Written by Scott Thompson
The FS sector was plagued by IT troubles throughout 2012 and a number of banks consequently found themselves under fire from the media, politicians and increasingly beleaguered customers. But, as Scott Thompson reports, there were also some bright spots this year
2012 has, it’s fair to say, been a year of extremes; there have been some highs but mostly lows. As Professor Merlin Stone, head of research at The Customer Framework, observes: “In the UK, the lows have been the failures in banking systems, which have paralleled the outages in the mobile phone sector, depriving customers of their ability to transact. Ironically, the latest failure was the discovery of the fraud proneness of the mobile systems used to withdraw money. A longer term low, in the advisory sector, has been the failure of regulators and suppliers to cooperate in envisioning and perhaps even creating the kind of advisory system that would replace the personal advice from which so many smaller investors will be barred under the Retail Distribution Review regime, and the associated withdrawal of many banks from the sector – their only way of staying would have been to automate, given their cost structures.”
He adds that the high is the financial world not collapsing, “despite the attempts of Greece and the EU, and the unintended consequences of clumsy regulatory interventions in many places.”
Another high should have been mobile payments/NFC, at least if you bought into the blizzard of hype surrounding it. Much of the talk in FStech’s 2012 preview feature (which appeared in our January/February edition) was around m-payments being the next big thing as infrastructure standards were finalised, pilots from both mobile operators and financial institutions kicked off and, in a few cases, transitioned to commercial service and NFC-enabled smartphone models were announced. But sadly there has been little in the way of people paying for stuff with their phones. And also sadly, the smartphone that really mattered failed once again to appear, with Apple declining to climb aboard the NFC bandwagon. Senior vice president of worldwide marketing, Phil Schiller, defended the decision to run with a NFC-free iPhone 5 by saying he had his doubts about NFC and wondered if it was the solution to any of today’s problems. Make no mistake, it was a major blow.
Stone comments: “In one of the side alleys of financial services – the card operators – 2012 (and 2013) will turn out to be the years when they discovered that NFC was terribly hyped, as Apple has more or less agreed and as Google and others have discovered to their cost. It may be – as it is turning out in the US – that what they need to watch is big retailers going it alone (e.g. Walmart and Amex) or the threat from more cloud-based providers (Square, PayPal), though the latter threat is not yet serious in Europe. Payment systems should stay on the radar, although in the UK there is little evidence that consumers or retailers are anything but happy with the status quo, particularly with card operator margins under tough regulatory scrutiny.”
For Ken Cregan, FS principal, Capgemini Consulting, NFC is an ongoing key area, given the potential benefits it could deliver for customers, coupled with the widening array of service offerings being made available. But there are obstacles to be overcome. “While the technology is getting considerable attention and focus, the FS sector as a whole has not adequately addressed
the creation of an attractive customer proposition. This mismatch between continuous technical investment, and the need for an effective customer proposition alongside clear communication on customer security concerns, is impacting customer and merchant adoption.”
Huw Thomas, managing director at PMC, backs up this viewpoint, arguing that the time for talk is over. 2013 has to be the year where this gets some real traction. “The market desperately needs it and consumer demand is pushing in that direction but there is a lack of real progress in mobile payments. Mobile is clearly lining up to be one of the key technology enablers over the next few years but there is a complete chasm in terms of leadership and direction. It feels as if the market is being driven by vendor offerings rather than led by the financial services institutions.”
Poor IT integration and legacy issues hit the headlines throughout 2012. Santander pulled out of its deal to buy 316 UK branches from RBS, blaming IT integration costs and complications. The deal had originally been agreed more than two years ago, with RBS expected to complete the transfer of the branches to the Spanish banking giant next year. But it was hit by serious delays as the banks struggled to cope with the organisational and IT challenges that come with separating out branches and creating a new business.
“The Spanish bank realised the detrimental impact that delayed technology systems could have had upon the valued customer, a setback that could ultimately shape the way we approach deals in the future,” says Aksana Pekun, managing director and technology specialist at Altium. “While the failed acquisition has taken two years and cost millions of pounds, Santander has probably saved itself from a succession of problems further down the line. Pulling out at this stage has saved the firm getting it in the neck from shareholders and being grilled in Parliament for unforeseen IT systems that would have served its customers poorly.”
Bank of Scotland (BOS), meanwhile, was fined £4.2 million by the FSA for legacy system failures which meant it held inaccurate mortgage records for 250,000 of its customers. Mortgage information was held on two separate unaligned systems and there were also problems with two further processes where manual updates were not always carried out. BOS relied on incorrect records for considerable periods of time between 2004 and 2011.
The issue first came to light when the bank put in place a programme to rectify the fact that some Halifax customers had received potentially confusing information about changes to their mortgage contracts, specifically relating to the standard variable rate. While monitoring a consumer forum website, the FSA found a number of customers complaining that they had been wrongly excluded from the programme and had not received goodwill payments. As well as excluding this group, the problem was compounded when BOS incorrectly contacted 33,700 customers who should never have been included in the programme, and mistakenly made goodwill payments totalling £20.4 million to 22,700 of them.
Tracey McDermott, FSA director of enforcement and financial crime, said: “This breach is particularly serious because the inaccuracies built up over a period of seven years. There was no structure in place to identify errors as they occurred and no checking procedures thereafter. In a complicated organisation where several legacy systems exist, firms have to make sure they are synchronised, otherwise it is their customers who suffer.”
A damning verdict. And one that provided more fuel for the fire of the banker bashers who were out in force this year (be it angry customers, newspaper journalists with the smell of blood in their nostrils or opportunistic politicians who had previously fallen over themselves to cosy up to the banking
sector when times were good). “Public perception of the financial services sector is that it is the fundamental cause of all issues economy-related and that anyone who works in the industry is crooked. With that as a starting position then the multiple banking outages this year didn’t do anything to help matters. Whether you look at the RBS online banking fiasco in June that affected millions of users or the multiple shorter online and cash machine outages from other institutions, this has not been a great year for the delivery of the key financial services that effect the majority of the population,” comments PMC’s Thomas.
For Simon Barrows, director of financial services, Glue Reply, the undoubted low of 2012 was the RBS ‘technical glitch’ which “resulted in customers being unable to access their money and make/receive payments for days and in the case of the poor de-prioritised Ulster Bank customers into weeks. The incident did serve to demonstrate, however, that banking and the financial services industry in general is utterly reliant on technology – a classic case of you notice and miss something the most when it is not there.”
FStech devoted many column inches this year to discussions on the perils of outsourcing/offshoring, creaking and overcomplicated decades-old core banking systems and the key strategic importance of these systems to the country as a whole. If all the debate and controversy catalyses the major banks to take meaningful action to simplify and de-risk their IT architectures then perhaps this particular black cloud will have a silver lining. It remains to be seen, though, whether this will be the case. “RBS’s own (£80 million) plans to simplify its mainframe estate sound like a good start but the challenge all the banks will have is that making material improvements to their core systems
won’t be easy, technically it will be extremely expensive and of course diverts what is in most cases already-strained organisational capacity away from other things, whether it be adding value to the business or keeping the regulators from the door,” observes Barrows.
A year, then, of negative headlines, budgets under pressure, job losses, trigger happy regulators, hefty fines, stagnant economies and deeply unhappy customers. And unfortunately 2013 promises more of the same. “Everywhere you look FS organisations are struggling to deal with a witches’ brew of significant cost cutting, a tidal wave of disjointed regulation, low customer trust and increasing demands, plus the need to innovate both products and services and the underpinning technology – mobile, mobile, mobile,” says Barrows.
“Trying to do several conflicting things all at once is next to impossible whatever the context, so not surprisingly the desirable (not mandatory) aspects suffer. A key capability for financial services organisations going forward will be their ability to not only comply with the various streams of regulation thrown
at them, but to do so in a way that minimises impacts on the value-enhancing initiatives and even supports them, e.g. improving data governance not just for Solvency II but build from that to deliver improved business performance from
better data quality. Strategic planning will be vital, aligning the objectives and footprints of initiatives across the organisation to remove conflicts, leverage synergies and focus on key priorities.”
FStech’s top tech trends of 2012
The consumerisation drive continued apace in 2012 with private banking the next step along this journey. Personal finance service, Nutmeg, launched private banking-like services for all, a logical extension of the smartphone and social networking revolutions seeping into enterprise, influencing existing working models and creating new ways of working.
Mobile banking was certainly one to watch this year and one of the companies at the forefront was UK outfit Monitise, which saw its user numbers quadruple in the last year to 17 million. The company was even singled out as an example of British entrepreneurial spirit by David Cameron during his Tory conference keynote speech. The PM said: “Alastair Lukies (CEO and co-founder) and his business partner saw a world with almost six billion mobile phones and just two billion bank accounts. They saw the huge gap in the market and they started a mobile banking firm helping people in the poorest parts of the world manage their money and start new companies. He’s been with me on trade missions all over the world – and his business is booming. Back in 2010, when we came to office, they employed about 100 people – now it’s more than 700. Then they were nowhere in Africa, nowhere in Asia, now they are the global player, with one million new users every month.”
Contactless cards finally began to take off. Yep, you read that right. After years of hype but no substance, contactless started to make some headway this year with consumers. Raising the payments limit from £15 to £20 was a wise move. Whilst two significant players here were NatWest and Marks & Spencer. The former increased the number of contactless debit and credit cards in issue, with an initial focus on London and the south east. And the latter rolled out contactless in its London stores. By year end, even our Editor, a notorious cynic in this regard, the result of one too many tired press releases trumpeting the slightest of developments, was using his card at M&S for lunchtime treats.
H is for hactivism...Recent months have seen a DDoS attack against HSBC and incidences involving US banks motivated by political aims. The attack on US Bank, PNC, Well Fargo, Bank of America and Chase Bank were believed to have been instigated by Muslim extremist group Izz ad-Din al-Qassam Cyber Fighters, which said it would target institutions until an anti-Islam YouTube movie trailer was taken offline. Paul Lawrence, VP international operations at DDoS mitigation experts Corero, comments: “In our experience financial organisations are slightly ahead of other businesses in the appreciation of the threats that DDoS attacks represent to their business, however many are lulled into a false sense of security by thinking that traditional means of defence like firewalls will combat the threat. Unfortunately it’s often only when they’re the victim of attacks, like HSBC, that they realise that firewalls are unable to cope with such large volumetric attacks.”
There was lots of interesting use of social media by financial services companies this year. Hats off to first direct which continues to lead the way in this area. Earlier this year, for instance, it relaunched its customer website, www.firstdirect.com, utilising crowdsourcing venture, firstdirectLab, to gather the thoughts and opinions of the public on how the site could be improved. And Metro Bank was top of the tweets, using its Twitter account to interact with customers and post updates on new branches and services.
The pace at which technology is being introduced into the financial services sector accelerated in 2012, with a range of new payment services, new banks and personal financial management solutions being announced. “This pace is challenging banks’ traditional customer relationship models, along with standard product development and launch models. On the positive side, banks are changing their relevant operating models to address these challenges, with a number of them, such as Lloyds Banking Group, showing early benefits,” says Ken Cregan, FS principal, Capgemini Consulting.