The fiasco at RBS and NatWest over the past few days has caused disruption to some 12 million retail and business customers, many of whom found themselves unable to access their cash, and forced the banking group to extend its opening hours. It was also entirely predictable.
NatWest and RBS – both part of the Royal Bank of Scotland Group since March 2000 – still have a large backlog of unfulfilled payments to process but are "cautiously optimistic" that the matter, which started on Tuesday, June 19, will be resolved by Monday June 25. A lack of clarity of what actually happened has only served to fuel the rumour mill.
Technology publication The Register, said: "the screw-up has been pinned down to a flaw with payment-processing software, and primarily means that bank balances don't register inbound payments" while the Daily Mail said "the error occurred when a software upgrade was being installed to the payment system".
But a systems meltdown of this nature was probably inevitable at RBS as a result of: (a) the inadequacy and age of its core systems and (b) the banking group's post-crisis policy of firing experienced IT staff and contractors and outsourcing the work to India.
RBS's core systems are positively veteran. According to someone with close knowledge of IT at the Edinburgh-headquartered institution, the bank's 'general ledger' dates from 1967!! He told me:
"Neither of the two state-owned banks in the UK [Lloyds Banking Group and RBS] have internal accounting systems that can tell the value of anything at all. The general ledger at RBS is 1967 vintage, they've spent £200m with Oracle trying to sort it, but they're still struggling to get it to add up"
I reported on shoddy IT and the inadequacy of management information systems at RBS and other leading banks, and the risks this poses, in my Clueless banks happy to drift in a sea of inexactitude blog of July 2010.
Andy Haldane, Bank of England executive director for financial stability, also highlighted such issues following a speech at The Credit Crisis Five Years On conference at the University of Edinburgh Business School earlier this month. In a question and answer session, Haldane said the Number One cause of the banking crisis was that "some of the biggest global banks" were unable to add up their own numbers. Haldane, also a member of the BoE's Financial Policy Committee, said he first became aware of the severity of the problem as the crisis started to unfold in 2007-08, adding:
"that left me dumbfounded ... It is pretty clear that if you cannot add up the numbers you cannot do consolidated risk-management"
He only knows of one global bank that has sufficient "visibility" of its own balance sheet to manage risks effectively. He didn't name the bank, but he may have been referring to Goldman Sachs.
So back to RBS. The second reason that a systems meltdown was probably inevitable, as I said above, is its post-crisis policy of sacking experienced IT professionals and outsourcing the work to India. In the comment stream under a Sunday Telegraph article on the bank's IT crisis, a pseudonymous self-proclaimed ex-RBS insider ('BoeingBoy') wrote:
...I'm anonymous for very obvious reasons, having been one of the recent 1000+ to find their roles now being done from Chennai, however I have been speaking to a few ex-colleagues who are still there and can confirm that a CA7 upgrade was done, went horribly wrong, and was then backed out (which will have been done in typical RBS style - 12 hours of conference calls before letting the techie do what they suggested at the very start).
My understanding is that most, if not all, of the batch team were let go and replaced with people from India and I do remember them complaining that they were having to pass 10-20+ years worth of mainframe knowledge on to people who'd never heard of a mainframe outside of a museum...
So is a bank which still uses a 1967 vintage general ledger, which is scrimping and saving on its IT systems, which is eliminating experienced IT talent, and outsourcing IT work to people with no knowledge or understanding of the hardware it uses, is basically taking its customers for granted?
Speaking to the Herald in November 2010, RBS's head of retail banking Brian Hartzer (who quit the bank to take over as chief executive of Australian bank WestPac on June 15) said that, under former chief executive Fred Goodwin, the Scottish bank used its retail arm as a "cash cow" to fund acquisitions.
In some respects this has changed. However, the systems meltdown suggests that, even under Goodwin's successor Stephen Hester, the retail business may still be being used as a "cash cow" -- only this time to fund egregious bonuses. Or, as Daily Mail City editor Alex Brummer tweeted it, "RBS was so focused on trading its way out of trouble and paying bonuses that it forgot customers".
More on banks' IT systems and Royal Bank of Scotland's bonus habit:
- Why would a bank change its core system? by Searching Finance
- Clueless banks happy to drift in sea of inexactitude by Ian Fraser
- So does RBS boss Stephen Hester deserve his £1m bonus? by Ian Fraser
Tags: Andy Haldane , Bank of England , banking , Brian Hartzer , CA7 upgrade , Chennai , Financial Policy Committee , general ledger , Goldman Sachs , Natwest , Oracle , RBS , Royal Bank of Scotland , Royal Bank of Scotland (RBS) , stephen Hester , The Herald , transparency , UK