Breaking up (a branch network) is hard to do

Posted on Thursday 18th October 2012 9:58

It’s been a torrid year for RBS. A few months ago we blogged about its catastrophic IT outage, which threw the spotlight on to how many banks are reliant on antiquated IT systems. And earlier this week this issue edged back into the limelight with the announcement that Santander was stepping away from a deal to take over 316 of the bank’s branches.

As soon as the announcement was made, the bank’s damage limitation team (surely one of the most experienced in the world by now) kicked into action. The papers filled up with rumours that Virgin Money was interested in buying the branch network. Meanwhile senior RBS executives dropped heavy hints that Santander had withdrawn from the £1.65bn deal because now was not a good time for the Spanish bank to be taking on new business. All of this, while entertaining for observers of PR spin, acted as a smokescreen for the real barrier to integration, because it really is all about the IT.

Like most highly centralised organisations, modern banks are dependent on monolithic IT systems. Right through the period of consolidation in financial services that lasted until the start of the financial crisis, a banking takeover had most of the major hallmarks of a coup d’etat. The winning bidder came in and enforced their management regime – crystallised in their IT systems that govern business procedures – on the other party. Nowhere in the UK was this more apparent than in the RBS-Natwest takeover. Here Natwest’s relatively modern banking software infrastructure was jettisoned in favour of the Scottish bank’s much older systems. In the order of priorities, modernisation came second to integration and the desire to create economies of scale.

The costs of merging and de-merging systems are substantial. Natwest and RBS were able to accomplish their successful merger principally because the noughties were a huge boom time for financial services, so its expense was easily offset by growing profits. Santander has no such financial cushion as the bank struggles with falling profits and the fallout from bad loans made during the boom years. This means it may have decided that taking on these RBS branches was too much of a financial risk in itself, as RBS hinted. A more nuanced view, however, would be that Santander couldn’t reconcile the likely rise in profits from 316 new branches against the management cost of integrating them into its own business.

RBS claims that the work to ring-fence the branches up for sale was 90% complete when the deal fell-through, and that problems with IT systems are always soluble. The thing missing from that is the modulating statement “at what cost”. It’s easy to make a business case for complex IT integration projects at a time when profits are healthy and scale matters more than individual branch profitability. It’s much harder, however, to see the rationale for the coup d’etat of a corporate takeover the trouble doesn’t justify the expense.