Do banks need to be IT experts?
The news that Santander is walking away from the acquisition of 316 branches from RBS (Royal Bank of Scotland) due to delays in the IT project to deliver the branches and customers to Santander once again brings attention to the dependency of banks on IT. This comes hot on the heels of the problems RBSG had with providing customers access to their Natwest and Ulster Bank accounts, the loss of access to ATMs that Lloyds and Halifax customers had recently and similar periodic outages that Australian banks have continued to have over the last eighteen months.
There is no doubt that banks are hugely dependent upon technology to deliver services to their customers, however there are significant differences between banks as to how they address this need.
Santander for many years has been clear that having ownership of world class IT competencies is critical to the success of the bank and has underpinned the growth of their business. As the Executive Vice-President Operations and Technology at Santander CIO, Jose Maria Fuster, has said “At Santander, technology has always been considered a competitive weapon”. In the early 2000s Santander put in place what is effectively their own internal IT company called Isban, which was responsible for building their core banking platform, Partnenon, and their core front end, Alhambra. These two platforms that have enabled Santander to deliver the synergies from acquisitions across the globe including in South America, and Abbey National, Alliance & Leicester and Bradford & Bingley in the UK. The strategy of having a single global platform for all their banks across the globe, whilst it has had its challenges, has enabled Santander to be one of the most efficient banks in the world. Others have tried to emulate this, HSBC and Citibank amongst them, but none have achieved it to the extent of Santander. The customers of RBS associated with the 316 branches would have been migrated onto Partnenon had the deal gone through to completion.
A bank that is taking a radically different approach to Santander is National Australia Bank. Gavin Slater, Chief Operating Officer, says “While we are an information technology driven company, we aren’t an IT company”. Banks today “do not have the expertise or R&D budgets” to invest in building its own systems. “I don’t want to be owning boxes, I don’t want to be owning networks, switches, software,” NAB instead wants to be an orchestrator of technology services and introduce variability into its cost base by only paying for what it uses. Not only does NAB not own the kit sitting in its datacentres or the network infrastructure, but NAB looks to suppliers to carry out the systems integration.
The model that NAB has implemented changes fundamentally the role and the competencies required of the IT function. For a start it means that the CIO should be able to spend far more time focussing on understanding the businesses requirements and both how technology can enable them as well as provide new opportunities for the bank. It also means that the CIO has to have exceptionally strong supplier management skills. The IT function will be dramatically different from that of an organisation such as Santander. It will be a far slimmer organisation with the principle competencies being relationship management (both internal business and external suppliers), enterprise architecture and innovation.
Santander and NAB are at two extremes of the models for IT for banks. Barclays went through the process of outsourcing significant parts of its application maintenance competency to Accenture only to bring it back in house again. Lloyds Banking Group has outsourced a large proportion of its application development and maintenance competency to a set of competing Indian offshore organisations. HSBC is more akin to Santander seeing IT as a core competency that it wishes to keep in house but, unlike Santander, largely offshore.
Whilst it has been accepted wisdom that IT is a differentiator for banks and that the intellectual property encapsulated within the software should be guarded and treated as top secret not all banks agree. With the increasing use of free and open source software banks such as Deutsche Bank and Credit Agricole have announced initiatives to share their software and their APIs with competitors and external software engineers much as Apple encourages programmers anywhere to develop apps for its App Store.
Deutsche Banks’ Lodestone Foundation’s aim is to “quickly and convincingly build the go-to non-profit open source foundation for financial markets”. That would mean attracting developers who are able to write software that can then be used by the whole industry. Sharing market software, Deutsche says, will save it and other big global banks some of the billions of dollars and euros that they would otherwise have spent building or improving on individual technology systems.
Credit Agricole has launched its CAStore where software engineers can download Credit Agricole APIs, build apps which customers will then be able to download. An example of crowdsourcing for application development.
As increasingly the major banks across the globe find their ancient systems creaking, failing and in need of replacement while at the same time the demands for technology-enabled solutions largely driven by the rise and rise of digital grow, the question bank CEOs and COOs need to be asking is whether the existing model for delivering IT is sustainable. As Gavin Slater of NAB points out when is a bank ever going to compete with the $2.5bn investment in R&D that the likes of Oracle makes?
Is NAB right? Is the Santander model no longer cost effective? Only time will tell, but one thing is sure banks across the world are watching and waiting to see what lessons they can take and apply.