What is a legacy account?
To put it simply, a legacy account is one that is no longer open to new business. Some of these accounts are closed whilst others are in run-off mode with the account holders paying off any outstanding balances. Legacy accounts result from the sale of a particular product line or lines, which may have become unprofitable or redundant to the business. In many cases, banks have sold off portfolios, but it is only the active accounts that are transferred and the legacy accounts remain the responsibility of the original lender, who must legally continue to service their former customers.
Why do banks have to maintain legacy accounts?
Banks have a legal requirement to retain and maintain records for at least six years. The time limit for taking legal action against a bank because of a problem with an account is six years. Under the Money Laundering Regulations, banks and building societies must retain records of accounts for at least five years from the date the account was closed. A protocol between the Information Commissioner and credit card reference agencies also states that agencies should hold data for six years.
Why has the number of legacy portfolios increased over the last 10 years?
It’s a combination of factors. Legacy accounts for credit card issuers have become particularly problematic over recent years. In 2008, there were 65.9 million credit cards in issue in the UK. By 2011, this had fallen to 54.5 million, so, in only three years, millions of credit cards had been withdrawn from issue. Credit card issuers also used a number of different brands; there were more than 1,300 different credit card brands in circulation in 2009. In an effort to realign their products, issuers have tried to limit the number of credit card brands they have. This combined with the trend of consumers transferring debt to interest-free cards has left a buildup of closed accounts that must continue to be maintained.
What problems do the accounts cause for banks?
Legacy accounts simply add no value to a business. It may take decades from an accounts portfolio being closed to new business to the closure of final liabilities. They are a drain on resources, time and money, and will never offer a profitable return. Not only are servicing costs for the administration systems very high, but the systems managing the legacy accounts are usually outdated or there are multiple, inefficient systems in place. Managing the legacy portfolios also takes up the time of trained staff, whose time would no doubt be better spent elsewhere.
Why is it important for banks to concentrate on their core activities?
Banks essentially have three main core activities: taking highly liquid deposits as capital, extending short-, medium- and long-term credit, and providing a payments system. Each of these activities is demanding and uses up resources yet they are central to a bank’s operations and generate profit. Banks are realising that they need to concentrate on their core activities to ensure they are competitive. In many instances, credit card issuing is no longer part of their strategy or individual brands may no longer fit in with their target market. Maintaining legacy accounts is a non-core activity, and distracts from the activities that add value.
What should banks consider when deciding to retain or outsource legacy accounts?
Banks usually have three options when it comes to their non-core activities: sale, retention (for legacy accounts this means running off liabilities to conclusion) or outsource. Selling and retention are both often unrealistic given the current market conditions. Banks have limited opportunities to sell the accounts and it can be difficult to find a buyer who is willing to take on such a burden. When banks are deciding whether to maintain or outsource a legacy portfolio in particular, they need to ask a number of questions: Do we have the resources to manage the legacy accounts? Does the legacy portfolio have special requirements that mean it has to remain in-house? Is it cheaper for us to do the work? It is highly unlikely that banks would answer yes to any of these questions.
What are the benefits of outsourcing legacy accounts?
The biggest is cost. It typically costs 20% less to outsource non-core activities than to do them in-house. Even as banks decrease the number of legacy accounts they have on their systems, the fixed costs for maintaining the accounts remains the same, thus increasing the unit cost of each account overall. For an outsourcing company, its unit costs are relatively cheap as it works for a number of clients. As well as lowering costs, there are many other benefits to outsourcing non-core activities. It allows banks to focus on their core activities and what they do best. Outsourcers offer a very high level of service, and give banks access to efficient IT systems without banks having to replace their own equipment. Data is then brought together onto a single system, which is easier to manage, and the bank’s most skilled staff can concentrate on more valuable activities.