What IBM Said about the IT Chaos at UK Bank TSB and Owner Sabadell, Now in its 12th Week

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Contracted to fix the fiasco, IBM estimates costs at $1.25 billion: sources. There’s even talk of divorce, after just 3 years of corporate marriage.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

As the blame game intensifies over beleaguered UK lender TSB’s never-ending IT nightmare upgrade, now in its 12th week, relations between the bank’s management and that of its parent company, Spain’s Banco Sabadell, are beginning to sour. According to sources quoted by the FT, things are so bad that TSB executives are even considering whether it has a future as part of the Spanish group after a bungled IT upgrade resulted in operational chaos:

At the heart of the row is the dominant role that Sabadell’s in-house IT provider Sabis played in the botched IT upgrade which left hundreds of thousands of customers unable to access their bank accounts and piled pressure on chief executive Paul Pester.

Mr Pester told MPs in a letter last month that the bank was looking to “insource” its IT infrastructure from Sabis. Such a move would sever TSB’s main operational link with its owner and make any future separation easier, three people close to the bank said.

“If Sabadell sold, that would clearly be for the best,” said one.

It’s a damning indictment of just how bad things have got at the UK’s seventh largest bank. The IT debacle has already been branded the “biggest IT disaster in British banking history.”

Hundreds of thousands of people have been left unable to access their bank accounts. Countless standing orders, payrolls, mortgage installments and other payments and transfers have failed. Thousands more have fallen victim to fraud attacks. Even when the bank tried to apologize, it managed to send the wrong apologies to the wrong people, in the process breaking the EU’s new data protection laws.

The prime cause of all of this mayhem was Sabadell’s determination to get the new IT system up and running as quickly as possible, in order to save millions of euros in monthly fees it was having to pay each month to TSB’s former parent company, Lloyds Bank plc, to use to use its old IT system (our articles on this fiasco). An insider at the bank alleged that the disastrous roll-out of Sabadell’s Proteo4UK system at TSB had been eminently foreseeable, and yet the management went ahead anyway, adopting a hope-and-pray attitude.

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In a letter to MPs TSB’s CEO Paul Pester laid much of the blame on Sabadell, whose “written attestations” about the readiness of its new IT platform were “instrumental” to TSB’s decision to proceed with the migration of customer data. But as a report released in late June confirmed, TSB and Sabadell were anything but ready.

The report featured a brief presentation by IBM, the firm appointed by TSB to identify and resolve its IT problems once the crisis had begun. In its preliminary work plan Big Blue’s technicians suggested that the bank’s testing was not up to scratch, saying it had not seen “evidence of the application of a rigorous set of go-live criteria to prove production readiness”.

Underscoring the scale and complexity of the project, IBM said that a firm would need “longer than normal to prove the platform through incremental customer take-on to observe and mitigate any operational risks.” It also cautioned that such projects often bring up a dizzying array of hard-to-diagnose technical and functional problems.

“To address this risk profile, IBM would expect world-class design rigour, test discipline, comprehensive operational proving, cut-over trial runs and operational support set-up,” it said. There was very little evidence TSB took such precautions. While TSB’s CEO Paul Pester told a parliamentary committee in June that the issues at the bank were with middleware, the IBM team detected additional problems with custom and package applications as well as the network.

A source close to the matter told WOLF STREET that IBM’s estimate of the cost of rectifying the issues and accounting errors was £955 million ($1.26 billion). This excluded the fraud instances as they are not regarded as being part of the IBM remit, and are being treated as a normal banking function of fraud prevention.

The source, whose statements could not be independently verified, told WOLF STREET that the migration was started before the final Lloyds backup runs were complete and verified; and given the time gap between the “last known good” backup and the cumulative transaction data to date, TSB was told that there is no question of a roll back, even if Lloyds would agree, which they have indicated is out of the question.

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IBM believes that the bandwidth calculations for the UK-Spain data link was out by 50% and did not take in to account that when the TSB customers were allowed to start using the system, the migration of a large part of the historic data was still ongoing, the source said. Sabadell IT staff allegedly throttled the bandwidth available to the TSB Internet Banking clients in order that the migration was not interrupted, but a router failure/malfunction in Spain meant that a large part of the historical data lost their packet ID’s which scrambled portions of the data. Throttling the bandwidth would explain the delays that internet banking clients experienced in getting on the system, the source said.

According to the FT, tensions are already rising between the management of TSB and Sabadell. The two banks have only been together for three years, and they’re already talking of divorce, albeit largely through unnamed sources. Investment bankers in the City of London have been speculating whether Sabadell would be willing or able to keep hold of the business in the long-term.

Sabadell would be hard pushed to find another bank willing to take TSB off its hands for anything close to the €2.35 billion Sabadell paid for it in 2015. Even at the time of the acquisition, experts warned that Sabadell was significantly overpaying for TSB while underestimating the potential costs of integrating the new business into its existing IT platform. Some also cautioned about the potential risk posed by a vote in favor of Brexit, which has since come to pass.

A source close to Sabadell suggested it would be reluctant to jettison its UK business. Its purchase of TSB was a key part of the bank’s plan to pare down its reliance on its domestic Spanish market. “It always needed an acquisition to make it sustainable,” on industry figure told FT. “They definitely cannot buy anything at the moment.”

TSB represents roughly a quarter of Sabadell’s total assets, and the impact of a forced sale on Sabadell’s own financial health could be considerable; but so, too, would the bleeding of funds from TSB’s unending IT meltdown. By Don Quijones.


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