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Sunday, 24 June 2012

"Show Me The Money!"

This week's 'technical issues' experienced by RBS/NatWest have been quite revealing. While the financial crisis has shown people how banks can suddenly fail to have enough money to pay depositors, this week has demonstrated how a bank could fail even when it's solvent. 

Solvency concerns are what led the UK government to own 85% of RBS in the first place. But systems failures add a more insidious dimension, especially in relation to high volumes of transactions. Securities trading system issues have tended to get most of the press in recent times - like the 2010 'flash crash', the cause of which is still worryingly uncertain. And we have seen poor record-keeping cause 'fraudclosure' problems in the US, when banks couldn't prove they had the right to force the sale of homes when borrowers defaulted on the underlying mortgages. RBS has also been among the banks fined for gaps in compliance processes. But the technical issues this week strike at the very heart of retail banking.  

Contrary to popular terminology, your bank does not hold 'your money'. The bank takes the money that is paid into your account and treats that money as its own. Your current account or business banking account is just a record of what you paid to the bank, what you asked the bank to pay out to whom, and the remaining figure - the 'balance' - which is the amount of money the bank owes you. The bank can pay that debt to you from whatever source it chooses to offer you (e.g. cash in an ATM or by transfer to others). In other words, at its heart retail 'banking' is really an accounting service, with payment services bolted on. And that accounting service - like, say, an email account - is really only useful if it is kept up to date - so you can see how much money has been paid in/out or is owed to you at any time.

But each bank's accounts don't exist in a vacuum. The entries in your account need to tally with the account records of other banks' customers you deal with, so all the individual debtors and creditors in the network know where they stand at the same time.

This makes RBS/NatWest's failure to process certain payments data last Tuesday and Wednesday nights completely unforgivable. It seems to have led to payments received not being recorded, and later payments not going out due to an apparent lack of funds. They say they "want to reassure customers that no one will be left permanently out of pocket as a result of this." But this misses the point of a bank account, both for its customers and the customers at other banks they deal with, and so on throughout the entire retail banking system.

Personally, I switched from NatWest years ago, when they wanted to charge me £12 for my current account. But perhaps RBS/NatWest call centres are receiving calls from others that go something like this:

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