The incident took place in a Citigroup unit that serves as the administrative agent for loans.

For years, Citigroup Inc. has been an anomaly among the big banks, relying on obscure software it helped develop to manage loan payments. Just as the bank tried to replace him, things went horribly wrong.

The saga began to appear in court this week, with the company accusing human error of mistakenly sending $ 900 million to a fleet of hedge funds reluctant to return it. But the backdrop, according to people familiar with what happened, is an obscure tech story dating back to the 1990s. It culminates with the bank’s decision last year to replace the software with the standard. industry. This rollout is still ongoing, adding to the upheaval at a time when employees are working from home.

An internal review at the bank found that humans manually using the old software were ultimately to blame and their remote locations were not the issue, one person said, asking not to be named to discuss confidential matters. Yet a global pandemic is, to say the least, a delicate time to embark on such a complex transition.

“If you want to switch from one provider to another, it’s a very big project”, explains Marc Victory, head of the financial services practice of the consulting firm Sia Partners. “Supplier changes are very heavy and very difficult.”

Backstop failure

The incident took place at a Citigroup unit that serves as an administrative agent for loans, collects and distributes interest payments, and provides other housekeeping services. The borrower in this case, cosmetics giant Revlon Inc., was grappling with lenders who wanted their money back.

After Revlon bought out some of the debt, a Citigroup employee was supposed to manually adjust the portion of the loan that the remaining lenders still held ahead of the interest payments expected this month. But the employee did not select the right options from the system – instead, he allowed the loan to be paid off in full with interest. Colleagues who are supposed to catch such errors did not.

“Unfortunately, manual checks of this selection also failed to detect the error,” Citigroup wrote in its court file.

Although the bank quickly recovered hundreds of millions of dollars from beneficiaries, a group that received most of the money refused to return it, forcing the company to launch an embarrassing legal battle.

Behind the scenes, regulators have encouraged the bank in recent years to invest in improving its lending operations, according to people familiar with the matter. The company has a long history of using Flexcube technology from Oracle Corp. for loans. But after a review, the bank decided to switch to Loan IQ from Finastra Group Holdings Ltd., which has been adopted by most of the other big banks.

Citigroup’s use of Flexcube technology dates back to the early 1990s, when the bank established a company called Citicorp Information Technology Industries Ltd. Hukkou.

“Basically what they said was, ‘We love you guys. We respect the fact that you can do something great, ”Hukku said in a 2007 interview with the Wharton School at the University of Pennsylvania. “” So we’re going to invest our money in it. But we can’t invest in mind management because it’s not our core business to sell software. “

The young company, which would later change its name to I-Flex Solutions, debuted with Flexcube in 1997 and eventually struck a deal with Citigroup to replace the lender’s old banking system. In 2005, Oracle purchased Citigroup’s 41% stake in I-Flex solutions for $ 593 million and increased its stake until it finally changed its name to Oracle Financial Services Ltd. in 2008.

“Unacceptable” error

Citigroup promoted Stuart Riley to lead the company’s operations and technology teams within its institutional client group in January 2019, and he began a broad review of the unit’s underlying systems, deciding to migrate his technology. syndicated loan to Loan IQ. Finastra promises that the technology can help banks reduce the time spent processing loans by up to 30%.

“We are proud of the role we play as a global leader in financial services and recognize that an operational error of this nature is unacceptable,” Citigroup said in a statement. “We have put in place important additional controls until the new system is operational.”

Citigroup has briefed regulators, including the Office of the Comptroller of the Currency and the Federal Reserve, on what happened this month, Bloomberg News reported earlier. The unit’s planned migration to another software platform could help allay fears that accidental payments signal deeper issues that still need to be addressed.

“The mistake is a reminder that the transition they are going through is absolutely necessary,” Paul Spiteri, CEO of The Lending Practice, which advises banks on their technology and commercial lending operations. “Loan IQ is designed to avoid such problems. “

(Except for the title, this story was not edited by NDTV staff and is posted from a syndicated feed.)

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