IT failure contributes to UK bank collapse
April 1st, 2009 by Michael Krigsman
A failed business strategy involving a large IT blunder contributed to the collapse of Scotland’s largest customer-owned lender, the Dunfermline Building Society. As a result, the Society is writing off a £9.5 million IT loss, despite total profit for the year of only £11 million.
The UK government will pay Nationwide Building Society 1.6 billion pounds ($2.3 billion) in cash to purchase the troubled bank.
The Financial Times reports:
Jim Murphy, Scotland secretary, said the previous management had made “reckless decisions” because of its over-exposure to commercial loans, involvement in the subprime market and unfortunate decisions on technology. Dunfermline was forced to make a £9.5m write-off on last year’s £11m profits because of a failed IT system.
Finextra reports that the company lost focus by attempting to establish a software business selling mortgage-processing systems to other banks:
The company poured £31 million into the loss making Dunfermline Solutions unit, which was set up to develop a mortgage IT system that could then be sold to other financial institutions.
Scottish newspaper, The Herald, describes the misguided business strategy behind this software solutions endeavor:
One expert, who has been involved in advising building societies on their accounts for the past 15 years, told The Herald this week: “The Dunfermline was never a particularly profitable organization. The IT loss was pretty huge compared with the size of their profits – so their buffer against further losses is not as good as it could be.”
He went on: “They have a good brand, healthy margins on their residential lending, but venturing into anything beyond housing association finance risks losses on property development type loans. It is easy to grow your balance sheet by lending to property developers, but it is quite unusual for that size of institution. If you are anything less than a £10bn society, the solution is not to get involved in anything other than simple basic commercial loans.”
