In February, BB&T Chief Executive Kelly King took to Twitter with a video apology to thousands of irate customers after an equipment malfunction hobbled ATMs, online and mobile banking. “We are committed to making this right,” he said.
On Thursday, during the Winston-Salem, N.C.-based bank’s quarterly earnings call, King revealed the bottom-line cost of the high-profile, three-day system outage: $15 million in lost revenue and an additional $5 million in noninterest expenses tied to fee waivers and other costs.
Additionally, King said the $220 billion-asset bank has spent $300 million on a new data center with duplicate redundant data hauls, an investment he said addresses the cause of the February outage.
“The event occurred because some of the investments that we made were not fully executed on the way they should have been,” King said during the bank’s earnings call. “The learning" from that event and from "working with all the parties that are involved in these new big investments," he said, is that "there will be mistakes. And the only thing you can do is to increase your focus in terms of managing the risk around that and checking and double-checking.”
BB&T is one of several large banks to suffer a major outage this year, and King’s acknowledgment underscores how technical glitches carry more than just a reputational cost for a bank. Banks often are left with little recourse but to shoulder millions in costs; even contracts with technology vendors are structured to make it difficult to sue for damages.
“Customer outages present themselves with financial costs such as lost fees, increase in time to market, and potential fines and class actions,” said Sankar Krishnan, executive vice president, banking and capital markets at Capgemini. “In addition, the digital savvy millennials and digital natives may avoid the bank altogether if there are constant interruptions to digital connectivity.”
After the outage, BB&T compensated customers with refunds for overdraft, overdraft protection, foreign ATM transaction and negative account balance fees whether they were "related to the lapse in service or not.”
That had an impact on fee revenue, but the bank likely felt it had to given the customer outrage, said Jim Burson, a senior director with Cornerstone Advisors.
“If somebody is overdrawn, and they can’t get into online banking or use an ATM or whatever the case may be to transfer money into an account and avoid the overdraft" during the outage "they’re going to say, ‘I’m not paying this fee; this is your fault,' " he said. “They had basically no choice but to refund those fees.”
BB&T is not the only bank to have suffered a major outage this year. In January, Capital One Financial charged customers multiple times for the same debit card transaction due to technical glitches. Twice this year, Wells Fargo customers ran into difficulty accessing online and mobile banking. And some TD Bank customers were unable to use online and mobile banking for days after the Canadian-owned bank ran into technical trouble while upgrading its software.
Banks typically think of reputational risk during and after system outages, as opposed to the real dollar value, Burson said.
“I don’t think historically they’ve given credence to revenue loss exposure, either from fee waivers but also from future revenues when it comes to customers negatively impacted who might choose to bank somewhere else, or take their next piece of business to another bank,” he said. “In addition to the hard revenue loss, there’s an opportunity cost due to customer dissatisfaction you can’t really quantify.”
The spate of high-profile glitches also highlights the quandary for bank technology executives caught between the risk that comes with upgrading systems, and the risk of continually running aging systems.
In a recent survey of North American bank operations executives conducted by the management consulting firm Accenture, nearly 80% said their organization’s existence could be threatened if they don’t update their technology; however, 40% stated that cost of modernizing legacy technology is largest challenge to adopting new technologies.
"Bank executives are definitely caught between a rock and a hard place," said Jim Eckenrode, executive director of the Deloitte Center for Financial Services in the U.S.
"Core technology transformation has been discussed for decades now to help banks get out from under legacy platforms," Eckenrode said. "It’s a very risky transition that needs to be made. As we continue through the years, the number of people who understand how these systems work, who are qualified to maintain them, and the ability of these systems to keep up with the exponential growth of modern technology will become increasingly problematic. It will only become more difficult to maintain legacy systems in face of new data and more digital experiences that the customer is demanding."
Those customer demands, especially when heard through the social media filter, can be deafening when things go wrong, industry consultants and tech service providers said.
"Today's digital banking consumer is unforgiving," said Doug Parr, senior vice president at D3 Banking Technology. "Anything that compromises availability is a time bomb that has the potential to do millions in damage to a brand. That is why the same way of doing things must be replaced with digital transformation that incorporates modern technology, built on API-based architectures, to support continuous innovation that is scalable and dependable."
From a technical standpoint, all banks should be taking the time to run tests to ensure that their systems backups will actually work during an outage, said Tyler Leet, director of risk and compliance services for the core provider CSI.
"They are very time-consuming and intrusive, but there is no substitute for simulating actual interruption tests to ensure systems failover or continue as planned, " Leet said. "I bet it would have been cheaper to bring employees in on a weekend to run a simulation test of these systems than it was to lose millions and take the reputational hit."
In the earnings call, to describe how the bank addressed the incident, King made an analogy to breaking in a new car.
“I hate to buy a new car,” King told analysts. “I'm still driving a 2001 Lexus with 140,000 miles. … You buy any new car, you got to go through about three months [of] working all around wrinkles. It’s fine when you go through the wrinkles, but it's a hassle going through the wrinkles.”
Cornerstone's Burson noted there’s not much banks can do to prevent a similar occurrence in the future other than “making sure your systems are up and running effectively.” But he said he thinks banks will do more in such cases “other than just acknowledging customer dissatisfaction, but that it has real PNL consequences, too.”