RBS should be broken into 130 local banks that use the same IT systems

The UK economy would receive a multibillion-pound boost by breaking up the majority state-owned RBS into 130 local banks, according to a think tank

The UK economy would receive a multibillion-pound boost by breaking up the majority state-owned Royal Bank of Scotland (RBS) into 130 local banks operated in a similar way to the John Lewis Partnership, according to a think tank report.

An alternative vision for RBS by the New Economics Foundation (NEF) said if the 130 local banks continued to use the same RBS Group back-office systems, the high cost of splitting them and setting up new operations could be avoided.

According to the report, RBS offers an opportunity to rebuild public trust in the UK banking sector.

We’re proposing the break-up of RBS into 130 new locally run banks, creating a network of truly local banks that would change the UK’s financial landscape. We recommend that the investment bank is sold to refocus all the bank’s resources on real economy banking on the high street,” said the NEF. 

“Not only would our plan reverse the trend of branch closures – 142 so far this year – but it would generate huge returns for the national economy.” 

Read more about banking IT

The NEF said the UK economy would have received an immediate boost of £7.1bn, plus a further £30.5bn over the following three years, if it had been done in 2008.

The report said IT could be provided centrally to all the separate banks by RBS Group, to avoid the high cost of separation and IT setup.

One IT expert in the banking sector agrees the government should split banks up. 

“Big is bad. Small is beautiful," he said. "The economies of scale don't apply to the big banks – they suffer anti-economies of scale with massive overheads and inefficiencies. They are too big to manage effectively and too slow to evolve. David and Goliath applies now that the world is online and mobile.”

New banks using IT as differentiator

But if 130 small and locally focused banks were created, it would come at a time of unprecedented competition, as for the first time in centuries new banks are arriving on the scene

These banks are often using IT as a differentiator. The 130 new banks created from the ashes of RBS would have to invest in modern technologies to keep pace. Relying on the RBS core systems may even put them at a disadvantage against more agile competitors.

Legacy IT systems are seen as an obstacle to change for the big banks. In comparison, new banks that are not tied down by legacy IT systems see IT as a major advantage. 

RBS’s IT systems have been in the news for all the wrong reasons in recent years.

The huge IT outage that RBS suffered in 2012 as a result of the mismanagement of the legacy system of left customers locked out of their accounts for weeks. If this happened following the split proposed by the NEF, all 130 different banks would suffer. 

In the summer of 2012, customers of RBS, NatWest and Ulster Bank were locked out of their accounts for days as a result of a glitch in the CA-7 batch process scheduler, freezing 12 million accounts.

The Financial Conduct Authority and the Prudential Regulation Authority fined RBS Group a total of £56m because of the IT failure. Ulster Bank was fined separately by the Irish regulator.

RBS has recognised this and, in February 2014, the bank announced it was making its legacy IT infrastructure more efficient. It said it will reduce the number of technology platforms by more than 50%, reduce the number of core banking systems from 50 to 10, and cut the number of payment systems it uses from 80 to 10.

Read more on IT for financial services