Qudos' IT fail burns through last year's profits

Bernard Kellerman
Australian mutual Qudos Bank, which recently reported on its 2017/18 financial year performance, has admitted its A$21 million-plus core banking system upgrade has been a failure, and it will seek compensation from its technology provider.

This concession marks the formal shut-down of a three year digital transformation project that commenced in 2015 with its stated aim "to upgrade core banking, online banking, mobile banking and all internal operational systems."

The history of this project stretches back to the days of Qantas Credit Union, before it was rebranded as Qudos Bank in 2016. By the end of FY 2016/17, the Qudos annual report indicated the bank had sunk almost $17 million into what was dubbed Project iQ.

The former long-serving chairman Mark Boesen was quick to claim early success, telling shareholders in the 2017 annual report that "the first phase, delivered in April 2016, saw a new mobile optimised company website, upgraded online banking and an improved product application process.

"The second phase, is all about improving the key channels you use to bank with us, including our mobile banking app - as well as upgrading the systems our employees rely on," Boesen said.

Then the wheels started wobbling, with the first warning sounding at the end of September 2017. Qudos had this to say to its customers:

"While we had anticipated our readiness to launch [our new mobile banking app and online banking] in October, we have decided to spend more time to ensure our project objectives are met and that we deliver the best possible solution for our people and customers.

"We are currently working on a revised schedule, however at this stage, we can confirm that this launch won't be in 2017," the bank conceded via the news page on its website.

In an emailed response to Banking Day's questions over the timing of this decision, which was reiterated in the Qudos 2016/17 annual report, a spokesperson said: "Qudos Bank decided not to proceed with the go live and replan the project because it was not going to launch when it was not confident that the upgrade would meet its requirements."

By May 2018, the bank had more to say in a note to its customers: "We've recently upgraded our Online Banking platform which has delivered some enhancements you may notice when using Online Banking from the 21st May onwards...."

The "enhancements" in the list that followed included making its customers' BSB number visible for mobile banking; additional transaction history search options; and showing uncleared transactions and details from recently closed accounts.

Meanwhile, the core banking upgrade - project iQ - was still being kept alive.

In its 2017/18 FY report, the bank's new chairman, David Hailes, in a letter to shareholders dated 26 September 2018, said: "As part of [a strategy to make banking less dependent on traditional points of presence] we engaged an international technology provider to deliver a new core banking solution, which was due for delivery in October 2017."

He then conceded the technology provider - later identified as Infosys - had been unable to deliver, leaving Qudos "reviewing its plans to implement an alternative" banking system.

The bank's CEO, Scott King, had more to say on this in the annual report, citing the off-the-rails IT project as the reason most of the year's profits had disappeared:

"Our year end profit margin has been significantly marred by the impact of prudential mandates and the repercussion of the investments made in our technology project. The latter has necessitated us making a provision of $21.8 million for expenditure associated with the project, given the failure of the vendor to deliver on the contracted solution.

"Without this provision, we would have achieved a pre-tax profit of $23.8 million, which would have represented a 52.0 per cent uplift on the prior year," said King.

This level of provisioning for a wobbly IT upgrade was no small event, even for a mutual the size of Qudos, which sits at around number 10 on the mutual bank honour roll, with assets approaching A$4 billion and a membership just shy of 95,000.

The timing of events surrounding the decision to abandon the tech upgrade has been tight, although the accounting treatment was signed off by the auditors.

A spokesperson for Qudos insisted that the annual report for the year ended 30 June 2018 was adopted by Qudos' Board on 26 September 2018.

"As at that date the contract had not been terminated, however the capitalised costs were fully provided for in the annual report, reflecting the uncertainty of delivery of the project," she said.

"The $21.8 million was the capitalised cost of the project that had been allocated to a work in progress account in the Balance Sheet under Prepayments and Debtors throughout the project.  Accordingly, the provision was applied to the same item.

"At the date of the annual report [dated end September 2018], the contract had not been terminated and it was therefore premature to give such an indication."

The contract was formally terminated in October 2018 - at a point after the adoption of the annual accounts - and accordingly the write-off will be reflected in the annual report for the year ended 30 June 2019, Qudos has told Banking Day.

Qudos added that is "now taking steps to seek compensation from the vendor, Infosys".

All was not lost, though, as Standard and Poor's Global Ratings greeted the confirmation from Qudos that it will not proceed with the replacement of its core banking system with a sense of relief.

"In August 2018, we revised our outlook on Qudos to stable from positive, given the unlikelihood, in our view, of the core banking replacement project being successfully implemented in the near term," S&P stated last week.

The ratings agency was therefore ready to give a nod of approval to management for spiking the iQ Project, finally recognising it was going nowhere. S&P is confident the existing Qudos systems can cope until it regroups.

"In our view, Qudos' existing core banking and processing systems should adequately support the bank's ongoing business processes over the next two years. We also believe that the bank has now recognised and mitigated risks associated with the system upgrade," the agency stated.

An S&P analyst also pointed out to Banking Day that notwithstanding the positive points, his agency wasn't handing out a complete vindication for Qudos, as the rating of BBB- was still one notch below the majority of its peers.

Qudos management has been contacted for further comment.