Thursday, 30 June 2011

Banks enjoy Insurers turn in the spotlight

There will have been a collective sigh of relief from the banks that for once the spotlight has moved off them and onto the insurance companies. For so long the insurance companies have been vocal about how they weren’t responsible for the financial crisis and weren’t like the banks and therefore they shouldn’t have to face tougher regulation and scrutiny just because they are in the Financial Services sector. However what is emerging from the investigation into referral fees paid by claims companies to the insurers demonstrates that some of the behaviours demonstrated by the banks can be seen in the Insurance industry as well.
The high premiums for Payment Protection Insurance  subsidising and artificially depressing the true cost of personal loans (see, is seen to be replicated in the world of car insurance. Referral fees paid by claims companies to the insurance companies have artificially depressed the premiums for car insurance. Though whereas with PPI successful claims against the policies were very low (until the intervention of The Banking Ombudsman), claims companies have been far more successful in making the insurance companies pay out, particularly for spurious claims for unprovable whiplash, resulting in car insurance premiums rising, though not as much as they should.
Having been caught sharing customer information with the claims companies, AXA has set the example by declaring that they will stop the practice (though they have said that if the rest of the industry doesn’t follow suit they may have to restart).  The parallels with PPI continue with the new CEO of Lloyds Banking Group, Horta-Osorio, breaking from the other banks and agreeing to pay compensation for mis-selling. The other banks followed and AXA must be hoping that the other insurance companies will also follow.
The initial reaction from the Coalition Government has been that this practice is all right as long as the insurance companies declare it up front. However after strong opposition to this from the likes of Jack Straw, the former Justice Minister, the Coalition’s position appears to be shifting towards banning the practice.
The insurance companies are not entirely to blame. UK consumers are obsessed with cheapness and therefore implicitly encourage companies to appear to be selling products cheaply. Whether it be cheap personal loans, cheap car insurance or cheap flights. Indeed the charges made for the use of credit and debit charges (not related in any way to the cost of the transaction to the airlines) to depress the perceived price of the flights is only yet another example this collusion between the UK consumer and businesses.
To date this has been wilful self-deception on the part of the consumer. The banks, insurance companies, budget airlines and all the other organisations that participate in this game would be doing everyone a service if they moved to a transparent system where everybody is charged the full price for the service or product they are purchasing. On that basis customers would be able to really compare, but then those businesses who aren’t the best wouldn’t want to do it, would they?

Tuesday, 7 June 2011

A flotation the most likely outcome for Lloyds Banking Branches?


                              Chelltenham & Gloucester Mortgage Quote                                                       

When it is reported that Lloyds Banking Group is to dispose of 632 branches it's important to be  clear as to what that actually means.

The number of branches being sold need to result in a reduction in Lloyds Banking Group's share of the current account market by 4.6 percent. These branches need to have average footfall, i.e. it can't be the least successful branches, and they can't be in the grottiest areas.

When the Information Memorandum (IM) is issued to potential purchasers it will contain a list of the branches. As Santander found out when they bought the 316 branches that Royal Bank of Scotland had to sell  as a result of their receiving state funding, bank customers don't like being sold by one bank to another like slaves in a market in Ancient Rome. There was a very vocal outcry and many customers decided to move their accounts elsewhere rather than be forced to become customers of Santander. What is not clear is what will happen if after the IM document comes out and customers find that they are to be sold if large numbers decide to move before the sale, thus diluting the reduction in market share by Lloyds Banking Group. Will Lloyds have to put more branches up or is the deal based on the impact of the market share reduction on the day that the IM is released or have Lloyds built in sufficient contingency in the number of branches they are selling to account for the defectors?

Whilst the talk is of selling the Lloyds TSB branches, there is more than just branches bundled in the offer.

For instance there is Intelligent Finance, the direct bank set up by Jim Spowart, which has no branches.

There is also the Cheltenham & Gloucester branches as well as the Lloyds TSB Scotland branches.

Certainly for the medium term it will have to include the infrastructure to support those branches - systems, data centres, processing centres, back office and staff. The buyer will need to bear in mind that whilst what will be retained will have been through a process of simplification and rationalisation as part of the integration of Lloyds TSB and Halifax, the parts that were never going to be retained e.g. C&G and IF will not have been through that process.

Once the process of acquiring this bundle of retail banking assets is complete there will have to be the multi-year programme of separating the purchase from the mother ship and, potentially, integrating it to the new owner, depending on who buys it and whether they have any infrastructure to integrate it to. This is clearly not a simple task and far more complex that the Santander acquisition of the RBS branches where not only was it one brand of branches but also Santander has a single, scaleable banking infrastructure already in place and experience of integrating many acquisitions across the globe.

Beyond the purchase of a large scale bank,  the issue for any acquirer will be funding the bank. Above the potential £3-5bn price that the disposal will cost there is the question of funding. With the expected mix of branches there will be significantly more loans (largely because of the Cheltenham & Gloucester branches being included where mortgages are the dominant product) than there will be deposits and therefore the purchaser will be expected to need bridging finance which is estimated to be in the region of £10-15bn.

The questions for any potentiall acquirer are how can they put together the funding, will their investors be prepared to wait for the many years before such a venture can break even and how can they assemble a team with enough experience to be able to pull this off?

Of course there is already one team already in place who knows more about the branches, the systems, the funding requirements, the staff and the challenges involved in separation and integration, and that is the team that Lloyds Banking Group has put together to run Project Verde, the disposal of the 632 branches.

In its leader, Paul Pester, you have the experience of setting up Virgin Money, the experience of separating the Bradford & Bingley branches from the rest of the former building society, the experience of integrating Alliance & Leicester into Santander and, most recently, as Managing Director of Consumer Banking and Payments at Lloyds Banking Group.

His COO is Helen Rose. Helen has led the integration of the retail banks of Lloyds TSB and HBoS, so there can be few people who know any more about the challenges involved in that and the details of the systems and infrastructure required to achieve this. Her previous role in the Lloyds TSB retail bank means that she knows the staff and has deep experience of how the bank works.

The combination of Paul Pester and Helen Rose are the dream team not only to sell the business, but also to run the new bank.

Given all the challenges just laid  out, and the fact that Antonio Horta-Osorio, the CEO of Lloyds Banking Group, wants to get the disposal of the 632 branches away as fast as he can, (for the very good reason that it will make it more difficult for the Independent Commission on Banking's recommendation that Lloyds Banking Group should be forced to sell significantly more to be acted upon), the prospects of the outcome being a flotation, rather than selling to a new entrant, look increasingly likely.

Thursday, 2 June 2011

Forget Virgin Money or Metro Bank, Handlesbanken is the real UK contender

File:Metro Bank logo.png   virgin money logo   

One thing that neither Sir Richard Branson or Vernon W. Hill II can be criticised for is their ability to drum up publicity. Over the last few weeks and months the publicity and positioning that Metro Bank and Virgin Money have had as the contenders to take on the Big 5 banks has been phenomenal. Yet these banks have less than two handfuls of branches between them. Metro Bank opened 25,000 accounts in its first year of operation and ran up losses of just under £25m, or a bit under £1000 per account.

Meanwhile there is a bank with over 100 branches in the UK  that has by far the highest customer satisfaction for both Corporate and Personal banking of any bank in the UK and the highest profitability, that is successfully growing and winning business and that is Sweden's Handelbanken. In typical Swedish style they have done this with little blowing of trumpets, marching bands or publicity stunts, but quietly, unassumingly and very successfully. It is Handlesbanken that the Big 5 banks should really be concerned about, particularly for SME and corporate banking.

So what is it that Handelsbanken is doing that is making them so successful?

Well it isn't providing free dog biscuits, it isn't having cash counting machines that look like fruit machines and it isn't about opening up branches in metropolitan areas where no one actually lives. It also isn't about opening branches that look like night clubs or designer hotels. Handelsbanken isn't about making banking sexy - because at the end of the day banking isn't. Trying to make banking sexy is like painting lipstick on a pig.

Handelsbanken's motto is the 'the branch is the bank'. With a highly decentralised model, the important decisions are all made in the branch by the branch manager. The branch staff don't have sales targets, equally there aren't centrally driven product marketing campaigns, so there is a restoration of the relationship between the customer and the branch. There is no need to deal with someone outside the branch. However you don't get this sort of service and relationship from Handelsbanken without transferring your entire banking relationship to them whether you are an individual or a business. Handelsbanken makes no bones about their goal to be the most profitable bank whilst still being able to have the highest customer satisfaction.

When Handelsbanken moves into a town then they ensure that they become part of the community. The bank manager is expected to live in the town and be visibily part of the community. (More challenging when you open a flagship branch in Holborn where virtually no one lives)

The Handelsbanken model will clearly not work for everybody. A branch-based model is certainly more expensive to run than a direct bank (like Virgin Money is, for the moment). Equally as more and more customers expect to be able to do their banking online and remotely then the Handelsbanken model and indeed the Metro Bank model will be attractive to a smaller and smaller market. However as long as there are customers who value a personal service from their local bank then Handelsbanken will quietly continue to be a success.

As the Big 5 banks continue to face pressure from all angles to lend more money, improve customer service and be less avaricious, rather than fearing the noisy upstarts like Metro Bank and Virgin Money they should be looking over their shoulders for the Swedish Weeping Angels are just behind them. Weeping Angel 3.jpg

Friday, 27 May 2011

Charity can be bad for Bank CIOs

It has been announced by the UK Government that from next year customers will be able to make charitable donations through ATMs. Undoubtedly one of the reasons this has been put forward is reduce the the lobbying by charities to let cheques continue beyond 2018, when they are currently scheduled to end. The charities argue that since such a large amount of their donations come via cheque the end of the cheque could be a disaster for them. The Government argue that this is an alternative.

Similar to many of the interim recommendations of the Independent Commission on Banking, this announcement, while well intended, has not been thought through as to how the practically it will actually work.

With 250,000 charities in the UK, your wait  behind the person in front of you to get your weekly £100 cash out of the ATM, could be exceedingly long as they try to find the charity that they want to make a donation to. Exactly how are they going to choose the charity? Will it be a freeform entry (imagine all the typing mistakes and money swishing around the banks unposted because the charity name is not recognised) or will it be by scrolling down a list. If time is of the essence then maybe the ATM will only allow donations to one charity for a period of time, but how will it be decided which charity and how will you as a customer know which ATM is allowing donations for the charity you want to support?

Various countries around the world have experimented with offering additional services at the ATM, to make the ATM more profitable for the bank. Examples include booking tickets for the bullring (not the one in Birmingham, England) or the Alhambra at ATMs in Spain. The challenge is that most customers do not want to spend a lot of time waiting to carry out their transaction, particularly when the ATM is outside. Most customers using ATMs want to 'cash and dash', so extending the waiting time while someone fumbles to find a charity to donate to is unlikely to result in a better customer experience or more money being donated to charitites.

So why can charities be bad for Bank CIOs?  Recently Mr Hagiwara Tadayuki, Bank IT Chief at Mizhuo Bank left his job following the ATM network at his bank crashing. The reason? All the people making charitable donations following the earthquake in Japan overwhelmed the ATM network. Of  course you could argue that only in a society such as Japan would an employee be expected to do the honourable act of resigning. After all if the same rules applied in Australia then NAB would probably be on its fourth CIO this year.

So if some of the UK banks may be a little slow next year in implementing the ability to make donations through their ATMs  you'll know why!

Thursday, 5 May 2011

PPI - A sign of the mad, bad world

The announcement that Antonio Horta-Osorio, the new CEO of Lloyds Banking Group has decided to draw a line under the sorry PPI (Payment Protection Insurance) situation, take a reserve of £3.2bn and withdraw from the BBA (British Bankers' Association) appeal against the recent judgement should be welcomed as a sensible, pragmatic move and hopefully bring a close to the mad, bad world that was operating at the time that the misselling was taking place.

When the sale of PPI was at its peak the banks and finance houses were working in a market where personal loans were being sold at a loss as competition had driven the prices down and demand for funds driven the wholesale prices up. Banks and Finance Houses were prepared to sell these loans at a loss because they were able to sell Payment Protection Insurance at such a high premium, with very little chance of a claim against them due to the convoluted terms and conditions. Staff were heavily incentivised to sell PPI because that was where the profit came from and as a result hard-selling took place.

Consumers actually got loans at lower interest rates than they should have, so a good proportion of customers (primarily those who didn't take out PPI) were getting a good deal, so it wasn't all a terrible rip off for bank customers.

Hopefully the other banks and Finance Houses will follow the lead set by Lloyds Banking Group and draw this sorry episode to a halt. (UPDATE: All the other major banks have followed suit with RBSG writing off £850m, Santander £538m, Barclays £1bn and HSBC £270m or a total just under £6bn). That doesn't mean that everyone who claims should get their money back, because there are a surprisingly large number of claims being made by people who either didn't take out PPI or worse still didin't even take out a loan. The process of weeding out the fraudulent claims and processing the valid claims will undoubtedly take some time.

What should happen now is that loans and credit cards move to being priced realistically, based on the wholesale market prices and with a reasonable risk-adjusted price. This may be a shock to customers, but at least it will represent a fair price.

The fall out from the financial crisis is that retail banking needs to change, but the changes and expectations need to be not only on the banks' side but also the consumers.

Wednesday, 4 May 2011

Why the Big 5 banks should be pushing for the end of 'free banking' (and the government shouldn't)

With the ICB (Independent Commission on Banking) looking at increasing competition in the retail banking sector, examining the market share of the big banks and overall looking for greater fairness and transparency in charging, strongly supported by the likes of Vince Cable and other politicians, increasingly it looks as if the end of 'free banking' is in sight. Of course 'free banking' doesn't really exist, rather it is a mirage in that rather than paying directly for the services provided, consumers are made to pay by low or no interest rates for money deposited in current accounts, low interest rates in deposit accounts, high mortgage rates and even higher overdraft charges. As consumers baulk at the costs charged for loans and going overdrawn and politicians continually call for fairer, transparent charges, the inevitable conclusion is a banking system where customers pay for the services they use.

Being able to charge a direct amount for the services they provide would bring some significant advantages to the big banks in the heavily regulated environment that they are increasingly operating in. When there is more focus on the market share that each of the banks has, and where more market share is seen as bad, then the banks will want to focus not on the absolute market share but the quality of the market share.

All of the big banks today have customers that they don't make any money from. These will be the types of customers that open a current account for their household money, for their book club, for their children, where the balances are low, transactions sizes are small and they have only one product. If market share is going to be restricted then these are the customers that the banks are going to want to be shot of. The problem is that in today's banking environment it is very difficult for a bank to fire customers. However if customers were made to pay directly for the services that they use then it would be far easier for the banks to adjust their charges to either makes the low balance/low transaction value customers profitable or, better still for the banks, to encourage those customers to take their business elsewhere.

With four out of the five big banks now being run by investment bankers not retail bankers, and Barclays, HSBC and Lloyds Banking Group focussed on a strategy of raising their Return on Equity (ROE) up to at least the 14-15% range, then there is clear evidence that making customers pay directly for the services they use can help achieve this. In Australia where this model has existed for many years, The 'Four Pillars' (National Australia, Commonwealth Bank, WestPac and ANZ), have in the past enjoyed ROEs of 20+%. Even with tougher regulation they are each expecting ROEs of around 16%, significantly higher than any of the UK banks.

However whilst this all sounds very attractive for the big banks, it is not great for the new entrants, who will struggle to compete with the scale advantages that will allow the big banks to make their charges attractive for the customers they want. It also raises the big question of who will provide the banking services to the customers that the big banks don't want? It has the potential to significantly increase the number of the unbanked. As the likes of Vince Cable continue their crusade against the banks and push for ever more transparency of charging for banking services, the politicians need to be wary of the consequences of getting what they wish for.

Thursday, 28 April 2011

Why the ICB recommendations make it more difficult for new entrants to retail banking

The interim recommendations of the Independent Commission on Banking suggest that Lloyds Banking Group should dispose of significantly more than the 600 branches that they have already been instructed  by the EU to sell for taking state funding and that these branches should be bundled together with the sale of Northern Rock to create a really significant competitor to the big 5 banks: Barclays, RBSG, HSBC, Lloyds Banking Group and Santander. Whilst this might make sense in theory, practically rather than making it easier for a new entrant this recommendation, if followed through, would make it far more difficult.

For a start whilst the Commission might think that one retail bank is like another one and therefore one branch from a bank is much like a branch of another, the truth is anything but that. Bundling Lloyds Banking Group's branches together with Northern Rock's make the integration for any purchaser easier nor does it make the integration simply twice as complex, but would make for a more complex integration than anyone has tried before. The branch systems aren't the same, the branch processes aren't the same, the employment contract's aren't the same and the list goes on.

Santander, which has more experience than any other bank in integrating acquisitions, (still completing the final integration of Abbey National, and currently integrating Alliance & Leicester and the branches of Bradford & Bingley) has recently announced that the integration of the mere 318 branches that it bought from RBSG, as a result of the forced disposal RBSG had to make for taking state funding, is proving to be more challenging than originally thought. The deal was announced in August 2010 and, at that time it was stated that the integration would be complete by the end of 2011, 16 months later. The latest estimate is that it will now complete at the end of the first quarter of 2012. This was the integration of only just over half the number of branches that Lloyds has been told to dispose of let alone the additional 'significant' number that the ICB is going to recommend on top of that plus the 70 Northern Rock branches.

It doesn't take much imagination or practical experience to understand how much more difficult the proposed integration would be, not only because of the sheer scale, but also, since none of the current big 5 banks will be allowed to bid for the branches, the lucky winner will have little or no experience of operating this size of bank in the UK, nor are they likely to have an existing infrastructure (unlike Santander) that will scale to handle this size of operation.

Funding is another signifcant issue that the ICB does not appear to have considered. Putting aside the amount of capital that will be required to purchase the branches (not something to be taken lightly), there is a question of financing the gap between the deposits bought and the loans acquired. Just for the disposal of the 600 Lloyds Banking Group branches it is estimated that the purchaser will need between £15-20bn of bridging finance. This is because the 600 branches come with far more loans than deposits. There aren't many new entrants who would want to take on the cost of the capital to buy the branches and a £15bn overdraft. Consider how much more capital and bridging finance would be required for the additional branches and Northern Rock.

By suggesting bundling together the LBG 600 plus the LBG additional branches plus Northern Rock, the ICB is effectively eliminating any truly new entrant and rather opening up the opportunity to only a large foreign bank, which is hardly going to encourage the new competition that the ICB is saying that it is seeking. 

HSBC to quit Russian Retail Banking

HSBC has announced that it is pulling out of retail banking in Russia. This follows on the heels of Santander who exited Russian retail banking in December 201 by selling their consumer lending business to Orient Express Bank and Barclays who announced their exit from Russian retail banking in February 2011 having written down £243m on an acquisition.

HSBC and Santander are two of the most successful Western banks in emerging markets with both being strong players in Latin America, and HSBC being very well established in Asia with Santander building it's presence there. (See ) It is therefore very telling that both of these banks have decided that domestic competition makes it too tough and not profitable enough for them to continue to offer retail banking in Russia. Certainly building a significant presence in Russia, given the vastness of the country and given that most banks still believe that having a physical branch network is key to winning in retail banking, is a significant investment and capital demands from existing markets rising, it is understandable how they might have come to this conclusion.

Interestingly HSBC's and Santander's views are not shared by the French banks, with both Societe Generale and BNP Paribas continuing to invest in and grow their retail banking presence in Russia. Citibank has also built up a strong retail presence in retail banking in Russia. This was under the leadership of Frits Seegers who then moved from Citi to Barclays and repeated, less successfully, the opening of retail branches in Russia.

To date Santander does not seem to have made a strategic error in their expansion plans, so it will be interesting to see how this one plays out.

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 ,  and . 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.

Thursday, 7 April 2011

Time for bank CIOs to become CEOs

Whilst banks overall are not great at PR, Bank CIOs make the Bank's PR look good. IT departments are forever the whipping boy for the business, the quoted reason why banks lack agility and respond to changes in the market, forever failing to deliver projects to time and budget and costs continually increasing, when Moore's Law says that they should be rapidly decreasing. It's no wonder there is so much outsourcing to third parties when there is such discontent with the internal IT function.

However it doesn't need to be this way. CIOs need to be getting onto the front foot and taking a business-friendly approach to the way that IT is run and services supplied to the business than the outsourcers who offer to take on the business of IT cheaper, better and with greater resilience.

Without getting to IT cost tranpsarency, how can the business units be expected to have trust in the recommendations and decisions that the CIO makes?

Many other business units of  banks operate P&Ls, but often IT doesn't, rather it is seen simply as a cost centre and there is no granularity about the cost and how that relates to the business units. Having said that, it doesn't mean that it makes sense or is useful to share the detailed costs of IT with the business.

One of the big difficulties for many CIOs when challenged about the cost of the services that they deliver is that they don't have the numbers available in a business-friendly way to enable the business to understand the true cost of providing services to the bank's customers and therefore being able to make intelligent choices about how they want to consume IT services.

Whereas every IT department will have a General Ledger where entries are made, the structure of these accounts is often designed from IT's perspective with categories such as hardware, software, network and people. Increasingly with the changes in the IT industry and alternative ways of delivering, such as cloud computing (Infrastructure as a service, software as a service, private v public clouds), off-shoring, outsourcing and the green agenda, it is becoming essential to be able to compare the costs of delivering these services.

Fundamentally there needs to be a transformation in the way that IT looks at its finances to being more commercial, and in the culture of IT departments to being far more outward looking and customer-centric. This shift needs to be underpinned by taking far more of a management accounting approach to the finances of IT. Bank CIOs  need to become the CEOs of the IT services businesses that they run - an equal with their fellow business unit MDs.

The end game is to have a set of costs that provide the fully loaded cost of  delivering a business process e.g. what is the IT cost for completing a customer's application for a mortgage from initial enquiry to release of funds. This cost would include an appropriate share of the cost of the use of applications, infrastructure (storage, processor, network, power consumption, data centre and office space, etc.), IT staff and overheads.

An example of an organisation that is taking this approach is Bank of America, who with the rolling out of videoconferencing into their branches (see )  is including the cost of not only the hardware but also the Telepresence licencing, the power consumption and the communications cost to work out the cost of sale using this channel.

Many IT organisations have made or begun to make the transition from a service delivery to a service management approach to IT. ITIL encourages this and, for many organisations, the first step along this path is to create a Service Catalogue. However the Service Catalogue really only becomes useful when there are fully loaded costs associated with each service.

However to get to a full financial model involves a significant amount of work and time, so the pragmatic approach is to take small steps towards this. The easiest way to break this work down would be to pick off a product or service such as network or mainframe, however doing that does not bring about the fundamental shift from internal IT focus to business focus, so a better alternative would be to take a single business process. For instance rather than going for something as complex as an application for a mortgage, a balance enquiry could make a simpler way to demonstrate transparency and build trust with the business, particularly if what is modelled is the IT cost of a balance enquiry over different channels e.g. branch, telephone banking, internet banking or mobile.

By changing the dialogue with business, by being able to explain costs in the terms they understand, CIOs operating as CEO of IT Service Businesses will move from supplier to true business partner.