Friday, 17 December 2010

Banking lessons to be learnt from down under

Mike Smith, CEO of ANZ Bank, has made a impassioned plea for an end to bank bashing. His speech applies equally to the UK, how important the banks are to the UK economy and what the banks need to do to respond to the current financial crisis.

"Allowing a populist backlash against our most successful businesses - whether they be miners, telcos or banks - and allowing a long-standing commitment to open markets and globalisation to be undermined - will inevitably lead to a less prosperous future for all of us - shareholders and the community alike.
"In this regard there has been a great deal of debate in Australia in recent months about the four major banks.
"One of the key issues is competition in the banking sector.
"We believe this is an important discussion because a strong banking system has been, and continues to be, critical to Australia's economic success and therefore our national prosperity."
Mr Smith said the irony is that in Australia we are currently having an inquiry into the banks which are safe and successful while in the US and UK there are inquiries into why banks failed, or had to be bailed out by their governments.
"Lower credit growth and the higher costs of doing business mean we'll need to drive productivity and innovation even harder to stay ahead of the game," he told shareholders.
"We need to change - we need to streamline our structures and do things in a new and different way.
"Our customers want simpler processes. They want convenience, they want security, and they want more innovation from us - and this also helps drive medium and long-term value for shareholders."

Plain talking common sense.

Thursday, 16 December 2010

Is Asia the new marmite?

RBSG has announced that it will be withdrawing from retail and commercial banking in China, but still sees China as an important market for investement and corporate banking. So anxious is it to exit China that it is not even asking DBS Bank of Singapore for any money, but are simply giving the customers and a number of staff to the bank.

RBSG was one of the first banks in recent history to enter into China, through a joint venture with Bank of China to launch a credit card. At the time it was seen as yet another example of Fred Goodwin making a smart move to turn RBSG into a global player. He appeared not to be able to make a wrong move. Partnering with Bank of China allowed the Chinese to gain the credit card expertise whilst it was a low risk way of RBSG getting to understand China and the financial services market. Since the disastrous acquisition of ABN-AMRO the global aims of RBSG have been put firmly into reverse, with this one of a number of disposals by RBSG in Asia.
The RBSG announcement comes hot on the heels of Aviva announcing the sale of Asian assets so that they can focus on growing Europe.

Whilst RBSG, Aviva and Santander do not see Asia as part of their consumer strategic direction, the FS industry is showing signs of polarising on Asia. Just like marmite FS companies seem to either like it or hate it. HSBC, Standard Chartered and Prudential can't seem to get enough of it.

Meanwhile in another component of the BRIC countries, Santander has announced its withdrawal from Russia with the disposal of its Consumer Finance business there. As the Russian banks get stronger local academic opinion is that there is less of a role for foreign banks to play. It will be interesting to see whether the likes of Barclays and Citibank follow suit.

Monday, 13 December 2010

Australian Banking Reform more tinkering than structural reform

After much discussion and posturing in the media, the banking reforms to increase competition in the Australian banking market were announced on Sunday December 12th. After much hype around fundamental restructuring and the building of a fifth Pillar, the reality has been little more than tinkering around the edges and is likely to have little impact on competition in the market, with even the danger of hurting the smaller players. Philosophically the reforms announced are more about helping the smaller players rather than restricting or hampering the Four Pillars. Fundamentally there are really two changes: measures to improve the access to wholesale funding and secondly measures to help consumers switch mortgages. Interestingly the measures to increase liquidity in the market including increased government funding of securitisation and the ability to issue covered bonds, both of which in their extreme form brought about the financial crisis in the first place.

There is one reform that gives the regulator more teeth and that is the ability to prosecute in the case of evidence of price signalling by the Four Pillars i.e. acting as a cartel, however how easy it will be to prove is highly questionable.

As reviews of regulation to improve competition in banking markets carry on across the globe, what are the lessons that those conducting those reviews can take from the Australian reforms?

Firstly for all the macho talk about breaking up the big banks, when the practicalities kick-in it is all a lot more complicated, expensive and difficult to do than say. Secondly, the focus should be more on helping the smaller players compete than punishing, and being seen to punish, the market leaders. Finally that market concentration does not mean a lack of competition, particularly when there is a similar level of scale amongst the big competitors.

Friday, 10 December 2010

Why the FSA RBSG report is like the Iraq Inquiry

Since the FSA cleared RBSG executives of any wrong doing last week, following an eighteen month inquiry led by PwC, there has been mounting pressure from (surprisingly) the RBSG executives, politicians, the public and the media for the report to be published. It now turns out, according to Lord Turner, Chairman of the FSA, that having spent a considerable amount of tax payers money on the investigation by PwC there is no report. This brings back memories of the 'dossier' that resulted in the war in Iraq - another document that can't be published.

Lord Turner went onto say "I feel uncomfortable with the present position and I recognise and respect the public desire to…have the history of why taxpayers ended up having to rescue RBS". He also pointed out that the eighteen months investigation was never intended to produce a report that met that requirement.

Just as with the Iraq Inquiry, once again we see the politicians deciding what the outcome should be and then setting the terms of reference to ensure only what they want comes out. They treat us all as if we are idiots and won't spot that these investigations and inquiries are rigged from the start.

Should there be a thorough review of what brought about the UK taxpayer having to bail out RBSG, so that we can ensure that it never happens again? Of course there should and, if a proper scope was investigated, it wouldn't only be the bankers who the finger would be pointed at, so it'll never happen. And even if it should by some miracle happen, who could possibly carry out the investigation when so many people and bodies have their fingerprints all over what went on from regulators, auditors to politicians. And there are so many with a vested interest in burying the conclusions.

Thursday, 9 December 2010

Tesco Bank chief Benny Higgins accuses UK's biggest lenders

At yesterday's Treasury Select Committee hearing on competition when Tesco Bank CEO, Benny Higgins, criticised the banks for sharing credit data between themselves (through the credit agencies - isn't that just a prudent way of ensuring lending is made to the right people ),  he failed to mention all the data that Tesco has as a result of the Club Card, which needless to say they won't be sharing with the banks. The data that Tesco has is far more detailed than anything the credit agencies hold and something that is absolutely the envy of the banks.

He also failed to mention that he was for many years one of those bankers, firstly  for a long time under Sir Fred Goodwin at RBS  for many years and secondly for a short period under Andy Hornby for HBOS.

Is this a case of poacher turned gamekeeper or more poacher turned poacher?

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.

Tuesday, 7 December 2010

How to enter the UK banking market (not for the faint-hearted)

Eric Daniels, the CEO of Lloyds Banking Group has said that the UK Banking sector is competitive, but just how easy it is to enter the market?

For a start each of your key team need to be personally vetted and approved by the FSA. This is no rubber-stamping exercise as has been seen by the number of people recently rejected by them. Secondly there is the need to get a banking licence.

Applying for a UK banking license is a complex process. You will need to complete a comprehensive set of application forms and provide the Financial Services Authority with a full set of supporting documents such as your business plan, risk management policy statements, compliance manuals and procedures and other information. As a new entrant that means that you will have had to have defined not only your operating model but in detail how you will perform all processes. Certainly not a short process, and that is before you apply for the licence.
“You will need to show the regulator that you have a clear and workable business plan. You will need to evaluate your capital requirements and to demonstrate that sufficient capital is in place.

Getting the FSA Approval and the Banking licence are only the first of the many hurdles for new competitors getting into the market. You either have to build the infrastructure for a bank from scratch (branches, technology, call centres, processing centres, hire the people, etc) or buy them (e.g. Northern Rock, Lloyds Banking Group's branches) with all the complications of separation from the mother ship. Combine these two together and you can see why it can take several years and a lot of capital before a new competitor can enter the market. Then the real fun starts, trying to persuade customers to transfer their banking relationship to the new bank whilst still making a profit.

You really, really need to want to enter the UK banking market to put yourself through all that pain and expense.

No wonder the incumbents aren't losing sleep about new entrants when the barriers are so high.

Standard Life has a Victor Kiam moment

Standard Life has announced today that it is to buy Focus Solutions, the financial services products and consultancy business. Victor Kiam, for those old enough to remember, used to go on television saying that he so liked his Ronson Shaver that he bought the company. It seems that Standard Life likes the Focus Solutions products so much that it has done the same.

This is a strange move at a time when many Financial Services organisations are looking at selling their captives, focussing on what they do and know best; Standard Life is bucking the trend.

They have tried diversifying their proposition before when they launched Standard Life Bank, focussing on savings accounts and mortgages. An adventure that ended in tears with the sale of the business to Barclays. Whilst at least the bank was in Financial Services, as many organisations have found, it takes a different set of skills and a different culture to run banking and insurance - timeframes, distribution channels and attitudes to risk are quite different, however they are lot more similar than running a Life Assurance company and running a software products business.

How much will having Focus Solutions as part of Standard Life distract executive attention away from the issues facing the Life & Pensions industry at a time where there is so much change, so much appetite for consolidation within the UK industry and so much focus on expanding in Asia for many players. With major changes such as Solvency II, the Retail Distribution Review and Pensions 2012 do the Standard Life executive have the bandwidth to grow a software business?

From a Focus Solutions customer perspective, how keen will the other 7 out of 10 insurance companies in the UK who use Focus Solutions products be on the company being bought by Standard Life? It will be difficult for Focus Solutions to argue that it is providing independent advice and solutions to the insurance industry when it is owned by one of insurance companies. Even with the best Chinese walls being built, there will always be at the back of the mind the ownership of Focus Solutions.

For Banking customers of Focus Solutions there must be a concern of where future R&D will be focussed given the new ownership.

Hopefully many of these questions will be answered over the next few days and weeks.

Friday, 3 December 2010

There's no such thing as free banking

John Varley, the outgoing CEO of Barclays, yesterday at the Independent Commission on Banking public meeting said that 'It is possible that free-if-in-credit banking is a structure that has outlived its time.' He described the concept as 'idiosyncratic by the standards of the world' and said it was worth examining.

This follows up the remarks made by the FSA Chairman Lord Turner that free banking damaged competition in financial services.

Whilst bankers may refer to 'free banking' and many consumers may believe that they have 'free' banking when in credit the reality is that banking is anything but free. All of us pay for our banking, but the charge is far from transparent. The fact that the banks either don't pay us for our credit balances or may pay a paltry 0.2%, but then lend out our balances to customers at much higher percentages is just one of the many ways that we pay for our banking services even when we are in credit.

Should the Independent Commission on Banking recommend the abolition of free-banking and the government implement their recommendation, then how would they make that work? Would they pass a law that organisations would be compelled to charge for cash withdrawals at an atm, for cashing a cheque, for paying a bill? A system where you pay for every transaction altready exists in Australia and has for some time, and to address Lord Turner's assertion that this will encourage more competition, there is an even higher concentration of market share amongst the Four Pillars (ANZ, Westpac, National Australia and Commonwealth Bank) than there is in the UK. Has the absence of free banking made that market anymore competitive than the UK - absolutely not. Indeed the Australians have their own commission on banking currently running that will report on its recommendations to create more competition in the Australian financial services sector later this month.

As a panacea to create more competition in banking the end of 'free' banking is not the answer. The only winners from the abolition of 'free' banking would be the banks. They are already actively encouraging more and more customers to pay fees for their 'value-added' accounts, as the banks look to boost the proportion of their income that comes from fees rather than interest, particularly when interest rates are so low.

Should the government persist in driving down that route, interfering with the free market by legislating the end of free banking (which is completely impractical), then consumers should be lobbying to ensure that the fees introduced are more than compensated for by the increase in interest that is paid by the banks for credit balances and the significant reduction in overdraft fees.