Why the TSB IT meltdown may be a failure of regulation

IT disasters are fairly regular occurrences. But they don’t come much more catastrophic than TSB’s botched migration to a new system.

While other organisations are busy ensuring they are GDPR compliant, TSB has been showing their customers other people’s bank account details. Among other egregious errors, small businesses have been left unable to pay their staff, freelancers have been unable to take booking fees, and mortgages have vanished from online accounts.

As the crisis entered its third week, The Guardian reported that full service may not return for months.

A comprehensive run-down of TSB’s issues has been published by Wired.

As with most of these sorts of disasters, the cause isn’t one big thing. It’s lots of things that, put together, has had dire consequences.

It seems likely that bad management will have played a role. And it is truly perplexing how such major technical issues wouldn’t have been spotted during testing.

But what interests me is how the root of the issue comes from the very beginning of TSB’s life, when competition regulations forced it to be split off from Lloyds Banking Group following its bailout in 2008.

According to the Guardian, TSB had to begin life using a clone of Lloyds Banking Group’s IT system. TSB were charged £100 million for the privilege.

The Lloyds Banking Group system was already a “bodge”, the result of integrations with the systems for the original TSB, Bank of Scotland, Halifax and other institutions that had come under the Lloyds Banking Group umbrella.

The idea with the IT was to create a mirror copy of the sprawling LBG merged systems and use this to service the much smaller TSB bank. It seemed a bad fit for a smaller bank to inherit all the problems of a bloated mess to service far fewer customers.

In other words, the small, new TSB was paying £100 million per year for a bloated system that was far to big for its needs.

Banco Sabadell obviously thought the same when it purchased TSB in 2015. To save itself the annual bill, it decided to migrate everything into its own IT system.

Sabadell seems to have grossly mishandled the migration. But it’s interesting that the root of the problem came from TSB essentially being too small to afford the legacy system.

The competition regulations that forced Lloyds Banking Group to carve out a section of its business to create a smaller bank were designed to protect consumers. But in this case, they have ultimately caused great harm to consumers.

Lloyds Banking Group may have been too big to fail. But TSB was possibly too small to succeed.