevitable writedown that would be required with the consequential drop in capital on the balance sheet at a time when capital is king.

However Nab is seen to be falling behind its domestic competitors (Westpac, ANZ and Commonwealth Bank) and Cameron Clyne needs to be seen to be doing something to change that position. Analysts in Australia have been calling for him to dispose of the albatrosses that are Yorkshire and Clydesdale banks.

Cameron Clyne may hope that by the story once again running that Santander is interested in Nab that this may start a bidding war with the likes of the resurrected NBNK and JC Flowers looking to ace Santander. However Santander has a reputation for never over-paying for acquisitions, indeed getting bargains as was the case with both Alliance & Leicester and Bradford & Bingley, so Cameron Clyne cannot hope to get a fat price from Ana Botin.

Should Santander get the Clydesdale and Yorkshire banks it will not be good news for most Nab employees in Scotland and Yorkshire since it will largely be the customers and the business banking skills that Santander will be keeping with the rest being discarded.

With both Cameron Clyne and Ana Botin needing to dmeonstrate to their respective markets their leadership it could be very interesting to see over the next few weeks and months whether a deal can be struck.

Friday, 7 December 2012

Commonwealth Bank of Australia run by Amazon?

 

No this isn't the latest bold move on the part of Amazon, acquiring one of Australia's so-called 'Four Pillars', but rather the extensive use of Amazon's cloud services by Commonwealth Bank.

Michael Harte, CIO of Commonwealth Bank of Australia (CBA) has spent the last four years and around AUD$1bn (£650m, $1bn USD) moving to a cloud-based operating model transforming the infrastructure and the way applications are delivered at the bank. This has included a considerable investment in the use of cloud services particularly those provided by Amazon Web Services (AWS). By so doing he has managed to reduce the percentage of the IT budget spent on infrastructure from 75% to 26%.

An example of where this cost reduction comes from is that whilst it used to take eight weeks to stand up a new server and several thousand dollars it now takes, according to Harte, eight minutes and 25 cents to do the same in the cloud. There is also a hugely significant reduction in the amount of energy that the bank directly consumes. No wonder large amounts of cost can be taken out.

Amongst financial services organisations there is a lot of debate about the use of cloud and whether it is safe or appropriate to use. There are some CIOs, such as Barclays European CIO, Anthony Watson, who are skeptical of the hype around the cloud and see it as fundamentally nothing more than large server farms, and there are others who are still in the early stages of deciding what to do about it. CBA and NAB (National Australia Bank) with their approach to virtualising the IT function (see http://www.itsafinancialworld.net/2012/10/do-banks-need-to-be-it-experts.html ) appear to be leading the way in implementing these technologies and  making the fundamental shifts to the IT operating model. However the use of Amazon Web Services by banks is not limited to those in the Southern Hemisphere, both Bank Inter in Spain and Italian bank Unicredito are using Amazon to host applications.

Customers may become concerned about the security of their personal data when they hear of  their banks moving onto the cloud, but Harte and other progressive CIOs are very clear about the fact that customer data will never be put into a public cloud. What this does mean is that the design of how applications and data are put into the cloud is absolutely critical, particularly as increasingly organisations implement cloud-based application such as the CRM solution, salesforce.com. Finding ways of exploiting the richness of functionality and the reduced costs of cloud solutions while leaving customer data firmly secured in the financial institutions private data centre is critical if the confidence and trust of the customer is not to be lost. This is particularly key for banks where the customer trust is at an all time low.

CBA has taken a measured approach to moving towards the cloud operating model starting with using it for development and testing, where no customer data is involved. Before Christmas 2012 CBA will migrate commbank.com.au, the internet banking platform onto Amazon's cloud and then it will be fair to say, with tongue lightly pressed into the cheek that Commonwealth Bank is being run by Amazon.

Tuesday, 13 November 2012

For Sale: 316 bank branches must go by end of 2013



In June 2010 it was announced that Santander was to buy the branches. Having made the offer, £1.65bn, and completed the local searches (regulatory approval)  when the surveyor's reports came back Santander decided that the RBSG technology estate was in too bad a state (or at least that's the reason they gave) and rather than negotiating a large discount walked away from the deal.

This leaves RBSG in an awkward position. They have just over twelve months to sell or float the branches. Hardly the strongest negotiation position for a seller to be in.

What will any potential buyer get? 1.8m customers, £21.7bn of deposits and 316  branches (2 of the original 318 mysteriously seem to have disappeared - possibly they were in Brigadoon), 240,000 small business accounts and 1,200 corporate banking relationships. This is the equivalent of 5% of the business banking market.

Why would anyone want to buy this business?

SME account customers on average have higher levels of deposits, have higher levels of personal account activity and are more profitable than other customers. They are also more inclined to use branches and want face-to-face contact. Traditionallly this has been a hard sector for new entrants as the Big Four (Barclays , Lloyds Banking Group, RBS/Natwest and HSBC) have dominated the sector and persuading customers to switch (because they have complex relations with their bank) has been difficult. Building an SME banking business from the ground up by encouraging customers to switch from their existing bank is a long slow process as Santander is finding. Therefore for an organisation wishing to enter the market or an existing player wishing to significantly expand their market share this should be highly attractive.

With bank valuations at very low levels, the example of what Cooperative finally got Lloyds Banking Group to settle for and the fixed timescales by which RBSG must agree a deal, this should be a buyer's market and the ability to get the branches for a snip is there. Whilst in 2010 Santander agreed to pay £1.65bn the expectations are that now this deal will be made at around £650m.

Who are the potential buyers?

None of the remaining three of the Big Five banks, Lloyds Banking Group, HSBC or Barclays, even if they wanted to, will be allowed to bid for the business on the grounds of their current market share.

Whilst Virgin Money was in the original competition for the branches, having subsequently bought the 'good bank' elements of Northern Rock, and having expressed initial renewed interest when Santander walked away from the deal, Virgin have effectively rules themselves out. Sir Richard Branson has said that organic growth makes more sense for Virgin Money at this time. Having had to raise large amounts of capital to fund the Northern Rock acuisition it would be very difficult for Virgin to return to the markets and raise even more capital to acquire the RBSG assets. Given the complexity of the integration project for Northern Rock underway it is not all surprising that Virgin has politely withdrawn from the sales process.

Next most often mentioned is Nationwide Building Society. With a track record of growing by the successful acquisition and integration of building societies (Anglian, Portman, Chesire, Derbyshire, Dunfermline to name a few) and positioning itself as different from the banks - more customer friendly and not tarred with all the scandals associated with the Big Five, Nationwide would be welcomed by many as a challenger in the SME banking market. As a mutual going to the markets to raise the large amount of capital could be a significant challenge, but The Cooperative was able to overcome this to acquire the Verde branches from Lloyds Banking Group, not least of all by getting the price significantly reduced.  A factor that may put Nationwide off the deal is the 1,200 corporate banking relationships. This is not a sector that Nationwide currently plays in. Whereas SME banking is often linked quite closely to retail banking and can share a common banking platform, corporate banking is quite different not only in the technology but also in the skills required from the staff.

Nationwide does have the advantage over other potential purchasers that it has spent the last few years investing heavily in a modern core banking system (SAP) which should make migration of the acquisition onto the new platform easier than for Santander. However the new platform isn't finished or fully proven yet, so there would have to be a quite lengthy period where Nationwide would be dependent upon RBS's platform.

JC Flowers, the private equity firm, is also seen as a contender. Having created its One Savings Bank vehicle from the acquisition of Kent Reliance Building Society and having put aside a £1.5bn treasure chest to acquire mortgage books, this money could be re-directed towards the RBSG branches. However the One Savings Bank vehicle is a very small operation and would need to be reversed into the far larger RBSG assets. Neither One Savings Bank or RBSG have modern IT platforms to run the business on so there would need to be a significant investment to make the business a real contender. Going for the SME banking business as the first serious entry into the UK banking market would also raise the risk for JC Flowers. What could be interesting to see is whether JC Flowers could negotiate for a different mix of the branches and customers more towards personal customers and mortgages to make it more attractive to them.

AnaCap Financial Partners LLP, a private-equity backer of Aldermore Bank Plc is also rumoured to be interested. AnaCap has partnered with Blackstone, the world's largest Private Equity firm, to buy banking and insurance assets. Aldermore Bank does not have any branches but still has assets of around £2bn. AnaCap and Blackstone having access to the capital to make this deal happen, however the shape of the deal would potentially be to back an MBO or floatation and to acquire the RBS IT platforms to run it. The question would have to be, given the IT problems that RBSG has had recently, what level of further investment in IT would need to be made to create a true challenger in the SME  and corporate banking markets?

Another private equity firm that could be interested is Corsair Capital where Lord Davies, the former CEO of Standard Chartered, is a partner and vice-chairman. There is no doubt that his experience would bring credibility to a bid, just as Gary Hoffman's presence lent credibility to the NBNK bid for the Lloyds Banking Group Verde branches. This would be very important as getting Bank of England approval for  the executive team of whoever acquires the business is going to be absolutely critical to the success of any bid.

On paper these assets could be attractive to National Australia who with their Clydesdale and Yorkshire Banks do have a significant focus on the SME sector and where there could be synergies. However the UK is not strategic for NAB and there is significant pressure on Cameron Clyne, the CEO of NAB, to dispose of his UK assets even at the cost of a significant writedown. If he were allowed to or wanted to take a longer term view then acquiring the RBSG assets and combining them with Clydesdale and Yorkshire Banks with a view to then selling them could be a way of getting a better return.

Handelsbanken has been making very success in roads into the UK SME banking market with over 150 branches and both high profitability and customer satisfaction. Whilst the addition of  316 branches would significantly increase their scale their preferred approach is grow organically so it is highly unlikely that they will enter the sales process.

Looking at other foreign players who might want to enter the UK banking market the European banks have their hands full in their domestic markets and closing their operations in the troubled European economies such as Italy, Spain, Portugal and Greece, so it is highly unlikely that one of them will enter the fray.

A long shot could be one of the Russian banks such as B&N Bank, Sberbank or VTB. They have the capital and the interest in expanding beyond Russia, but this would have to be a long shot.

Looking at the timescales, the integration challenges and the potential buyers the most likely outcome is a flotation or a management buyout of some form. RBSG needs to go through this process whether it is the final outcome or not as it is important for any potential buyer to believe that there is a competitive bidding process in order to protect the price that RBSG and ultimately the UK tax payer gets for these assets. Whilst Stephen Hester,  the Chief Executive of RBSG, sees the disposal of these branches as a 'distraction' and representing only 2% of RBSG it should be an interesting twelve months.

Update February 3rd 2013: According to Britain's Sunday Telegraph an IPO is now increasingly likely as no one has made a serious offer for the branches. Potential bidders have no been helped by a significant rise in the value of banks in the last few weeks. Whilst it is now most likely that a float will be the outcome, don't assume that this is not an elaborate ploy to force the hand of a potential bidder.

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Friday, 19 October 2012

Do banks need to be IT experts?



The news that Santander is walking away from the acquisition of 316 branches from RBS (Royal Bank of Scotland) due to delays in  the IT project to deliver the branches and customers to Santander once again brings attention to the dependency of banks on IT. This comes hot on the heels of the problems RBSG had with providing customers access to their Natwest and Ulster Bank accounts, the loss of access to ATMs that Lloyds and Halifax customers had recently and similar  periodic outages that Australian banks have continued to have over the last eighteen months.

There is no doubt that banks are hugely dependent upon technology to deliver services to their customers, however there are significant differences between banks as to how they address this need.

Santander for many years has been clear that having ownership of world class IT competencies is critical to the success of the bank and has underpinned the growth of their business. As the Executive Vice-President Operations and Technology at Santander CIO, Jose Maria Fuster, has said “At Santander, technology has always been considered a competitive weapon". In the early 2000s Santander put in place what is effectively their own internal IT company called Isban, which was responsible for building their core banking platform, Partnenon, and their core front end, Alhambra. These two platforms that have enabled Santander to deliver the synergies from acquisitions across the globe including in South America, and Abbey National, Alliance & Leicester and Bradford & Bingley in the UK. The strategy of having a single global platform for all their banks across the globe, whilst it has had its challenges, has enabled Santander to be one of the most efficient banks in the world. Others have tried to emulate this, HSBC and Citibank amongst them, but none have achieved it to the extent of Santander. The customers of RBS associated with the 316 branches would have been migrated onto Partnenon had the deal gone through to completion.

A bank that is taking a radically different approach to Santander is National Australia Bank. Gavin Slater, Chief Operating Officer, says "While we are an information technology driven company, we aren't an IT company". Banks today "do not have the expertise or R&D budgets" to invest in building its own systems. "I don't want to be owning boxes, I don't want to be owning networks, switches, software," NAB instead wants to be an orchestrator of technology services and introduce variability into its cost base by only paying for what it uses. Not only does NAB not own the kit sitting in its datacentres or the network infrastructure, but NAB looks to suppliers to carry out the systems integration.

The model that NAB has implemented changes fundamentally the role and the competencies required of the IT function. For a start it means that the CIO  should be able to spend far more time focussing on understanding the businesses requirements and both how technology can enable them as well as provide new opportunities for the bank. It also means that the CIO has to have exceptionally strong supplier management skills. The IT function will be dramatically different from that of an organisation such as Santander. It will be a far slimmer organisation with the principle competencies being relationship management (both internal business and external suppliers), enterprise architecture and innovation.

Santander and NAB are at two extremes of the models for IT for banks. Barclays went through the process of outsourcing significant parts of its application maintenance competency to Accenture only to bring it back in house again. Lloyds Banking Group has outsourced a large proportion of its application development and maintenance competency to a set of competing Indian offshore organisations. HSBC is more akin to Santander seeing IT as a core competency that it wishes to keep in house but, unlike Santander, largely offshore.

Whilst it has been accepted wisdom that IT is a differentiator for banks and that the intellectual property encapsulated within the software should be guarded and treated as top secret not all banks agree. With the increasing use of free and open source software banks such as Deutsche Bank and Credit Agricole have announced initiatives to share their software and their APIs with competitors and external software engineers much as Apple encourages programmers anywhere to develop apps for its App Store.

Deutsche Banks' Lodestone Foundation's aim is to “quickly and convincingly build the go-to non-profit open source foundation for financial markets”. That would mean attracting developers who are able to write software that can then be used by the whole industry. Sharing market software, Deutsche says, will save it and other big global banks some of the billions of dollars and euros that they would otherwise have spent building or improving on individual technology systems.

Credit Agricole has launched its CAStore where software engineers can download Credit Agricole APIs, build apps which customers will then be able to download. An example of crowdsourcing for application development.

As increasingly the major banks across the globe find their ancient systems creaking, failing and in need of replacement while at the same time the demands for technology-enabled solutions largely driven by the rise and rise of digital grow, the question bank CEOs and COOs need to be asking is whether the existing model for delivering IT is sustainable. As Gavin Slater of NAB points out when is a bank ever going to compete with the $2.5bn investment in R&D that the likes of Oracle makes?

Is NAB right? Is the Santander model no longer cost effective? Only time will tell, but one thing is sure banks across the world are watching and waiting to see what lessons they can take and apply.

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.

Tuesday, 1 May 2012

NAB withdraws to the north - the end of innovation?



The announcement by National Australia Bank (NAB) that they are to close 29 of their business lending centres in the south-east of England and withdraw back to their northern roots, abandoning 80,000 customers, marks the end of an experiment initially started by John Stewart, then CEO of NAB, and more recently Lynne Peacock, until last year CEO of NAB in the UK.

John Stewart and Lynne Peacock worked together for many years at the Woolwich Building Society, where they were responsible for launching the UK's first flexible mortgage, the Open Plan mortgage, combining a savings account with a mortgage account, offsetting savings interest against mortgage interest. Ironically the Open Plan account was based on Australian flexible mortgages. Such was the success of the Open Plan account that Barclays decided to acquire The Woolwich and centre their mortgage business around their acquisition.

John Stewart was seen as an entrepreneur,leading Financial Services industry development and was subsequently hired by NAB to lead the business in Melbourne. He brought Lynne Peakock along, initially in Melbourne and then to lead the UK business consisting of Clydesdale Bank and Yorkshire Bank.

Once again, looking at how he could make a small player in a crowded market stand out from the crowd, he and Lynne Peacock came up with a strategy to take the strong Yorkshire Bank brand down to the sout-east and take on the Big 4 banks in their traditional territory. They came up with an entrepreneurial model where banks managers were allowed to operate like a franchise, to be directly rewarded for the performance of their branches, or Business Lending Centres, to be able to make lending decisions with less referral to the centre and therefore quicker decisions for customers. Their Business Lending Centres look like airline lounges, customers could use them to conduct their own business when in town, creating a very different customer experience. They even went so far as to organise 'speed-dating' for buinesses, whereby SMEs could meet other SMEs in order to do business with each other introduced by NAB. At the time  NAB was, once again, seen as leading the way in terms of a new banking model, of a new customer experience and indicating where the banking industry needed to go. The model was successful with the lending book growing at above market rates.

Many of the ideas that he and Lynne Peacock came up with have been emulated by other banks such as Handelsbanken (see http://www.itsafinancialworld.net/2012/02/who-said-branch-banking-was-dead.html , http://www.itsafinancialworld.net/2011/06/forget-virgin-money-or-metro-bank.html ), where the bank manager is master of his own business. NBNK in describing the type of banking they want to launch also describes something that is very similar to the NAB model. Metro Bank has gone some of the way towards this as has Virgin Money.

The reason that this has not worked for NAB is twofold. Firstly the focus was on commercial property lending. Since even before 2008 the commercial property market was overheating and finally burst, but like HBoS, NAB continued to lend and has, as a result, got a disproportionate amount of bad loans. Undoubtedly one of the reasons why the book grew so fast was because of the franchise model where the managers were paid in direct relation to the loans they made, which encouraged lending and discouraged caution. The second reason is that whilst NAB provided an excellent customer experience the customers were not prepared to pay for that. This is something that many banks face in a heavily commoditised market where there is the perception of 'free banking'.

In many ways it is a great shame (not least for all the people who will lose their jobs), that what NAB set out to do has failed. Certainly a number of the players, such as JC Flowers and NBNK, who have stated that they want to enter the UK banking market should consider whether acquiring the UK southern assets of NAB should be an option, rather than acquiring all of NAB UK.

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.


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  http://www.itsafinancialworld.net/2010/11/these-things-happen-says-nab-ceo-after.html , http://www.itsafinancialworld.net/2010/12/nab-systems-down-again.html  and  http://www.itsafinancialworld.net/2011/01/nab-loses-systems-for-third-time.html . 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.

Monday, 31 January 2011

UPDATED: NAB loses systems for third time

To paraphrase Lady Bracknell (once again)  - to lose your systems once maybe regarded as a misfortune, to lose them twice looks like carelessness. What the poor woman would have said for losing the systems for the third time is unprintable.

On the first ocassion the systems were down for over a week (see http://www.itsafinancialworld.net/2010/11/these-things-happen-says-nab-ceo-after.html ).

The second time was much shorter for less than hour (see http://www.itsafinancialworld.net/2010/12/nab-systems-down-again.html# ).

This time access to internet banking was down for most of Monday 31st January, with the notice to use phonebanking leading to disappointment as that too was down for the morning.

In this day and age, with the increasing dependency by businesses and consumers on online, real time banking, unreliable systems are not only unacceptable, but could lead to significant customer defections. Whilst glitches with systems will occur, having adequate redundancy built in, well-thought through contingency plans and sufficient capacity to meet the surge of demand when systems return online are not optional features for any commercial business let alone a bank.

National Australia has announced some time ago that it is outsourcing its IT to IBM, let's hope for all its customers that this results in an improvement in systems reliability.

In a further update it has been reported that this was not the only problem that National Australia Bank has had in the last few days  - at the weekend and yesterday they suffered 'technical problems' when thousands of customers received old SMS messages and emails about their accounts.

Apparently  8000 to 10,000 UBank customers, a NAB brand, were resent old text messages and emails about their accounts.

One customer received 21 text messages telling him thousands of dollars were being moved from his account when, in fact, none had. Mr Wright said text and email messages were duplicates of messages they had previously received.

When will National Australia Bank's woes end?

Wednesday, 8 December 2010

NAB systems down again!

To misquote Lady Bracknell 'To lose one's systems once may be regarded as a misfortune. To lose your systems twice looks like carelessness!". National Australia's systems went down again earlier today (their afternoon) taking out electronic payments systems including ATM and POS and internet banking. This time, however they were able to restore the systems after only an hour. According to National Australia the two incidents were unrelated, however it sounds that a much deeper dive into what is going on in IT is required than the review by their auditors KPMG.

Bank of Ireland follows NAB in systems crash

You might think it was catching, but following National Australia's payments systems crash (which has still to be completely resolved two weeks after ocurring - see "These things happen" says NAB CEO after payments system crashes), Bank of Ireland's systems crashed yesterday preventing customer access to their cash accounts. ATMs and Point of Sales systems were impacted both in Ireland and in Post Offices across the UK. It's reported that the problem has largely been resolved, but that the amount of cash that can be withdrawn from ATMs might be restricted. Bank of Ireland said the problem was due to an "unforeseen technical issue".

We can all take some relief that it wasn't due to a "foreseen technical issue". Of course in comparison to National Australia, Bank of Ireland was able to recover their systems far more quickly and with far less impact on their customers. However should there have been any impact on customers? The criticality of ATM and POS systems and the impact on customers of any failure is such that these systems should be designed and built with a high level of redundancy and the ability to failover instantly without any impact on customers. This clearly wasn't the case for Bank of Ireland.

The Bank of Ireland systems are currently outsourced to Hewlett Packard. Perhaps it is telling that only last month Bank of Ireland announced that that contract was not being renewed and was going to be transferred to IBM.