(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, June 25 (Reuters Breakingviews) - Stephen Hester must be chewing the carpet. Since joining the Royal Bank of Scotland after its near-total nationalisation in 2008, the UK lender's chief executive has spent his time gradually detoxifying RBS's subprime-infected investment bank, and restoring severely underpowered capital and liquidity. But he has been tripped up by a more basic problem: the retail bank's payments system is on the blink.
In a way, the software glitch that struck on June 19, creating a backlog of unprocessed claims in RBS's payments platform, may be part of the same poisoned legacy that is causing Hester so many headaches. Like the dodgy portfolios, the software problem can probably be traced back to the years before the credit crunch when only high returns mattered. Then Fred Goodwin, the aggressive RBS boss, used to boast about the bank's lean cost structure. Now that sounds like under-investment in infrastructure.
RBS will suffer a direct hit from compensating those inconvenienced. But the systems snafu is unlikely to dent the bank's earnings as much as its reputation, especially coming after storms around banker bonuses and the mis-selling of payment protection insurance. If Hester is forced take a lower bonus this year, after waiving his 2011 payout, he might be tempted to quit.
Even if he stays, RBS's blushes could also perpetuate a severe structural flaw in UK banks' business models. Payments systems and current accounts cost billions of pounds a year to run, but British banks offer the services to their customers almost free of charge. The money has to be found elsewhere, historically through such unsavoury expedients as eye-watering overdraft charges and duff products like PPI, as Andrew Bailey, the UK's chief banks regulator-in-waiting, recently lamented.
RBS's problems underline Bailey's point. Banks are more likely to put resources into areas which generate revenues. But the anti-bank headlines make charges an even tougher sell. Trying to market a utility service to customers who don't currently pay anything is bad enough. Asking them to pay for a service that doesn't even work properly is that much worse.
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- Royal Bank of Scotland has pledged to waive overdraft fees incurred by its customers as a result of glitches in its payments systems last week.
- The UK bank, which operates the Ulster Bank and NatWest brands, suffered an IT failure on June 19. The problem was fixed by June 22 but has left a large backlog of unprocessed transactions, meaning customer cannot see if money has gone into their accounts.
- RBS said that it wanted to reassure customers that no one would be left permanently out of pocket as a result of the problems. - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Edward Hadas and David Evans)
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