RBS nightmare continues

Hester’s position becoming untenable

It now seems scarcely credible that as recently as 10 days ago, the outgoing head of retail banking at Royal Bank of Scotland (RBS), Brian Hartzer, told the Financial Times:

“I have rebuilt nearly everything about the place……from call centres, to branch systems…”

As Hartzer departed to return to Australia to take up an appointment at Westpac, he summarised his work at RBS as “job done”.

Hartzer’s upbeat assessment of his own performance at RBS echoed a glowing tribute from RBS chairman, Philip Hampton.

On 30 May, Hampton told RBS shareholders:

“Brian is leaving a behind a division with a much sharper customer focus. 

“The latest independent audit of UK Retail's Customer Charter shows Brian has made real progress on the things customers most wanted changed.”

Within two days of Hartzer’s FT interview being published, RBS endured a nightmare “technical failure” which has affected a large number of its 17 million customers.

A week after the IT problem surfaced, RBS remains unable to confirm when all customer accounts will return to normal.

The cost to RBS in respect of the extra cost of staff overtime, branch openings and fees refunds is likely to cost the bank tens of millions of pounds. Once you factor in the cost of customer compensation, the final cost could easily exceed £100m.

PR disaster

Above all, the episode has been yet another PR disaster for RBS in general and CEO Stephen Hester in particular.

In February, Hester did himself no favours by giving the impression of only waiving a proposed £1m bonus as a result of a public outcry and pressure from politicians that no such bonus was merited.

Hester’s neck is now on the block as a result of this latest embarrassment, one of the biggest customer-service disasters in living memory.

He did not exactly cut an impressive figure on TV news with the inadequate explanation that the service failures related to a “software change that didn’t go right.”

It would be a surprise if he remains in his current role beyond the end of the year.

It has been claimed that RBS’ technical issues have been exacerbated by an over-enthusiasm on its part to outsource key parts of its banking technology.

If anything, RBS has outsourced less of its IT functions than rival banks.

RBS continues to run the majority of its banking technology in-house via so called IT legacy systems.

There is no evidence that the current problem relates to failures within RBS’ core banking IT platform.

It is however fair comment for analysts to point out that RBS has failed in the boom years to replaced ageing legacy systems with modern platforms.

By contrast, RBS rivals such as Nationwide Building Society and Cooperative Bank are investing heavily in latest generation core banking platforms.

Power vacuum

The impression of a power vacuum at the top of RBS’ retail unit also does not help.

Hartzer left RBS earlier this month. His successor, Ross McEwan, another Australian – does not take up his position until early August.

Meantime, the head of retail banking role is being shared by Satyendra Chelvendra, managing director consumer distributions, and Les Matheson, managing director, products and marketing.

Ross McEwan has run the retail banking unit of Australia’s largest retail bank, Commonwealth Bank (CBA), since 2007.

Under McEwan’s leadership, CBA has adopted a very different IT strategy to RBS.

In April 2008, CBA announced plans to its core banking operations to the SAP for Banking platform under a four year, $600m programme to overhaul its legacy systems.

At the time, McEwan said that the investment would deliver a better customer service platform and simplify IT systems, infrastructure and business services, as well as provide significant operational benefits and cost savings. 

The current RBS IT and customer service nightmare should make McEwan feel quite at home, straight away.

Lowlights of CBA’s IT and service issues include during McEwan’s time as head of retail banking include:

  • November 2008 - CBA had to issue a groveling apology to customers as problems with its NetBank online banking system and other payment channels affected around 200,000 customers;
  • June 2009  - CBA had to shut down its online banking platform under the weight of unprecedented levels of traffic;
  • August 2009 - CBA announced that it added $150m million to its original $580m core banking overhaul budget;
  • December 2010 -CBA was hit by another glitch that left some customers unable to access their account information;
  • February 2011 – CBA extended its core banking tech modernisation programme by one year, and upped spending on the project to $1.1bn almost double its original estimates of $580m, and
  • December 2011- CBA customers are left fuming by more ATM and online outages.

In the boom years, there is a strong argument that RBS failed lamentably to invest in its IT architecture and systems – it has hundreds of millions of pent-up IT investment ahead in the short to medium term.

As the experience of CBA shows, investing in the latest banking technology is no guarantee that major customer service problems will not occur.

One thing is for sure: it will be some time before a head of retail banking at RBS cheerefully signs off with a “job done.”

UK retail banking customers are notoriously reluctant to switch their main banking provider.

Less than 1 in-10 of us switched our main bank last year.

The customer service meltdown at RBS NatWest of the past week will stretch that customer loyalty to the limit.

It is now for the FSA to ask some pertinent questions of RBS as to why its back-up systems or lack of back-up systems have failed so miserably in the past week.

It is highly unlikely that RBS or Hester will emerge from that enquiry with their reputations enhanced.

Meantime, if you happen to note that RBS’ share price seems to have moved in the right direction  - it has limped along at around 20p-30p for the past year, don’t be kidded, don’t be conned.

Earlier this month, RBS shares were consolidated with shareholders handed one new share for every 10 they own, meaning the bank's share price will soared artificially to around 200p.

So RBS shares will now have to exceed 500p before getting close to a level at which the UK government can start to sell off its 82 per cent stake and break-even.

RBS shares currently trade at 229p (or 22.9p under the old shares arrangement). The day when the UK government can dispose of its RBS shares cannot come too soon but seems further away than ever.

Douglas Blakey is the editor of Retail Banker International

Hester, Photograph: Getty Images

Douglas Blakey is the editor of Retail Banker International

Getty Images.
Show Hide image

George Osborne's surplus target is under threat without greater austerity

The IFS exposes the Chancellor's lack of breathing space.

At the end of the last year, I noted how George Osborne's stock, which rose dramatically after the general election, had begun to plummet. His ratings among Tory members and the electorate fell after the tax credits imbroglio and he was booed at the Star Wars premiere (a moment which recalled his past humbling at the Paralympics opening ceremony). 

Matters have improved little since. The Chancellor was isolated by No.10 and cabinet colleagues after describing the Google tax deal, under which the company paid £130m, as a "major success". Today, he is returning from the Super Bowl to a grim prognosis from the IFS. In its Green Budget, the economic oracle warns that Osborne's defining ambition of a budget surplus by 2019-20 may be unachievable without further spending cuts and tax rises. 

Though the OBR's most recent forecast gave him a £10.1bn cushion, reduced earnings growth and lower equity prices could eat up most of that. In addition, the government has pledged to make £8bn of currently unfunded tax cuts by raising the personal allowance and the 40p rate threshold. The problem for Osborne, as his tax credits defeat demonstrated, is that there are few easy cuts left to make. 

Having committed to achieving a surplus by the fixed date of 2019-20, the Chancellor's new fiscal mandate gives him less flexibility than in the past. Indeed, it has been enshrined in law. Osborne's hope is that the UK will achieve its first surplus since 2000-01 just at the moment that he is set to succeed (or has succeeded) David Cameron as prime minister: his political fortunes are aligned with those of the economy. 

There is just one get-out clause. Should GDP growth fall below 1 per cent, the target is suspended. An anaemic economy would hardly be welcome for the Chancellor but it would at least provide him with an alibi for continued borrowing. Osborne may be forced to once more recite his own version of Keynes's maxim: "When the facts change, I change my mind. What do you do, sir?" 

George Eaton is political editor of the New Statesman.