The aftermath of a problematic core banking upgrade by New Zealand's Aotearoa Credit Union, with 15,000 members, threatens to drag down the profitability of most of the country's mutual sector - potentially affecting 200,000 customers.
Back in August 2017, ACU was championed, with much fanfare, as the New Zealand credit union to claim first mover kudos when it announced the launch of its new tier one banking platform based on the Oracle Flexcube core banking platform.
The system had been negotiated on behalf of its members by Co-op Money NZ, the trading name for the New Zealand Association of Credit Unions.
Anthony Wilson, chief executive of ACU at the time, described the Oracle banking platform as “one of the most sophisticated and complex banking systems in the world used in over 500 other financial institutions worldwide.”
After that, reality set in, with cost over-runs, balance sheet revisions and a system that chronically under-delivered to customers and management alike for a year.
The credit union was forced to admit to increasingly serious revenue shortcomings, summarised in two statements from acting CEO Wyn Osborne to ACU's members on 17 October and 1 November.
Initially Osborne conceded that the credit union had made an unaudited operating loss of NZ$1.75 million, revised upwards a fortnight later to NZ$2,050,000.This was comprised of shortfalls in expected loan fees; EFTPOS and ATM fees; and interest income; and increases in staff and administration costs and "provisioning".
Osborne said ACU considered that the loss in 2018 was "primarily due to ... losing customers as a result of teething difficulties associated with its transfer to a new banking platform, which meant that ACU was unable to serve customers as quickly as previously."
These same IT woes also meant in management reports were produced that "proved to be less reliable than what was previously produced and which have caused ACU to underestimate the extent of its loss," he added.
In his notice to investors, Osborne also reported that: "While the loss is substantial, ACU remains solvent and continues as a going concern, although it is in breach as at 30 September 2018 of its minimum capital ratio of 11 per cent under its Trust Deed and also in breach of ... the Non-bank Deposit Takers Act 2013."
ACU was also caught out in its treatment of the payments for its core banking upgrade the previous year in the 2016/17 year. The credit union intended to capitalise the costs associated with the implementation of the core banking system as a "work in progress" intangible asset.
On review, ACU realised it has an agreement for the provision for "bureau services" where Co-op Money NZ "grants access to and, use of, the core banking system software." The credit union concluded that it did not own the core banking system and as a result an intangible asset was unable to be recognised.
In practical terms, payments that were allocated to implementation of a new banking system accordingly had to be expensed, and in FY 2017 this increased the loss by almost NZ$530,000, and in FY 2018 was estimated at NZ$400,000.
The unexpected expensing of implementation work, along with the drag on revenue, led ACU to revise its capital ratio as at 30 September 2018 from 11 per cent down to 3.9 per cent, leaving it approximately NZ$2 million short of the capital ratio prescribed by its trust deed.
While there are a number of ways out for ACU, including transferring all of its members to another credit union, the interlinking of most of New Zealand's credit union sector via the Co-op Money NZ core banking system means that if one member falls over, the rest of the sector will be expected to plug any revenue gaps, and those yet to transfer over to the new core banking system could be hit with increased licensing fees for running Oracle Flexcube.
The ramifications of the Oracle FlexCube upgrade are proving to be more expensive, and extend well beyond the small membership of ACU.
The next two credit unions to announce completion of their Oracle Flexcube systems were NZCU Baywide, one of New Zealand’s largest credit union by assets, and NZCU South.
While both conceded in their FY 2018 reports that the costs were far higher than expected (total costs of implementation were reported as NZ$2.8 million and NZ$2.5 million, respectively), they also had the balance sheets and income to cover the over-runs.
The solvency of ACU, and any other members who come unstuck when implementing the Oracle software, however, is not the only headache for Co-op Money NZ, as it is now in a fight to keep the number of its full members at 10 or above.
Below that, and related party provisions are triggered as each member will have more than 10 per cent of the voting rights for Co-op Money NZ, giving any of the notes purchased the status of related party transactions, and making all transactions with members more difficult.
And here's where it's getting more tricky.
New Zealand online news service interest.co.nz reported in July that two members of Co-op Money NZ – Westforce Credit Union and First Credit Union – "have stopped taking its business services", although First Credit Union is still using Co-op Money's industry representative services such as risk and compliance and government liaison.
They were particularly miffed at, firstly, the intention by Co-op Money NZ to provide access to its core banking services – which credit unions had all funded – to building societies, which they saw as competitors; and, secondly they questioned the need to upgrade to an expensive first tier banking system such as Oracle Flexcube.
First Credit Union and Westforce have both adopted a Finzsoft core banking system.
"They [Finzsoft] were tried and true and we've found them excellent to work with. We've got better pricing [for members and the credit union]," Simon Scott, general manager of First Credit Union, told interest.co.nz.
The upheaval comes at a time when the sector, with NZ$1.5 billion in assets, should be setting itself to take advantage of the Friendly Societies and Credit Unions (Regulatory Improvements) Amendment Bill, which was passed in July.
Among changes introduced, credit unions will be able to more easily expand their services to include lending to small and medium sized enterprises in the next 12 months. Yet only three entities out of nine have had their core banking upgrades completed, with the Flexcube project running at least six months behind schedule.
The Oracle Flexcube story in NZ is not, however, limited to the credit union sector.
BankingTech.com reported last year that, outside of the Co-op Money NZ group, Heartland Bank went live with Flexcube in July at a cost that was understood to be around NZ$22 million.
Meanwhile, another local bank – Kiwibank – is struggling with its core banking software overhaul, BankingTech.com added.
The project, known as CoreMod, was initiated in 2013 with SAP to replace the legacy tech at Kiwibank with its core banking and payments solutions. However, the entire endeavour was recently put under “strategic review” and NZ$90 million was written off in FY 2017, and a further NZ$11 million write down in the September 2018 quarter, bringing a NZ$101 million failure onto the books.
"The Board decided that the delivery path of the project to modernise Kiwibank’s core banking system would not meet its key transformational objectives therefore the project has been closed and alternative options are being considered.
"The decision to close the project resulted in an increase in related operating expenditure (NZ$10m) and other impairment losses (NZ$11m) during the current financial year," the bank reported in its Bank Disclosure Statement for the year to 30 June 2018.