Banking Disintegration – A New Industry?
RBS has announced the sale of some 300 odd branches in the UK to the Santander Group; the Spanish banking group that has recently acquired Abbey, Alliance and Leicester and parts of Bradford and Bingley in the UK.
The sale by RBS of some of its branches, customers and accounts may seem just another banking industry merger. However, from a banking operations and IT systems perspective, it is a landmark. Read more to find out why, and why it might spawn a new IT service industry.
Bank Integration to Date
The world of investment banking has constantly been one of banks forming and then fragmenting as key staff leave to form boutiques or join rivals. The world of Commercial and Retail banking has been characterised by a single direction of travel; one of increasing size with a substantial portion of the growth created by bank mergers and integration.
This trend is driven by the possibilities of creating economies of scale by rationalising IT infrastructures, back office processing and in some cases branch networks. It is a worldwide phenomenon, so giants like Bank of America and JP Morgan Chase in the USA, Lloyds TSB in the UK and Santander Group in Spain have followed the same basic integration idea.
Accompanying this process, a small industry, both inside banks and in consulting and services companies has grown, specialising in bank systems and operations integration. Methodologies have evolved for mapping products, data, processes and customers and software tools have been developed to do the Extract Transform and Load (ETL) of the millions of data records banks need to migrate from one platform to another when they integrate.
What is New?
The first key difference between the recently announced RBS/Santander deal and others is that it is a partial divestment. RBS has grown largely by acquisition and integration, most notably the NatWest integration in 2001/3 and most infamously the ABN integration in 2007. It is selling the branches because it is forced to by an EU competition ruling resulting from the UK Government aid it has received. It does not want to sell these branches; it is forced to.
Previously, bank integrations have dealt with whole banks, entire legal entities, and complete branch networks. The acquiring bank bought the whole organisation including the IT infrastructure and back office processes and then set about rationalising these aspects.
In the RBSG divestment, the IT platform and infrastructure has to remain with the selling bank in order to run the branches and customers that it retains. This is illustrated in the diagram below.
A surgical analogy would be that of a heart transplant versus Siamese twin separation. Most bank integrations are like a heart transplant and involve the transfer of data from one bank to another, one set of systems to another, whereby the donor systems are expected to “die” at the end of the transplant. In the RBS case, the assets to be transferred have to be separated whilst ensuring that both the recipient bank and donor bank continue to live on healthily afterwards. This is inherently more complicated.
What about competitors collaborating?
Good question. In most bank acquisitions, the purchaser gets a whole bank and so gets full rights to inspect all the aspects of the bank acquired (the books, the staff records, the system and other intellectual property).In this disintegration situation, the buyer is a competitor who must only be allowed to see those aspects of the selling bank that are being purchased.
Given the very integrated nature of operations (e.g. multi-function call centres) and systems, putting invisibility walls through the middle of the acquired bank will be very difficult. It will certainly not make collaborative disintegration project working straightforward.
It still does not sound that complex compared to banking intergration
Another key difference is a consequence of the business plan to sell whole branches with their associated customers and staff. Modern banks like RBS do not work very much on a branch-based model, so:
- Some customers (particularly businesses) have accounts in multiple branches, e.g. for geographic reasons – some in Scotland, some in England and some in Wales. It is very likely that these customers could end up being chopped in half by the disintegration process, so to maintain customer services, exceptions will have to be created. Either the customer stays with RBS when the rest of the branch in which his account sits migrates, or the customer’s account moves to the new bank while the rest of the branch is unaffected and remains as it was.
- Modern banks also have “virtual” branches for particular products like certain types of mortgage or ISA. These virtual branches do not have a physical location and are just a logical grouping of accounts but they do conform to branch accounting rules. Again, some of the accounts will go as part of the divestment and some not.
Thus, whilst the physical bricks and mortar of what is to be sold is readily identifiable, the customer accounts are far less easily classified. Practically every branch will have at least one account that is to be divested and conversely nearly every branch that is to go will have at least one account that is to remain. This means that the divestment process has to be managed at an account-by-account level. Bank integrations have generally worked at a whole bank level or at the very least a whole branch level. An example of the complexity this generates is the whole area of Branch level general ledgers and suspense accounts which have to be split across new and old banks.
Afraid so. In the UK, the sort code (or branch code) is a key identifier of where to send interbank payments. As a consequence of the previous section, the branch sort code is no longer a good identifier of which bank the payment has to go to because the account in that branch could belong to the divesting bank or the acquiring bank. This means the two banks will have to choose whether to:
- Renumber customer accounts (not popular with customers as they have to get new debit cards, cheque books, DD’s reset, etc), or
- Create some clever interbank re-routing based on lists of accounts numbers, or
Most bank integrations have avoided these sorts of developments because of their complexity and riskiness.
The New Industry?
The RBS/Santander deal is not unique. Lloyds TSB is under a similar EC ruling to divest itself of 600 branches. All over Europe, banks have been receiving state aid and in many of those countries the banks have limited local competition.
So it is possible that many more such divestment deals will take place. The existing industry skills in banking integration are relevant to these divestment operations but they need to be complemented with expertise in payments and core banking accounting to cover the specific problems of divestment, as opposed to Banking integration.