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.