Showing posts with label verde. Show all posts
Showing posts with label verde. Show all posts

Thursday, 24 April 2014

The challenges facing the next RBS CIO

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

Wednesday, 15 May 2013

Should Co-op exit banking?

As incoming CEO, Euan Sutherland, reviews his options for raising potentially in excess of £1bn extra capital, given the issues he faces, rather than considering selling off his funeral business (a recession proof, profitable business), a logical option would be to look at selling off Co-op Bank.

The problems that Co-op Bank has both with the quality of the debt and the IT sit squarely with the misguided acquistion of Britannia Building Society. It is Britannia's foray into commercial property that has resulted in the downgrading of the Co-op's debt. It is the poorly executed integration of Britannia into the Co-op bank that has cost more, taken longer and has not left the Co-op with a viable banking platform. Both of those facts not only de-railed the Verde deal but should have been enough of a warning to both the Treasury and the FSA (as the regulatory body at that time) not to proceed with the Co-op as the preferred buyer of Verde.

A question that Euan Sutherland needs to answer as part of his strategic review is does it make strategic sense for the Co-op to own a bank? If it does, what will it cost to take what he currently has and turn it into a significant competitor in the market?

Tesco has invested heavily and continues to in Tesco Bank. It is taking more time and costing a lot more than it  was orignally envisaged to re-launch it as a full service retail bank. However its starting position was and is very different from that of the Co-op. For a start Tesco is world class at customer analytics and applying that to its business. With the launch of the Tesco Clubcard and the acquisition of the customer analytics business Dunhumby, Tesco has a wealth of information and insight about its customers which it already leverages and with the launch of current accounts and mortgages will be able to leverage further for its bank. Secondly Philip Clarke, the CEO of Tesco, recognises that digital is the second curve (the first curve being the stores) that Tesco must invest in to win in the market. Having a large estate of stores is not enough anymore to win in Financial Services or Retail. Tesco is investing millions in digital for both marketing and selling. With Tesco Mobile as part of its offering it is also very well positioned to lead in mobile payments and banking.

Although Sainsbury's was the first amongst the UK supermarkets to launch a bank, it allowed Tesco to overtake it. With the announcement by Sainsbury's that they have bought out Lloyds Banking Group's share of Sainsbury's Bank and will be investing £260m over the next 42 months to put in place a new banking platform, the seriousness of Sainsbury's intent to become a significant competitor for financial services is clear. Like Tesco, Sainsbury's will leverage the synergies from their stores and the customer insight they get from the Nectar card. Like the Tesco Clubcard Nectar will be a critical part of it's differentiated offering. Sainsbury's too is investing in digital (though it lags Tesco) and recognise the need to deliver omni-channel propositions i.e. allowing customers to interact with the bank over multiple channels simultaneously. Sainsbury's will in many ways be playing catch up on Tesco, however in comparison to Co-op are still significantly ahead.

Co-op still needs to complete the integration of Britannia Building Society, would need to invest significantly in digital for both the retail and banking offerings to even compete. To  be in a position to leverage the synergies between the bank and the rest of the Co-op Group will require significant investment beyond that required to meet regulatory requirements.

When Euan Sutherland looks at all of this, the capital he will need to inject onto the bank's balance sheet, the  size of the investments he will need to make to even get close to Tesco and Sainsbury's in terms of financial services, the time it will take and the likely returns he will need to consider whether this really is the best place for both his customers and members to place his bet.

However who will be interested in buying and how much they will be willing to pay for Co-op Bank with it's junk status debt given that there are at least two other banks available on the market - the 316 RBSG branches and the 632 Lloyds Banking Group Verde branches? There is no doubt that Euan Sutherland has some tough decisions to make in his first few months.

Monday, 23 July 2012

Is Co-op really a contender with Lloyds' Verde?


Lloyds and the Co-op?


What Co-op is acquiring is the 632 branches that Lloyds has had to sell, with all the Lloyds TSB Bank branches in Scotland, the Cheltenham & Gloucester branches across the UK and the rest made up of other Lloyds TSB branches. They will also get the CEO of Verde, Paul Pester, his team and the management and the staff for those branches. Lloyds Banking Group will provide and manage the systems for the foreseeable future.

What does this mean? Starting with the customers there is no guarantee that the customers for those branches will move to Co-op. Whilst Lloyds Banking Group can't market to those customers to transfer their business back to Lloyds, customers are not obligated to stay and could easily move their accounts to another bank, including Lloyds. Evidence of this was seen when Santander bought the RBS branches that had to be sold. Customers did not like the idea of being sold and many have moved their accounts before the transaction went through. As a consequence the value of the deal to Santander has gone down significantly.

Looking at the leadership and staff of the new bank - it is the old leadership and staff. Many of these people will have been at either Lloyds or TSB for many, many years, so there is no guarantee that they won't continue to deliver banking the way that they always have done. Indeed the systems will enforce the processes and incentives of the existing Lloyds Banking Group. Verde, or TSB as it will be branded, could be just a mini-me Lloyds Bank, without the scale to compete.

Having Verde run on the Lloyds' existing systems for the foreseeable future has two distinct disadvantages for the Co-op.

Firstly, the acquisition benefits of rationalising systems and processes that usually underpin any M&A deal are not going to be realised. Instead the Co-op will end up running their Co-op and Britannia branches using the Co-op systems and processes (assuming the completion of the migration of the Britannia systems onto the Co-op platform) and the TSB branches using the Verde systems and processes. Many of the synergies that the bank would have hoped to realise from their 1000 branches will not be achieved until they can move onto a single platform. Due to the complexity and the cost of the Verde systems the migration has been kicked into the long grass. The Co-op will have all the overheads of having to support three brands in the market, Co-operative, Britannia and now TSB. Not only is there expense in running multiple brands, but significant scope for confusion amongst customers. Rather than having a new 1000 branch contender there will be three brands fighting to compete for customers all with less scale than the Big 5.

Secondly Antonio Horta-Osorio, the CEO of Lloyds Banking Group, recognises that the systems underpinning Lloyds are simply not good enough to compete in today's retail banking market. This is why he is spending hundreds of millions of pounds on the 'Simplification' programme to improve the efficiency and effectiveness of the banking systems to enable them to compete in the mutlichannel, always available, digital world. However those improvements will not be applied to the Verde systems. To use an Olympics analogy it is like your older brother giving you his old Nikes while he is upgrading to the far superior ones. Who would you expect to win in those circumstances?

With the size and scale of Lloyds Banking Group there is far more scope for investment in making the retail bank fit and efficient than there is for the Co-op. Not only that, when the Co-op wants to make upgrades to their TSB systems they will be dependent on Lloyds Banking Group to make those changes for them. Whilst Lloyds can be recognised for its history and experience of  excellence in retail banking it is not well known for its provision of IT services and certainly not as a commercial provider of IT services. The Co-op may find itself held back by the speed and agility of not only its systems but also its IT services provider.

The celebrations of the Co-op creating a contender of scale to compete against the Big 5 banks may be a little premature.

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.

Tuesday, 20 March 2012

Will the sale of Verde by Lloyds Banking Group to the Co-op complete and it is good for consumers?



The announcement by Lloyds Banking Group at the end of last year that LBG were in exclusive talks with Co-operative Financial Services (CFS) for the sale of the bundle of  632 branches and brands that is referred to as 'Verde' raised the question of whether this is good for UK banking and consumers. Clearly Gary Hoffman, Chief Executive of NBNK and former CEO of both Northern Rock and Barclaycard, didn't think so. “Lloyds has made the wrong decision. There is no question that the execution risk with the Co-op is much more significant, and over a very short period of time this will be proven". It could be argued that this is just sour grapes, given that Gary Hoffman's NBNK (a vehicle with significant institutional backing set up to buy one or more banks) was also bidding for Verde and didn't make the cut, however Gary Hoffman is one of the most experienced retail bankers in the UK and led Barclaycard to be one of the most successful credit cards businesses in the world, so he does know what he is talking about. With the expiry of the exclusivity agreement and the invitation of NBNK back into discussions, Gary Hoffman may yet prove to be right.

Merging Verde with the Co-operative ticks all the boxes for the ICB (Independent Commission on Banking) in that it will create a competitor with around 7% market share in current accounts and is building on an established player, both recommedations made in the ICB report. However that still doesn't answer the question of whether it will really become an alternative to the Big 5 banks.

Unlike Virgin Money (see http://www.itsafinancialworld.net/2011/12/is-northern-rock-decision-good-for.html ), the existing Co-operative Financial Services is largely undifferentiated from the Big 5 banks. Whilst it makes a lot of its ethical stance it was still caught up in the Payment Protection Insurance (PPI) misselling scandal, writing off £90m, which, in fairness, is a lot less than the major high street banks, but is still significant. CFS is hardly the most customer centric organisation. Until very recently the payment terms on its many charity-branded cards were so tight that unless you opened the credit card statement on the day you received it and made payment within a couple of days it was impossible to avoid charges for late payment. Hardly a customer friendly or ethical way to operate. This has now been addressed.

If you look at the high street presence of the combined CFS and Britannia branches (CFS acquired Britannia Building Society in August 2009), the offering and customer experience is dated and certainly no better than the major high street banks. With the addition of the Verde branches CFS will have around 1000 branches.

In the digital space CFS has in the past won many awards for its direct bank, Smile, but the lack of investment in this operation  has meant that it has not kept up with what customers are looking for from a digitally-enabled bank and is not sufficiently different to attract customers away from more traditional players. The same could be said of Intelligent Finance, the brainchild of Jim Spowart, which CFS acquires as part of the Lloyds Banking Group Verde bundle.

For CFS to really become the challenger that the ICB is so keen for it to be then CFS needs to significantly invest in fundamentally changing the branding and customer proposition that the combination of Co-Operative Financial Services, Britannia, TSB, Intelligent Finance and Cheltenham & Gloucester brings. With such a diverse group of brands with different values and attracting different segments it will not be clear to customers what it stands for and why they should engage with it. CFS will need to simplify, move to a single brand with a strong customer proposition which is more than just being an alternative to the other banks. It needs to design a customer-centric bank where branches are but one part of the overall way that customers can engage, digitially enabled and fit for 21st Century Customers. That requires a lot of investment, above and beyond the capital required to acquire Verde, the hundreds of millions required to integrate Verde whilst still keeping the lights on, and ensuring the Verde customers don't defect before they are transferred. With no shareholders to turn to and the wholesales markets still not working efficiently finding the funding at an affordable price is an enormous challenge for CFS.

Over the following few months as the negotiations continued with Lloyds Banking Group, CFS got to understand more about what it is undertaking, but still has to establish whether it can raise the funding and only then will it become clear whether CFS is going to be able to close the deal. If they do, but don't invest in the transformation, then what the UK consumer will get is just another high street bank and the hopes of a challenger that the ICB had will be just that, hopes. If CFS embraces the challenge then the re-born CFS could be a really exciting, ethical, customer-focussed challenger and the Big 5, as they wrestle with implementing ring-fencing, should be seriously worried.

The concerns don't only lie with the Co-op. For Lloyds Banking Group having just come off the back of spending nearly £4bn on the integration of Lloyds TSB and HBoS, the question of just how much it will cost to separate what constitutes Verde from the mother ship is concerning. Anything over £1bn would be a real challenge for LBG given everything else they have on their agenda. The Co-op target systems are not ideal, particularly as they still haven't completed the integration of Britannia, so increasingly the deal may be looking less attractive to LBG.

As is increasingly looking likely they reverse their existing banks into Verde sticking with the LBG systems, they will end up with superior systems than they have today. Unlike RBSG, the Lloyds Banking Group systems, based on the original TSB systems are real-time and not significantly batch-based. This gives them significant advantages in dealing with customers demanding real-time banking. However CFS will end up with the suboptimal LBG systems as Lloyds is spending significantly on 'simplifying' their systems, but only for the LBG version not the ones going to Verde. This means that Verde will be disadvantaged to LBG, so may not be as competitive.

The FSA (Financial Services Authority) is now demanding that, assuming the Verde deal goes through, given that Financial Services will be around 40% of the Co-op's business that the governance appropriate to a bank is put in place. This would mean having a board made up of executive and non-executive directors that would need to be FSA approved. Given the time it is currently taking for the FSA to approve executives is measured in months not weeks and that the Co-op doesn't currently have a CEO for its Financial Services business (though interestingly Gary Hoffman has allegedly had conversations about filling this role) this could be a deal breaker. However Lloyds Banking Group could sweeten the deal by providing a team of seasoned managers to run the business. Whilst this might put the FSA's concerns about leadership experience to bed, how radical will this new competitor be if it is being run by the same people who ran Lloyds Banking Group?

On top of that the Co-op as a co-operative is currently governed by its members. The FSA's requirements fundamentally challenge the way that the Co-op wants to run its business.

The possibility of  CFS walking away from Verde is looking increasingly unlikely.
There is still the chance that an  IPO is the more attractive solution for LBG given how cleaner and simpler that will be for the bank, however with bank asset prices at an all time low at what price would the IPO get away?

It looks like CFS may have got their deal, but will they suffer from buyers' remorse?

Monday, 12 March 2012

Why the culture of banks has to change



With the FSA (Financial Services Authority) report on what went wrong at HBOS (Halifax Bank of Scotland) before the bank had to be rescued by the UK Government and Lloyds TSB clearly showing that the issue was one of governance, there has never been a time when the need to change the culture of the banks has been clearer or more urgent.

The FSA report demonstrates that the corporate lending division of HBOS had a far riskier book than any of the other UK banks. HBOS continued to win deals in both the commercial and retail property markets in the UK, Ireland and Australia at lower margins and higher risks at a time when all the other banks were reducing their exposure to the sector or no longer pursuing new business. HBOS proudly proclaimed their success and growth in the market, not recognising that they alone were doing this. It doesn't appear to have crossed the minds of the executive that they were winning business that no one else wanted, or at least no one wanted at the rates that HBOS were offering. When the Head of the division proposed a growth of 10-12% in commercial lending not only was this not challenged he was told by the CEO of HBOS that this needed to be increased to 22%.

How could this situation have arisen?

The CEO of HBOS, Andy Hornby, had arrived at HBOS triumphantly from ASDA, part of the Walmart Group. With no background in Financial Services but having graduated top of his course at Harvard and having had a successful career with the strategy consultancy, Boston Consulting Group prior to ASDA, he was seen as the person who would shake up the sleepy financial services industry. He surrounded himself with people who agreed with his position. Those who didn't agree with him got short shrift. Benny Higgins (currently CEO of Tesco Financial Services), had joined from RBS, where he had had a very successful career, to lead the HBOS retail banking business. He left after only a very short while when he fell out with Andy Hornby over strategy.

What this meant was that no one was there to challenge the strategy and the decisions that the CEO of HBOS was taking. Not dissimilar to the situation that was described in the recent report on what went wrong with the corporate governance at RBSG under the leadership of Fred Goodwin.

It is undoubtedly for this reason that the FSA is asking for a change at the Co-operative if they wish to push ahead with the acquisition of the Verde branches from Lloyds Banking Group. The FSA are insisting that the board of the Co-op must have much more experience of Financial Services and be able to challenge the executive leadership of Co-operative Financial Services. This could be such a significant challenge for the Co-op to make them question whether they will continue to pursue the deal. Finding people who the FSA will approve to run or sit on the board of a bank is increasingly difficult. It took Tesco over two and half years to get approval to set up their bank. The FSA has an increasingly large backlog of people to be approved to work in senior roles for banks and it now takes months to get approvals for an individual, even if that individual has already been approved for a similar role at the bank or a rival bank. Such a delay in being able to pushed forward with Verde could make the deal so unattractive to the Co-op that they walk away from it. However given what went on at HBOS and RBSG it is not difficult to understand why the FSA is pushing for this.

The culture of banks where the CEO's and other executives' words are final and unchallengeable is not something new and has always been dangerous.

A recent example of this is the fine raised on RBSG for complaints. The fine was not for the poor service that RBSG was giving its customers but for the fact that the complaints received were modifed by staff before being submitted to the Banking Ombudsman. The reason given being that the staff were afraid of the consequences for their careers of the complaints being upheld. What does this say about the culture at RBSG today, many years after Fred Goodwin left?

A further example that illustrates why the culture needs to change is that of the misselling of PPI (Payment Protection Insurance). It was known throughout the banking industry that both personal loans and mortgages were being sold at prices below cost and subsidised by the excessively high margins on PPI policies, which were very hard to claim on. Yet because it was so profitable no one spoke out and the number of PPI policies that were sold grew exponentially. Why did no one speak out? Surely the hierarchical, command and control culture of the banks has to be key to this along with the pursuit of short term profits at the cost of the customer.

The £8.75m fine imposed on Coutts, owned by RBSG, for not putting in adequate measures to ensure that the money-laundering wasn't taking place or that they were doing business with PEPS (Politically Exposed Persons). One of the reasons cited by the FSA for this behaviour was that staff were incentivised to add additional customers and balances with no measure about the quality of the balances or the customers, is yet more evidence for the need for a fundamental shift in the culture enforced by alignment of incentives with the values that the banks should be upholding.

Without a fundamental change to the culture of banks, where both independent, experienced voices are listended to and encouraged to challenge the exexcutive of banks and with CEOs and senior executives who encourage their staff to challenge their thinking without fear of reprisals then another HBOS, PPI misselling or the latest misselling of derivatives to SMEs is inevitable.