Banco Sabadell faces a significant challenge integrating TSB’s IT systems onto its own technology platform, despite a £450 million ‘dowry’ fund provided by parent company Lloyds Banking Group.
The Spanish bank announced plans today to move the TBS onto its proprietary Proteo software platform as part of the £1.7 billion takeover, with the bank expecting to achieve £160 million per annum “IT optimisation benefits” within three years.
The migration will be aided by Lloyds’ fund, but separating large, complex banking systems will be a tough test for Banco Sabadell as it seeks to gain a foothold in the UK, according to one expert.
“Banco Sabadell is going to benefit from the funding from Lloyds to enable the migration. They have the opportunity to create something new and exciting if they choose to seize the opportunity, but it is still going to be an expensive and taxing process,” said TechMarketView financial services analyst, Peter Roe.
“A lot of money will be spent unpicking all of the stuff out of the Lloyds systems. [The migration fund] is a large amount of money because of the way in which it is intricately woven into the Lloyds system stack.”
TSB spin-off plans near completion
The acquisition is the final step in the UK government’s plans to spin off the bank from the main Lloyds business, as part of the strategy created following the financial crisis known as Project Verde which involved 632 branches being sold at the behest of EU regulators.
The project involved a doomed attempt to sell TSB to Co-operative Bank, before officially re-launched onto the high street in September 2013.
Despite the split, TSB remained on Lloyds’ IT systems, with its parent bank charging £100 million a year under a rental agreement, expected to rise to £200 million in 2017 - an arrangement which came under scrutiny from the Office of Fair Trading.
Although Lloyds would have initiated the process of splitting systems – such as separating customer data separated and creating separate data bases – the complexity of the systems means there is plenty of work ahead for Banco Sabadell.
“They would have made some baby steps towards it in terms of separating the customer list and the branches in terms of reporting systems,” Roe said. “They will have started that but it will be a long way from completion.”
He added: “Lloyds has a complex legacy stack and very old components, like all large UK banks. Even though Lloyds is one of the more simple of the banks as it has been very much a domestic bank, it has still got a complex legacy structure.”
Roe added that the process could be made easier by moving TSB to off-the-shelf software from suppliers such as FIS, Fiserv and Temenos rather Banco Sabadell’s platform – a strategy employed by other challenger banks in the UK, such as Sainsbury’s Bank.
“They have an opportunity to make a significant break and make a significant change in systems, and to provide TSB with a much more agile, forward-looking and responsive computer system,” he said.
“Sabadell systems are several years old, and not designed for the UK market, so what they may want to do is look at making the new TSB system as good as possible.”
Gaining a foothold in the UK market
Overall, however, the £450 million payment is likely to makes deal a beneficial one for the Spanish bank.
Josep Oliu Creus, chairman of Banco Sabadell, commented that moving TSB onto its systems will "speed up TSB's expansion" and help position it as "strong and effective challenger to the traditional UK banks, without any of their legacy issues".
Roe agreed that the deal make sense for Banco Sabadell: “Yes it will be painful, yes it will take time, but they have probably seen that as quite a fortuitous way to get into the UK market, having the migration paid for to some significant extent by somebody else and learning quickly about the UK market.”