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Speedy sale may be needed for Co-Op Bank to stabilise poor IT systems

Derek du Preez Profile picture for user ddpreez June 1, 2015
The Co-Operative bank hasn't got a full disaster recovery plan in place and it is also preparing to close its online bank to new customers.

co-op bank
The Co-Operative Bank's IT systems are so poor and its resilience plans are so precarious that senior government officials want the bank to quickly be sold off to a bigger player, in the hope that this will stabilise its technology and prevent a huge problem for customers if a major issue occurred.

According to a report in The Times, if something went awry at one of the Bank's data centres, the lack of a sufficient disaster recovery plan would likely result in the Co-Op not being able to keep track of its customers' deposits.

Whilst we are used to hearing about banks struggling with their out-of-date legacy systems, to give you an idea of how bad the situation is at the Co-Op, it has itself confirmed that its current technology situation means that it is not compliant with the Financial Conduct Authority's threshold conditions.

The situation has meant that the Treasury and regulatory authorities want the bank to find a buyer in an attempt to secure it some stability. And one possibility currently being considered is that Banco Sabadell would be a good suitor, once it has finalised its acquisition of Lloyds TSB, as it is planning to move TSB's to its own IT platform and could follow suit with the Co-Op.

As noted by The Times, however, finding a buyer for the Co-Op will be hugely impacted by the quality of its IT systems. And whilst any purchaser would be given a stake in the current account and savings market, as well as a good presence on the high street, agreeing a price given the risk associated with the bank's IT could prove to be tricky.

Research director at analyst house TechMarketView, Peter Roe, commented that technology is very closely linked to the value of a bank. He said:

Notwithstanding the Co-op Bank situation, it is obvious that technology is fundamentally important to the value of a bank’s shares. Underlying IT determines the ability of a bank to run its operations and manage its risk.

The way a bank is addressing its legacy IT problems and introducing new systems is vitally important in determining its future efficiency, the quality of its customer experience and its ability to take advantage of opportunities. Also, the scale of a bank’s IT is such that decisions made today have multi-year effects on the company’s performance and value.

fintech banking devops
The Co-Operative Bank noted the problems with its IT in its annual report and said “the Bank's infrastructure is in need of an upgrade in numerous respects”. It added that across “the Bank's IT infrastructure there are varying levels of resilience and recoverability and whilst a basic level of resilience to a significant data centre outage is in place, the Bank does not currently have a proven end-to-end disaster recovery capability”.

In a bid to overcome these challenges, the Co-Op Bank added that it is migrating its IT infrastructure to an IBM platform and is expected to deliver proven end-to-end recovery capability by the end of 2016.

The deal with IBM could run for ten years and cost £275 million, in addition to an up-front cost of £93 million. However, it has said that the agreement could be cancelled through its life, making it easy for the bank to exit if a buyer makes an offer (although this is obviously easier said than done).

No reason to smile?

In other news, the Co-Operative Bank has also raised the prospect of closing off its internet bank Smile to new customers, in an attempt to cut costs and focus on its core business. According to the Telegraph, executives suggested to investors that its plan currently is to focus on bringing new customers under the Co-Op umbrella and that Smile is of diminishing importance.

Liam Coleman, the retail and commercial banking director said at an investor event on 20th May:

The Smile brand still exists, but the intention going forward is we will acquire [customers] into one brand which will be the Co-operative Bank.

A spokesperson was somewhat more measured in its comments to the Telegraph, stating that it had no “short or medium term” plans to stop people opening accounts with Smile.

Just over two years ago the Bank revealed that it had a £1.5 billion black hole in its accounts and did not
expect to make a profit until 2017 at the earliest – hence its plans to focus on customer acquisition in its core business.

My take

This is all very worrying for the Co-Op. If a fault does occur and its poor resilience means that it can't fully keep track of customer money, this will no doubt have a huge impact not only on its brand, but also its balance sheet. As we have seen in the past, bank technology failings have resulted in huge fines and huge investments required to right wrongs.

Not only this, but shifting attention away from online-only banking, whilst the rest of the market is making moves towards this, is a bit alarming. I can see the logic, but from my perspective the Co-Op could be focusing on acquiring online-only banking customers in what is a growing market. Surely this has some potential to fill that problematic black hole in its accounts?

Whether or not a buyer will find any of this appealing is also an issue. Perhaps a knock-down price will tempt...

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