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 ).

The second time was much shorter for less than hour (see ).

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?

Tuesday, 25 January 2011

Banks not ambitious enough with switching targets

It's being reported that the banks are finally looking to invest in improving the time it takes to switch your current account from one  bank to another. This has been talked about for at least two years when the 2008 OFT report on banking said that they had to do better, but the catalyst appears to be in the Independent Commission on Banking. The banks want to appear to be doing something about speeding up switching before they are compelled to.

They are saying that they are aiming to get switching down to one to two weeks from the current average of four to six weeks, possibly even to the Dutch standard of seven days. They are also saying that it will cost them hundreds of millions of pounds to make the systems changes to achieve this. But why? They're not talking about account portability, where a customer has an account number for life (see ), but rather simply moving the money out of one bank account and trasferring it to another account in a different bank and moving direct debits and standing orders to the other bank. Even today internet bankers can see the balance on their accounts, they can see a list of their standing orders and their direct debits. Even if you were to do the process manually writing down the list of standing orders and direct debits, emailing it to the receiving bank, making the transfer of funds as a consumer would do it, surely can't take four to six weeks and cost hundered of millions of pounds to automate that manual process?

The challenge to the banks should not be to deliver switching in one to two weeks, not to deliver it in seven days but they should be aiming to deliver it no longer than it takes for the money to clear, and with Faster Payments which means it should be twenty four hours, but to be generous to the banks, let's say 2 working days from receipt of instruction.

Ultimately the question is even if there was a gold-plated process that was guaranteed to take less than two working days, would we see customers switching accounts in their droves? The reality is probably not. The reason customers don't switch current accounts is not because of the process, but rather because there is so little differentiation between banks in terms of the products they offer, the prices they charge and the service they deliver that banking is a commodity and most customers don't care which bank they bank with because they see them all as the same. That is the real challenge for the banks and where they should be investing their money.

At the end of the day the only real reason the banks are now proposing to  invest in the switching process is to remove one more complaint about them from the Independent Commission on Banking's long list.

Thursday, 20 January 2011

Why portable bank accounts aren't going to be here anytime soon

At the Treasury Select Committee on Competition and Choice in Banking, Jayne-Anne Gadhia, CEO of Virgin Money proposed that one day she would like to see portable bank accounts in the same way as today where you can have a mobile phone number for life. She is not the first person, nor will she be the last, to suggest this as the way to make it easier to move bank accounts, create more competition in the market and make it easier for new entrants to rapidly build up market share.

Across on the other side of the world the Commission looking into competition in the Australian banking market also considered this as the way to make switching banks easier. There were many in Australia who hoped that the implementation of portable account numbers would be one of their recommendations that would pass into law. Having taken hearings on the topic instead a review into the feasibility of this has been commissioned, effectively kicking it into the long grass.

In theory it certainly sounds like an attractive solution to overcome the reluctance of customers to move their bank accounts. Customers can do it today for their phones, gas and electricity, so why not for their bank accounts?

To find out why it is not as simple as that you have to understand the origins of our bank account numbers. When banks originally started operating your bank was effectively your branch. You would go into your branch to pay in some money and the amount would be handed over the counter and the clerk would write with his quill pen in the ledger on your account page  how much you have paid into your account. When you wanted to take some money out, the process would be reversed, the money would pass the other way over the counter and the clerk would write down the withdrawal amount with the quill pen in the ledger.

Not a lot has changed since then, particularly with some building societies where there is no on-line updating of accounts but rather entries are held locally in the branch ledger (albeit electronic) until the end of the day when the accounts are balanced and head office updated. Even in today's global retail banks customers have to 'belong' to a branch and the bank sort code and account are associated with a single branch. The whole payments process that transacts millions of transactions every day and the cheque clearing process are all based around the premise that a customer is identifiable by their sort code and account number. Each bank has a set of sort codes that tells the payments system which bank to transfer the money to and to which branch

To have portable bank accounts the connection between the customer and their bank and their branch would need to be broken and replaced with some other identifier. This is not minor surgery, it is more like a heart, lungs and brain transplant all being performed simultaneously with the added handicap of the anatomical guide to the human body having gone missing. It would effectively mean the re-writing of not only the core banking system of every bank but also the re-writing of the payment systems. Almost all of our banks and building societies are working on extremely old banking systems for good reason.The banks have shied away from replacing because the knowledge of exactly how they work has been lost as the original programmers have either retired or gone up to the great card punchrooms in the sky, and the risks associated with refurbishing or replacing them have been seen as too high and the benefits too low.

At a time when governments all over the world are looking at de-risking banks and where over the last few days and months we have seen National Australia Bank losing its payments systems for a couple of weeks, Bank of Ireland's systems going down,  Lloyds Bank's payments system paying out double and Bank of America losing its core systems for a weekend, no politician is going to mandate the high risk action that the banks must make the changes to make portable bank accounts viable.

You can completely understand why new entrants would like portable bank accounts as a way of easing their way into the market, but the reality is that it isn't going to happen anytime soon

Update June 2011.

The proposal by Lloyds Banking Group that the banks should create a shared database of direct debits and standing orders so that when a customer switches banks the direct debits don't get lost in the process appears to be getting traction across the banking industry. It is based on the model deployed in The Netherlands and is also being considered by the Australian banks. Lloyds is estimating that the cost of this change for the industry could be in the order of £2bn. This is still major surgery on the core banking systems but it is not the full blown account number portability that mnay new entrants are calling for.

Account number portability is increasingly becoming irrelevant. When more and more people don't even know their own telephone numbers, let alone others, due to storing their numbers in their phones, on their computers and iPads, and having the ability to speed dial, it brings further into question the need to know a long bank account number. With the increasing use of alternative ways of identifying yourself, the growth of mobile payments and the alternative means of making person-to-person payments then the need to know your account number will become increasingly redundant.

There are two real issues that stop people switching. Firstly there is the lack of sufficient differentiation between the banks to make it worth people changing bank accounts - banking continues to be seen universally by customers as a commoditised and poorly delivered service. Secondly there is the fear that the process will fail and extra costs and hassle will be occured. The Lloyds Banking Group proposal will only help address the latter (and will be some considerable time coming).

As the banks wrestle with the paradox of how they can make it easier for customers to leave them whilst retaining their customers then their focus has to be on how they differentiate themselves in the eyes of their customers and that is where the investment really needs to be.

Wednesday, 19 January 2011

Don't blame the branch staff for mis-selling

Coming on top of the record fine imposed on Royal Bank of Scotland last week for the way that they handled complaints, it was announced yesterday that Barclays is to be fined £7.7m for selling inappropriate funds to people either close to retiring or retired. It's absolutely right that the bans should not be allowed to do that and that the consequences for banks that do should be significant. The £7.7m is only the tip of the iceberg for Barclays. It is estimated that it will cost Barclays up to £70m in total compensation to those customers who suffered as a result of the misselling. This is only the direct cost to Barclays, there will also be a knock-on effect of the loss of trust that the reports in the press and on TV will have on Barclays, which will lead to even greater losses of revenue. This comes at a time when trust in banks is at an all time low. This is not unique to Barclays and RBS, but is indemic across the industry.

However the staff in the branches who sat in front of customers and sold them these funds should not be blamed and should not be held to account for the misselling. As the banks battle for share of customers' decreasing wallets, branch staff are at the frontline of this war. Every product team within the banks wants to launch new products. Products that are effectively commodities i.e. exactly the same as every other banks, so the subtleties and details of the products become ever more nuanced to try and create some diffferentiation.

Meanwhile new regulations, new branch formats, new technologies all produce more change in processes and procedures that the branch staff must learn and the rate of change that branch staff must absorb gets higher and higher. Not only that, but branch staff are put under increasing pressure to hit sales targets and to demonstrate how productive they are, that the time for adequate training of staff is sacrificed due to all the competing demands on them. This is why this type of misselling happens. The banks need to be far more effective at recognising the level and speed that changes can be rolled out to the branches, to put in place systems that protect the branch staff from change overload and fatigue.

The role of the executives of the banks should be to protect the branch staff from taking on more than they can professionally do and why the responsibility for the misselling of products sits firmly with the executve.

Wednesday, 12 January 2011

Why 2011 will not be the year of new entrants in banking

There is no doubt that there are plenty of opportunities for new entrants into the retail banking. There are quite a number of 'starter packs' of various sizes including:
  • Northern Rock (the "good" bank)
  • The Lloyds Banking Group 600 branches (as dictated by the EU due to the state funding)
  • The UK operations of Bank of Ireland
  • National Australia's UK operations (Yorkshire Bank and Clydesdale Bank)
  • Building Society consolidation (due to the constraints on wholesale funding)
In addition there are opportunities for those who will start with a complete blank sheet in the bricks and mortar world such as Virgin.

There are even players with money who have said that they want to enter or expand their presence in Retail Banking, such as NBNK (led by the former CEO of Northern Rock and Barclaycatd, Gary Hoffman), JC Flowers based on their relationship with Kent Reliance Building Society, Advent, who have a large fund and have made no secret of their desire to enter the financial services market and Tesco, but this will not be the year of new entrants.

The reason is time - the amount of time that it takes to get all the approvals, build the organisation and get ready to start business. Tesco is expected to launch its new bank this summer, but it will have taken them 2.5 years since they originally announced their intention to end their partnership with Royal Bank of Scotland and go on their own. This isn't a case of Tesco being slow indeed they have demonstrated on many occasions and for many different products lines (pharmacy, mobile phones, DVD rental) that what Tesco excels at is executio. The reality is that is the time to takes to get through the regulatory processes, to get infrastructure and applications in place, to define business processes, establish the organisation and hire and train staff.

Virgin recently announced that they will open four or five branches, but that it will be twelve to eighteen months before they are open for business, and the likelihood is that it will be nearer to eighteen than twelve months.

The second reason that 2011 will not be year of new entrants is due to the uncertainty caused by the Independent Commission on Banking which will not produce its final report until September this year. Whilst we may be given an indication of their likely conclusions as early as April, even when the report back in September their recommendations will not be binding on the Coalition, so there will clearly be a delay whilst the government decides what they will actually implement. This makes it very difficult to put a valuation on the potential assets for acquisition, so it is questionable as to whether any serious contender will  be able to make a bid this year.

So whilst we may get some announcements of intent to enter the UK retail banking market in 2011, with the exception of Tesco, we will see little or no change in the banks on our high streets for some time to come.

Monday, 10 January 2011

Why the leadership of banks needs to change for success in Retail Banking

All of the free biscuits and pens, the glossy touch screens, the cash-counters and cheque books that you pick up from branches are all worth nothing if the type of leadership  of the bank is wrong.
Let’s face it there is little to differentiate one bank from another. The products are basically the same, the differences in pricing are marginal and banking is fundamentally boring. For most people banking is a necessary utility. Banking is something that you need to operate in the modern world much like gas, electricity and water and not much more interesting. With a fundamentally boring product and little to differentiate between suppliers it isn’t surprising that consumers don’t switch their accounts very often.
The CEOs of the banks will tell anyone who is prepared to listen that their bank is different because of its customer focus and its high level of service.  However the problem is that customers simply do not believe this.
The way that banks have been organised has not fundamentally changed since the Victorian days portrayed in the film Mary Poppins. Run from the centre by a set of grey characters who metaphorically punch through the bowler hat, break the umbrella and snap the carnation of anyone within the bank who voices a different opinion. Dissenting voices challenging the status quo  have never been welcomed in banks.
To truly bring about a change in the service that banks offer to their customers and to bring the customer into the centre of everything that the banks does requires turning the organisation of banks on their heads.
Rather than the branches and call centre being there to bring in deposits and lend money to meet the demands and targets set by Head Office, the people in the centre need to recognise that their role is to support  the most important employees of the bank, those who face off directly to customers in the branches and contact centres. That nothing is more important than to ensure that they are providing everything that the customer-facing staff need to deliver the best service to the customers.
Decision-making also needs to move back from the centre to as close to the customer as possible. That is moving back to a model where the bank manager was what his or her title said ‘the manager of a bank’, not simply a supervisor or order taker.  (Some banks are having great success in terms of customer satisfaction and profitability with a move to this model  - see )
In other industries the idea of the centre being there to support the branches or stores is absolutely the organisational model that they operate. It is a fundamental philosophy of Tesco, where the people in the stores are seen as the most important people in the organisation.  It is also true of John Lewis where the partners in the shops are king.  In a completely different industry, IT application and business process outsourcing/off-shoring, HCL has gone even further and have moved to a model of Employees First. In this model employees can raise service tickets against executives if they are unhappy with the service that is provided to them. The executives are held to service level agreements to respond to the tickets. The result is that HCL has seen a rise in customer and employee satisfaction as well as profitability.
This problem is not limited to the existing banks, but also applies to the new entrants. With the ever closer scrutiny of the people appointed to be executive in banks  by the FSA with the emphasis on previous experience, this forces the banks to  give favour to those who have spent many years in the traditional culture of hierarchy, no dissent and management by fear and compliance where the band grade and the number of employees working for you is key to your authority.
That is not to say that some banks are  cognisant of the cultural issue and the need to change, however if we are to end up with the types of banks that we the customers want fundamental change in the way that our banks are operated is needed and that does mean the addition of new touch screens or more free dog biscuits.

Tuesday, 4 January 2011

10 reasons why outsourcing so often disappoints the FS Industry

1.       Outsourcers don’t take enough time to understand the business outcomes that the client is looking to achieve
2.       Financial Services organisations underestimate the cultural transformation that outsourcing involves and rarely complete the transformation of the retained team.
3.       The measures on contract performance dashboards  contradict each other,  are over-complicated and are not aligned with delivering the desired business outcomes
4.       Financial Services organisations don’t take enough time to understand the outsourcer’s business and how and when they make money
5.       Most outsourcing advisors are just that, advisors, who have little or no practical, operational, hands-on experience of delivering outsourcing upon which to base their advice
6.       Financial Services organisations  engage contract negotiators who are rewarded for getting the cheapest (win-lose) deal not the optimal long term (win-win) deal for both parties, see outsourcing as a transaction and not a long-term relationship, have no incentive to keep the deal simple and have no long-term vested interest in the success of the deal
7.       Outsourcers have their sales team lead the deal, who are rewarded on the projected revenue and margin  of the deal with too little phasing  of commission based on performance of the contract. Delivery executives are, at best,  junior partners  in deal
8.       For outsourcing salesmen closing a deal is the only thing that counts (due to their competitive  nature and the make-up of their financial packages), leading to closing the deal being more important than the quality of the deal
9.       Outsourcers play ‘bait and switch’ – the best team are involved in selling the deal, but a less good team is left to deliver it
10.   Investment analysts continue to expect the very high margins  that early outsourcing deals had when the industry was in its infancy leading to unrealistic expectations being put on outsourcers driving scalping once the contract is signed

Wednesday, 22 December 2010

Spotlight falls on Big 4 role in banking crisis

With the annoucement that the New York State Attorney-General, Andrew Cuomo, could press charges against Ernst & Young relating to an accounting practice which allowed the Lehman Brothers to hide tens of billions of dollars in debts from investors, the spotlight is beginning to fall on the role of auditors in the banking crisis. With the levels of fees that the Big 4 receive for auditing the banks measured in hundreds of millions, yet again questions have to be asked as to whether they are commercially conflicted from calling out where they find questionable practices when the loss of a contract to audit can have such a large financial impact on a firm.

An argument put forward by some from the Big 4 is that many of the reasons for the financial crisis were too complex to have been spotted by the auditors. One of the reasons for this may be that, whilst the Big 4 charge millions to conducts audits, they flood the audits with new graduates and junior staff, thus maximising their profits. Carrying out audits, which is openly acknowledged as not the most interesting work that the Big 4 do, is seen very much as part of the rites of passage, part of the apprenticeship that is required to be done by those wishing to progress through the firm. Questions need to be asked as to whether the right calibre of staff are put onto audits and whether the culture of Big 4 prevents those on audits from asking the difficult questions.

A critical part of the Attorney-General's case will be that both middle ranking managers at Lehman Brothers and Ernst & Young flagged up concerns about the use of 'Repo 105'  to Ernst & Young, but that this was not raised with the Lehman Brothers board. This raises a serious question about the culture within the Big 4, where Partners are treated as demi-gods who's judgements cannot be questioned, certainly if the employee wishes to remain in the firm or on a career upward trajectory. In the case of Matt Lee, the Lehman's employee who raised the issue, within weeks he was laid off.

The issue of the auditors raising issues is not limited to Lehman Brothers, but also the other banks that failed during the crisis such as Countrywide, Northern Rock and Anglo Irish Bank.

With all the focus on bankers and their bonuses, it should not be forgotten that many of the partners of the Big 4 are paid significantly higher than the majority of the investment bankers and rather than their pay being reduced as a result of the financial crisis, which they could potentially have helped prevent, all the Big 4 have announced significant growth in their profits and their partners' take home pay.

History can teach us many lessons and the partners of the Big 4 should very conscious of the impact of Enron on the once mighty Andersen and its partners.

Tuesday, 21 December 2010

UK in closing down sale!

It's official the UK is up for sale, but better hurry up everything must go!

As passengers sit out another day at our Spanish owned airports (what do they know about snow?), reading their Australian-owned newspapers or watching Australian-owned Sky TV, they will be pleased to know that the salt that is needed to clear the runways and get the motorways open has just been sold to the Indians. Lloyds Banking Group's private equity arm has announced that is has sold British Salt, producer of 50% of the UK's salt, to the Indian firm Tata. The more bad winters we have the more profits will flow overseas, and who said that there wasn't an upside to global warming - just not for the UK.

For those looking for another bargain there's not a lot left, Britain is prepared to sell anything, even if it is nailed down. Already gone: Airports (Spanish and Australian), newspapers (Russian and Australian), channel high speed rail link (German), gas and electricity (French and Russian), cars (Indian), football clubs (Russian, American and many more), banks (Spanish).

Rumours are that the Russians have put a bid in for the Royal Family, as unfortunately they shot their lot a while back!

Call my bluff over moving Head Offices from London?

The news that JP Morgan has announced that it will acquire the Lehman Brothers offices in Canary Wharf as it's new European Headquarters will be good news for both Vince Cable and George Osborne as it demonstrates that, despite the draconian regulations and restrictions on bonus payments, bankers are not fleeing London.

Mike Geoghan, out-going HSBC Chief Executive, may talk about HSBC's review every three years of the location of its Head Office (next coming up in early 2011), but just how realistic is it that HSBC might up sticks and relocate back to Hong Kong?

When HSBC was last headquartered there Hong Kong was a very different place. It was still under British control and very much managed as a British outpost. HSBC was also significantly smaller and less international. If HSBC were now to relocate back to Hong Kong, the reality would be that it wouldn't be regulated by Hong Kong, but rather Beijing and that is not something that either the shareholders or the employees would want.

It's not even clear that the Hong Kong regulator would even want HSBC if they wanted to come. To regulate a bank of the size and complexity of HSBC would require a far larger and more sophisiticated regulator than exists today, requiring the hiring of regulators from across the globe, in the short term at least and a very significant investment on the part of Hong Kong.

So the reality is that as the top executives of the banks sit down today with George Osborne and Vince Cable to discuss bank bonuses, for all the bluster and implied threats of moving their headquarters out of the UK, the politicians will be confident that HSBC, Barclays and Standard Chartered are all here to stay, at least for the time being.