Even though community banks compete mostly on service, many bankers still want the ability to adapt IT systems to gain a strategic edge. The question for banks with these aspirations-and whose IT departments are usually small and stretched thin-is what systems are worth tinkering with and which are best left alone.
The smallest of community banks-those with under $100 million in assets-often rely on turnkey "bank-in-a-box" products from large providers, including Fiserv and Metavante. These vendors' products offer a streamlined infrastructure, but lesser room for customization for very small banks. That doesn't matter much, however, since they're not competing on technology; rather, they compete more on service, says Celent senior analyst Bart Narter.
Institutions that are a step up in asset size have more IT options, and a greater ability to customize offerings. Like the smallest banks, they are also competing mostly on service, but some also want the ability to introduce technology modifications. Jeff Meyer, president and CEO of $450 million-asset Three Rivers Federal Credit Union in Fort Wayne, IN, says adaptability is crucial to his technology decisions. The bank uses Open Solutions' core-processing product, which allows financial products to be added to the lineup in minutes as dictated by the bank's need.
But Meyer warns that even though Three Rivers needs some latitude to make adjustments to its platform, making significant changes is not productive. If community banks and credit unions embark on larger alterations, a new software version will inevitably come along and require more changes later. "It makes it too tough," he says. "You have customization beneath a new version."
A bank needs at least $200 million in assets before it can afford the luxury of modifying its software, he says. Institutions smaller than that typically outsource all technology functions to a data center, which allows even less control over changes.
Paul Keen is vp of business development at Precision Business Development, which was bought by Fiserv in 2003. Precision's core solution, Vision, is used by about 700 banks, the largest of which has $11 billion in assets. He describes the system as a "parameters-driven application," meaning a bank can make minor changes, such as altering how it opens new accounts or handles non-sufficient fund fees.
He acknowledges, however, that bigger changes are more problematic. If a community bank requires major platform changes, switching the technology altogether can be less cumbersome than modifying the existing platform.
For banks that want to do some modification, but also want to carefully pick their battles, partial outsourcing may be the right option. The idea is to outsource auxiliary pieces of technology while keeping core functions in-house, says Keen. This is a break from the past, he says, when banks traditionally chose either an in-house or an outsourced strategy, but not both. By outsourcing some functions previously handled in-house, the internal IT group has more time to tinker with remaining systems.
This hybrid approach evolved with the advent of check imaging, according to Keen. Many small banks didn't want to keep the required imaging hardware on site, so they began outsourcing the activity. Then they examined which other software functions management could outsource, including cash management, data storage, ATMs and even telephone banking.
The decision to outsource any technology often revolves around the question of cost. In the long run, Keen says, handling systems in-house can be cheaper. Outsourcing typically involves monthly fees that eventually surpass upfront costs of in-house handling; but outsourcing is initially less expensive, because there are no large hardware costs, he says.
So the decision, he notes, is often about whether to defer costs-increasingly the more attractive option. When Keen's company opened a data center in LaCrosse, WI, in 2002, it began with four clients. By the end of this year, it expects to have 80.
(c) 2007 U.S. Banker and SourceMedia, Inc. All Rights Reserved.
