TSB's reliance on Lloyds Banking Group’s (LBG) IT infrastructure could hinder the recently re-launched bank’s ability to compete independently in the marketplace, the Office of Fair Trading has warned.
Lloyds sold off 632 branches under the terms of an EU bail-out agreement, and as part of the terms of the divestment deal, known as Project Verde, the bank is currently negotiating an arrangement to provide ongoing outsourced IT support to TSB until at least 2016.
However, the OFT’s chief executive Clive Maxwell said that TSB’s dependency on Lloyds’ IT platform could have a negative impact on its competitiveness, and that any agreement between the two should give TSB the flexibility to capture more of the personal current account market by differentiating itself from Lloyds in terms of its strategy.
“We recognise LBG’s assurances about Verde’s ability to modify and innovate and the efforts made to reduce the overall cost base for the IT platform and the overall benefit that a transitional arrangement can provide stability for Verde in its early years,” Maxwell wrote in a letter to chancellor George Osborne.
“However, there remain concerns about the impact on competition arising from any Verde dependence on LBG, the influence that LBG will retain over the operational flexibility of Verde, including its ability to innovate and differentiate its product offering as well as any information flows between the parties.”
In a series of recommendations, the OFT suggested an “expert and independent” organisation should be employed to scrutinise any IT services agreement, in order to ensure that Lloyds does not either leave TSB open to “poor quality of service”, or influence TSB’s competitive behaviour.
TSB has already encountered problems as a results of its use of Lloyds' IT systems, with customers unable to access internet banking on the morning of its re-launch earlier this week. Lloyds told ComputerworldUK at the time that the outage was caused by a fault in its data centre, following a networking equipment failure.
In addition, the watchdog suggested that a break clause be inserted in any agreement between the two banks to ensure that TSB can terminate the IT support deal should it be acquired by another bank with its own IT systems.
'Verde' and 'Rainbow' merger not viable
The OFT also highlighted the possibility of requiring a merger between TSB and a company formed as a result of a similar divestment process underway at RBS, codenamed Project Rainbow. However the watchdog suggested that such a deal should not be required, on the basis that a merger would cause significant delays to the divestment process as consequence of “extensive technical integration issues”.
RBS has already run into problems with its own divestment, with a proposed deal worth £1.7 billion involving the sale of 316 branches to Santander falling through due to problems integrating its complex IT infrastructure with the other bank.
It had originally been intended that the Co-op bank would purchase the Lloyds branches as part of Project Verde, but the £750 million deal fell through due to a capital shortfall at the Co-op.