While the precise detail of why Westpac is not currently able to levy different interest rates on landlords and owner-occupiers remains unclear, it is well understood that when IT systems struggle to talk to each other, banks find it hard to adjust profitability and costs allocation to various products. This can slow down bank innovation, and in the case of Westpac's reference rates (the standard variable rates charged to home loan borrowers), its systems have apparently reduced the flexibility needed to respond to competitors, meaning a million dollars of lost revenue a day is being left on the table. CBA's big investments The big investments made by Commonwealth Bank of Australia and National Australia Bank to upgrade core IT systems with products from the world's best banking software vendors - SAP and Oracle - has not been matched by ANZ Banking Group or Westpac, which uses a Hogan core banking system made by Computer Sciences Corporation. Under former CEO Ralph Norris – a former chief information officer before he rose to lead Australia's biggest bank – Commonwealth Bank of Australia spent billions of dollars upgrading its core systems. Analysts say this has provided flexibility to innovate and adapt. In the case of changing the interest rate for property investors but not for owner-occupiers, the issue was probably as simple as flicking a switch.

Ironically, it might have been ANZ's older systems that helped it follow CBA last week by raising rates for property investors but not owner-occupiers because different interest rates can be plugged in to different products - such as investor and owner-occupier loans. It is understood that NAB's decision to increase interest rates on interest-only loans was made because it also does not have the flexibility to charge different reference rates to property investors and owner-occupiers. Over the past seven years, NAB has been working with Oracle to upgrade its core banking system in a project called NextGen. But the personal banking origination platform has not yet been added to the new system, meaning the multi-billion dollar upgrade is not yet fully operational. Lack of foresight The question investors will be now be asking Westpac is: why was it not foreseen that interest rates on loans to investor and those to owner-occupiers might diverge – and to make the adjustments to their systems ahead of time?

It was December when the Australian Prudential Regulation Authority came out with its so-called macroprudential policy. This made it clear that housing speculators, rather than those living in their houses, were the ones regulators are concerned about. Countless media reports have focused on the issue of an investor-led property bubble. Macquarie analyst Mike Wiblin - who identified the current issues for Westpac and NAB in a report last week - said last year Westpac that will need to spend an additional $1.7 billion on IT on top of $2 billion already announced to make the bank's technology ready for the new world. The bank has disputed his analysis. Core system capability will become crucial as banks transition to the New Payments Platform (NPP), a piece of infrastructure being built by the Reserve Bank of Australia, which will allow payments between banks in real time. CBA's SAP core system puts it at a competitive advantage in this real-time environment. The ability of Westpac's IT to respond to fast-changing world of banking will have a big impact on its profitability over the coming years, including its ability to win retail banking market share off CBA and to compete with more nimble competitors unencumbered with the complexity of banking behemoths.

After the issues of the past few days, it seems that challenge may be more difficult than initially thought.