Case Study:

Becoming
a smaller,
simpler and
smarter Bank
Case Study: Becoming a smaller, simpler and smarter Bank 2

Background
About Royal Bank of Scotland
Royal Bank of Scotland Group plc (RBS) is a banking and financial services
company.

From its headquarters in Edinburgh, RBS serves over 19 million customers

predominantly based in the UK and Republic of Ireland. It has three customer
franchises, each of which caters to a specific segment of customer base.
Franchises are then underpinned by a range of distinct brands, which are the route through
which it engages with customers. Supporting franchise colleagues are the functions and services
teams. These provide business aligned technology, operational and functional support to ensure
RBS provides outstanding service to its customers every day.

We are building a better bank for our customers, and one that will deliver sustainable returns for
shareholders. Our purpose is to serve customers well, and to do so, we are becoming a safer, simpler,
more customer-focused bank.

The Company’s products and services include banking and risk management, such as payments,
insurance and liquidity management; personal lending, including personal loans and credit cards;
deposits, such as current accounts and savings accounts; investments, such as portfolio management
and unitized funds; commercial lending, including business lending, and capital markets, including rates,
currencies and financing.

The Bank we were

The biggest bank in the world (2001-2007)
In the early 2000s, a series of large acquisitions saw us grow rapidly. By 2008, with
the £49 billion takeover of ABN Amro, we were the largest bank in the world. Our
£2.2 trillion (that’s £2,200,000,000,000!) balance sheet was bigger than the UK
Gross Domestic Product. But irresponsible lending – a key cause of the financial crisis
– was also our downfall. Our losses mounted and even a £12 billion rights issue and
plans to sell our insurance business wasn’t enough to stop a record £691 million
loss. In late 2008 CEO Fred Goodwin resigned. Global stock markets crashed. Lehman
Brothers and Northern Rock collapsed. RBS and other UK lenders were expected to
follow.

The bailout (2008)

The UK Government issued a £37 billion rescue package for UK banks, with a condition
that we sell large parts of the business. Stephen Hester came in as our new CEO and
announced a focus on defusing the ‘balance sheet time bomb’ the billions of pounds of
toxic assets the bank had accumulated.

First steps to recovery (2009-2012)

In February 2009, we recorded losses of £24.1 billion the largest in UK corporate
history. Stephen Hester admitted that the bank had lost sight of why it existed in the
first place and in early 2012 reset our purpose: to serve customers well. We began to
put customers back at the centre of what we do. Not least, we developed the world’s
first fully functioning banking app!
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IT failure (2012)
But we weren’t out of the woods just yet… A computer failure in June 2012 brought
down our systems for over a week for NatWest & Royal Bank of Scotland, and a month
for Ulster Bank. It was a huge challenge for customers and highlighted the need to
simplify our ageing back office systems. But it also showed how dedicated and
determined our colleagues are. Many of them worked round the clock and went above
and beyond to make sure everything was done to give our customers the service they
deserved.

The Bank We Are

Earning our customers’ trust (2013-2014)
Ross McEwan’s appointment as CEO in October 2013 was an important moment.
The bank moved from survival mode to putting the customers at the heart of
everything it did. In 2014 he outlined our new strategic vision and set ourselves the
ambition of becoming the number one bank in the UK for customer service, trust
and advocacy.
This included some major changes, like shifting our global ambition to a UK & Ireland focus:
• We transformed our seven divisions and seven support departments into three core businesses and
one shared support structure
• We committed £10 billion new lending to business customers and mortgage lending to UK
customers passed £100 billion
• We established RBS Capital Resolution (RCR) on 1 January 2014 – to help shrink the balance sheet
and dispose of the assets the bank no longer wanted

Going further and faster (2015)

In 2015 the UK Government sold its first 5.4% stake in the bank to raise £2,079 million and
reducing its shareholding to 72.9%. We launched a new current account, rewarding
customers with 3% on eligible household bills. With the sale of Citizens, we completed the
largest commercial bank IPO in U.S. history. And we continued to shrink our balance sheet to
become a smaller, more focused bank.

Bank of brands (2016)

By the end of 2016 we had paid £1.2 billion to Her Majesty’s Treasury to buy
back the Dividend Access Share – another crucial step towards privatisation.
We closed 503 legal entities (a reduction of 45%), and reduced the number of
IT systems and applications we used by 30% as the bank continued to become
smaller and simpler. We also unveiled our ‘bank of brands’ strategy, another
step in our transformation from the global RBS brand to one where individual
brands have distinct identities. And we backed local communities with £2.5
million of grants from our Skills & Opportunities Fund, split between 125
organisations supporting those from disadvantaged backgrounds.
Case Study: Becoming a smaller, simpler and smarter Bank 4

Partnership focused (2017)

By 2017, we had reached some significant milestones:
• Our first bottom line profit in ten years
• Moody’s rating agency upgraded the Royal Bank of Scotland Group’s
credit rating. As a result all three of the large credit rating agencies deem
RBSG to be Investment grade
• We are the first bank to offer paperless mortgages
• We started Closed Loop Feedback that allows us to listen, learn and act on customers feedback on
every interaction they have with us
• We introduced self-service account opening for our corporate customers
• The National Diversity Awards recognized us as a top 10 employer for Working Families and ‘Diverse
Company of the Year’
• We launched a network of community bankers UK-wide – who give customers personal assistance
and support, particularly in rural communities

• We’re safer and more secure. By significantly improving our IT resilience, there were 94%
fewer ‘Criteria 1’ IT incidents in 2017 compared to 2014
• We put in least one TechXpert in every NatWest and Royal Bank of Scotland branch

• And despite the significant change in the organization, colleague engagement reached +83, the
highest level in a decade

Smaller, simpler and customer focused (2018)

The last ten years have been bumpy, but the journey has been remarkable. In
February 2018 we announced a return to bottom line profitability and then in
May we resolved the last of our big legacy issues – the Department of Justice fine
of $4.9 billion in relation to the historic selling of Residential Mortgage-backed
Securities (RMBS).

By the end 2018, our balance sheet was £694 billion – around a third of the
£2.2 trillion it was in 2008 (refer Appendix 3 for the latest financial summary).
That’s the equivalent of shedding the combined value of Lloyds and Santander!
We finalized the remaining Williams & Glyn State Aid obligation with the
European Commission & HM Treasury with the provision of £775 million to
fund an incentivized switching scheme for eligible SME customers (Business
Banking Switch) as well as a Capability and Innovation fund for qualifying
financial institutions. And we have ring-fenced our investment bank from the rest
of the bank – well ahead of the January 2019 deadline.

Ultimately, we’re in a much stronger position: our Common Equity Tier 1 ratio, which is the main
measure of our capital strength, has improved significantly from just 4% in 2008 to 16.2% in 2018. And
in August 2018, we announced we would re-start paying dividends to shareholders – for the first time in
10 years. And to top it off, we won the British Bank Award for Best Mobile App – for the second
year in a row!
Case Study: Becoming a smaller, simpler and smarter Bank 5

The Bank we’re becoming

The bank we are becoming (2019 and beyond)
But we can’t stop there. All areas of banking face the risk of disruption from
new players. To stay relevant we must keep challenging and innovating.
Optimizing and simplifying our existing service won’t be enough. We need to
proactively provide new services for our customers. We’re at the start of this
new chapter and have already made some great innovations:
• We acquired FreeAgent and now offer cloud based accounting software,
free of charge, to our business customers
• We launched APtimise – the first solution of its kind in the UK – to help SME
customers automate accounts payable and cut the processing time in half
• Recently we also launched; Bankline Mobile, New Bankline, ESME, Cora, Archie, Paperless
Mortgages, ClearSpend Receipts… to name just a few, with many more innovations in pilot stage
like CurrencyPay – the new foreign exchange platform from NatWest Markets
And more opportunities are becoming clearer as we make better use of data and look to areas where
we have overlapping expertise. Our approach is setting us up for success. We are growing in our core
business, finding new opportunities to add value and entering new growth markets. This is just the
beginning…

Structure and Vision

We have four customer franchises - these are the different routes our
customers can do business with us: Personal Banking, Commercial & Private
Banking, NatWest Markets and Royal Bank of Scotland International.
Teams in Services support all of our customer franchises, providing technology, operations and property
services while the Functions (Finance, Human Resources, Risk, Corporate Governance & Regulatory
Affairs, Communications & Marketing, Legal and Internal Audit) provide professional advice and guidance.
Our operating model, vision and values are also outlined in the following diagrams.

Figure 1 RBS Group Structure

Case Study: Becoming a smaller, simpler and smarter Bank 6

Our blueprint for

lasting success
No.1
For customer
service, trust
Our Ambition and advocacy

Serve customers well

Our Purpose

Serving Working Doing the Thinking

together right thing long ter
Our Values customers

Our Brands

Strength Simplifying Employee

and the bank engagement
Our Priorities Sustainability growth

Employee
CET1 ratio 13% No.1 for Cost:income Leading market engagement in
Our 2020 RoTE 12% service, trust ratio < 50% positions in upper quartile of
and advocacy every franchise Global Financial
Goals Services (GFS) norm

Figure 2 RBS Vision and Values

Our 2020 Investment Case

• A leading UK Retail and Commercial Bank with a focused Markets division
• Strong brands and market positions
• Growing in attractive chosen markets
• Track record of cost and risk reduction
• Improving returns and capital generation
• Significant distribution potential

Figure 3 RBS 2020 Vision

Case Study: Becoming a smaller, simpler and smarter Bank 7

With the buzz of Open Banking gathering strength in UK (refer Appendix 1), there’s an extra layer of
challenge thrown at the UK banks. That being said, RBS do have an opportunity to cater to this new
generation by embracing the FinTech innovation for smarter banking solutions (refer Appendix 2).
However, coming out of legacy systems can have its challenges. The Bank does offer internet banking
and a mobile app and is keen to explore what more can be done to cope with the change in industry
dynamics.
RBS is reviewing its existing strategy and has empanelled a leading Consultancy firm called “Crystal
Consulting” to see a) if it’s current strategy is successful b) is there a need for an interim strategy and c)
should it look for innovations while core business is strong.
You are an employee of Crystal Consulting and the firm has assigned the RBS Strategy review project
to your group. RBS has advised Crystal Consulting to knit the proposal as a response to the following
questions. The proposal needs to keep in view RBS’ vision of becoming a Smaller, Smarter and Simpler
Bank:
1. Which Technology channels should RBS leverage to become Future Ready?
2. What should RBS do to build a future ready workforce?
3. In order to successfully adopt disruption and innovation, what are the changes that RBS should
make to its:
• Organizational design & agility
• Market capitalization & customer acquisition strategy
• Risk appetite
You will be presenting the proposed strategy to the CEO and Executive Committee of the Bank.

All the Best!

References and recommended reading:
• Annual Results for RBS Group and Asia – https://investors.rbs.com/reports-archive/archived.aspx
• https://www.gov.uk/government/news/cma-paves-the-way-for-open-banking- revolution
• https://www.home.barclays/content/dam/barclayspublic/docs/Citizenship/Research/Open%20
Banking%20A%20Consumer%20Perspective%20Faith%20Reynolds%20January%202017.pdf
• http://www.investors.rbs.com/~/media/Files/R/RBS-IR/2015-annual-report-section/RBS-capital-
resolution.pdf
• http://webarchive.nationalarchives.gov.uk/20131003105424/https:/hmt-
sanctions.s3.amazonaws.com/icb%20final%20report/icb%2520final%2520report%5B1%5D.pdf
• https://investors.rbs.com/presentations.aspx
• https://investors.rbs.com/shareholder-centre.aspx
Case Study: Becoming a smaller, simpler and smarter Bank 8

Appendix 1
Introduction to Open Banking
Open Banking is used as a general term to describe two new pieces of
regulation: the Competition and Market Authority’s (CMA’s) ‘Open Banking
remedy’ and the European Payment Services Directive 2 (PSD2).
PSD2 covers all payments accounts, including easy access savings accounts and
credit cards that are accessible online or over a mobile. The scope of the CMA’s
remedy is narrower and focuses on personal and business current accounts
only. However, in time Open Banking may extend to other financial products.
Open Banking requires firms to:
• Make it possible for people to share their financial transactional data far more easily with third
parties online
• Allow third parties to initiate payments directly from a person’s account as a bank transfer as an
alternative to credit or debit card payments
• Make public and openly share their product information and importantly, their customer satisfaction
scores and separately other ‘service level indicators’ (for instance average call waiting time and other
indicators as decided by FCA)
One big aim is to increase competition in the market by driving innovation in the quality of products and
services that customers receive. The CMA found the current account market has complex pricing, low
customer switching, difficulties in comparing products and high charges on overdrafts. The outcome is
that people are paying more for lower quality services than they need to.
PSD2 legitimizes payment initiators and aggregators, bringing better consumer protection, improved
security, and clarity about liability for unauthorized transactions and some aspects of data protection.

Appendix 2
The need to align with Disruption and Innovation
The technological revolution is now shaking up the banking industry like all other industries.
Today, millennials are no longer interested to use the banking system that was actually
designed for their grandparents. Tomorrow’s university graduates will be taking a journey
into the professional unknown guided by a single, mind-blowing statistic: 65% of today’s
roles will not exist in next 5 years. Technological change, economic turbulence and societal
transformation are disrupting old career certainties and it is increasingly difficult to judge
which degrees and qualifications will be a passport to a well-paid and fulfilling job in the
decades ahead.
The existence of Banks in the UK has been further challenged by a number of additional factors such as
Open Banking, Brexit and GDPR.
It is not only down to the old institutions embracing the technological developments digital, regulatory
and political landscape has brought about, but also due to the arrival of new competitors for financial
services companies: technology companies such as Google, Apple, Facebook, and Amazon (GAFA) and
financial technology (FinTech) start-ups.
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Appendix 3
Financial Results Analysis
Following illustrations are taken from the Annual Report 2018 which gives a highlight into
RBS Group financial statements.

Income Statement
Case Study: Becoming a smaller, simpler and smarter Bank 1
0

Balance Sheet