IT Nixes Big Bank Deal

Pablo Valerio, International Business & IT Consultant | 11/5/2012 | 13 comments

Pablo Valerio
The Royal Bank of Scotland (RBS) was set to get £1.65 (US$2.7) billion for the transfer of 316 branches to Santander, but unreliable IT killed the deal.

When RBS, unable to cope with the results of the financial crisis, requested a taxpayer-funded £45 billion (US$72 billion) bailout, the European Union required that the bank sell some of its branches to ensure fair competition. RBS has until November 2013 to comply, or face heavy fines by the EU regulators.

Last year, Spain-based Santander Bank, the third largest bank in the UK, agreed to purchase 316 branches, with over 1.8 million customers, for £1.65 billion (US$2.7 billion), effectively saving RBS' financials and giving some badly needed money back to the government. But last month, Santander decided to cancel the deal, blaming RBS' "poor IT infrastructure," which caused a major outage during the summer that effectively shut down the bank's operations for several days.

The outage of RBS' systems during the summer occurred when the batch processing platform crashed, making it impossible to correctly process transactions for several days. The main batch scheduling software used by RBS is CA-7, the flagship banking platform of Computer Associates, some portions of which are still running on 12-year-old mainframes RBS received when it acquired NatWest in 2000.

Some experts claim that the problem started with the bank's decision to outsource some of the CA-7 programming to India. While the bank was quick to deny that as the source of the problem, some IT banking experts agree that, while the outsourced programmers are capable, they don't have experience on, and knowledge of, the complex UK banking systems.

This is not the first time Santander had to deal with poor IT when acquiring banks in different countries. When the bank purchased Abbey National (UK) in 2004, it took nearly four years to update Abbey National's systems to Santander's working standard. Meanwhile, many customers experienced difficulties.

Santander uses a Java technology system called Partenon as their main IT platform. Partenon helps the bank streamline operations and integrate different systems while they work on updating and/or replacing the existing IT infrastructure of acquired banks. Santander's standardization project at Abbey hasn't been a walk in the park, with some customers experiencing some serious issues during the four-year project to integrate the two banks.

"The integration of bank IT systems after a merger or takeover is always a tricky project, given the millions of customer records involved and the potential for customer service to be disrupted. If the IT switchover hits a problem, the reputation of the bank can be damaged. Santander's use of an in-house core banking system as a global system raises the stakes even further," says Nathalie Ormazabal, an MBA candidate at Columbia Business School.

Fortune Magazine has praised Partenon as the "key to cost savings... which has slashed back-office expenses at all its subsidiaries. At its Abbey National subsidiary in Britain, for example, back-office staff went from 70% of the payroll to 30%."

Carol Wheatcroft, an analyst at Tower Group, says Partenon is "probably the best of breed" due to its speed, and ability to take the strain off of back office IT systems.

RBS announced an investment of £80 million (US$128.3 million) over the next twelve months to overhaul its IT systems. The bank's CIO, Ron Teerlink, said he was planning to cut the number of mainframes "to help reduce the potential for future problems."

I hope he has time to finish the job, since, as published by The Telegraph on November 1, Ron Teerlink has resigned for "personal reasons."

What's next for RBS? Someone needs to seriously work out the problem and try to make another deal for those 316 branches. Both RBS' customers and UK taxpayers are not happy with the situation of their banks in the current financial climate, and another failure could cost the collapse of one of Europe's big financial institutions.

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mejiac   IT Nixes Big Bank Deal   11/30/2012 2:50:30 PM
Re: the next deal?
@kstaron,

I think they'll end up being bought out, and the buyer will have to deal with the IT upgrade...I just don't see it happening in such a small period of time.
mejiac   IT Nixes Big Bank Deal   11/30/2012 2:49:24 PM
Re: RBS unacceptable
@Pedro Gonzalez,

I think one thing is to be up to date, and another is to simpley be in compliance, which is I think what happened. They just made sure they passed using the same old tools, nor putting much stategic planning on making the existing infrastructure better.

RIM is an example of what happens when you don't keep things in check and make placeholders for future upgrades and expansion.
mejiac   IT Nixes Big Bank Deal   11/30/2012 2:46:09 PM
Outsourcing is not always the answer
Great Article!

Even though outsourcing is seen as the golden rule to achieve overhead savings, it does lead to secondary issues, as clearly explained in the article.

I think this is why CIOs need to be heavily involved in the process, and know when to stand up and say that it's not a viable solution.

And as mentioned, it doesn't have to do with skill set, but more of the nature of the business and its complexity. So saving on one side can lead to greater costs on the other.
batye   IT Nixes Big Bank Deal   11/6/2012 12:41:07 PM
Re: Boost its' Hardware and then think of the platform
on the global scale of thing it small improvment :)
Pablo Valerio   IT Nixes Big Bank Deal   11/6/2012 11:55:30 AM
Re: the next deal?
@kstaron, the EU mandate to sell some branches is a result of the bailout from the UK government; as a result the taxpayers own 84% of the bank, effectively converted into a National Bank. Under EU rules the UK government can't keep that forever and selling the branches is required to ensure competition. 

RBS was buying banks aggressively during the past 15 years, until the financial crisis, buying NatWest in 1999 and other banks, both in the UK and abroad. This led to a complicated IT infrastructure, effectively running several different systems.

While the IT structure was aging, the bank still paid bonuses to bank executives of nearly £1 ($1.6) billion starting a big controversy since the bank is owned by the taxpayer and lost £24 ($38.4) billion in 2009.
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kstaron   IT Nixes Big Bank Deal   11/6/2012 11:32:23 AM
the next deal?
With subpar IT infrastructure, do you think RBC will have to invest in better IT before it can make the move to sell off branches or are their banks willing to do that kind of upgrading themselves? I wonder if they can get a next deal, and what that means for their mandate to sell off branches.
nimanthad   IT Nixes Big Bank Deal   11/6/2012 7:35:06 AM
Re: Boost its' Hardware and then think of the platform
Why only small improvement ?
Pablo Valerio   IT Nixes Big Bank Deal   11/6/2012 4:31:19 AM
Re: RBS unacceptable
I'm in shock to read that a bank such as RBS is backward when it comes to staying up to date with current technology and making updates to its system.

@Pedro, The issue is more complicated. I believe RBS did what was necessary at the time to keep their systems running. CA-7 is a solid banking standard for batch processing -what most banks do overnight to consolidate the day transactions. But using old mainframes and external IT "consultants" was a recipe for disaster.

For Santander it was a good decision to step back; they need to continue using the current systems of the bank for a while and -after the summer outage- they are not confident about keeping the system running for the RBS customers until they finish their upgrades.

Santander develops and maintains all their critical applications in-house, with their own IT people all over the world.
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Pedro Gonzales   IT Nixes Big Bank Deal   11/5/2012 9:26:46 PM
RBS unacceptable
I'm in shock to read that a bank such as RBS is backward when it comes to staying up to date with current technology and making updates to its system.  I though banks in the UK were suppose to be very efficient and modern, I know now this is not the case.  Hopefully, they can learn from their mistakes and recover from this, otherwise, it may be a political crisis in the U.K
batye   IT Nixes Big Bank Deal   11/5/2012 11:43:06 AM
Re: Boost its' Hardware and then think of the platform
thanks Pablo, interesting... hope they efforts could bring a small improvment to the economy...
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