For community banks, as for many financial institutions, business is intricately tied to the interest rate picture, and right now that picture is volatile. While the Federal Reserve Board has raised short-term rates steadily since mid-2004 -- from roughly 1% to slightly less than 5% -- long-term rates have held firm at about 5%. With both short- and long-term interest rates residing in the same neighborhood, the resulting "flat-yield curve creates a more challenging environment" for midsized banks, says Thomas Doheny, associate director of equity research at Sandler O'Neill & Partners, a New York investment banking firm.
Top business challenge: To expand market reach and cut costs, all while complying with government regulations/
Solution: Open new bank branches, offer specialized services, improve customer service and ensure efficiency of IT.
How IT can help: By supplying check imaging, thin clients and broadband technologies for branches, as well as software for network and data security.
To counter an uncertain growth scenario, community banks must control costs. And they need to expand business by attracting new customers, which they are doing in two ways: by expanding with new branches and by specializing (focusing on commercial lending rather than retail banking, for example). According to a Federal Deposit Insurance Corp. (FDIC) study, the number of bank branches increased by 15% between 1994 and 2003; another FDIC report reveals that 68% of midsized banks specialized in 1994; by 2003 the percentage jumped to 89%.
For IT, these endeavors mean that CIOs at midsized banks must balance the demands of growth -- linking new branches and supporting ubiquitous services throughout the network -- with other top priorities: finding ways to cut costs with new technologies and complying with government regulations. Legislation such as the Gramm-Leach-Bliley Act requires the financial services industry to protect customer data, and the Sarbanes-Oxley Act requires all public companies to support their financial statements with proof of their procedures. Such compliance is a significant IT expense.
IT's Job: Make Niche Services Happen
NexBank SSB in Dallas provides commercial banking services such as portfolio management. To stand out, the bank has focused on providing high levels of service, according to Todd Williams, vice president of technology and security. For example, Williams says, in an effort to provide personalized service, NexBank sends its representatives out to customers rather than having customers come to the bank.
"IT is tasked with making all of the services at the branch available wherever the client may be and making that information [available in] real time," Williams says. Representatives have laptops, BlackBerrys and other devices that enable the connectivity they need to open accounts and provide service once those loans have been made.
Branching Out With Network Management
Building and operating branches is one of the most expensive ways to serve customers, according to Will Wade, technology editor at American Banker, an industry newspaper based in New York. But that's not stopping midmarket banks from opening new offices.
To support its growing number of branches, Bank of the Sierra in Porterville, Calif., has designed its corporate network to be easily scalable, says Rick Davis, vice president and director of IT. "Our network can be expanded ad infinitum for new branches," he says. This includes having sufficient components such as backbone circuits, backup equipment and circuits, and the ability to maintain branches remotely, he says.
NexBank uses fiber channel from SBC and AT&T to provide "stability, speed and flexibility for data transport between branches," Williams says. "Using fiber allows us flexibility in terms of reducing the hardware necessary for branch connectivity. We also rely on the fiber to provide a secure-voice-quality network among all of our branches with data running over the same pipe."
Enterprise Bank and Trust Co. in Lowell, Mass., has $1.3 billion in assets under management and focuses on the commercial sector. It also continues to open new branches. Since 2003 it has used a Citrix-based thin-client architecture to speed the time it takes to set up a branch from two months to a week, says CIO Stephen Irish. The centralized authentication of this approach has also improved security.
"The major benefit is managing how we deliver our applications to the branches. It's all handled centrally," he says.
IT has further supported the business by developing software for services such as cash and escrow management and investment accounts, Irish says.
CIOs Working on Cutting Costs
If supporting new business is one job requirement for CIOs at midsized banks, cutting costs and increasing efficiencies are others.
One growing application of technology is imaging, which got a push from the Check Clearing for the 21st Century Act, or Check 21, says American Banker's Wade. Check 21 simplifies the check-clearing process. With an on-site scanner provided by a bank, a business customer can scan individual checks and submit them to the bank electronically as image files, eliminating a physical trip to the bank or the need to mail checks. And electronic processing of a check costs just 2 cents, versus 14 cents to 20 cents for a paper check, according to JP Morgan Treasury Services.
Midmarket banks, Wade says, are just starting to use imaging technology in this way and could use it to build business. "Some of the larger banks are doing remote check capture for commercial customers," he says. "Midmarket banks looking to reach customers in other regions could use remote check capture to get a beachhead in a new area."
NexBank has found savings through advances in networking -- namely, Voice over Internet Protocol (VoIP). It uses SBC/AT&T's VoIP managed service, which reduces both the amount of hardware the bank needs and the number of IT staff required, Williams says. "In one instance, I was able to save $26,000 in hardware costs and reduce our annual telco costs by $6,000." VoIP also allows the bank to eliminate the cost of moving, adding or changing a phone, which averages $150. "We'll save $3,800 a year at one branch with this capability," Williams says.
At Bank of the Sierra, IT helps control costs by minimizing expenses for equipment and telephone use. "So far we have mainly dealt with IT expenses and have saved [money] by making our networks more efficient," Davis says, adding that IT plans to use data mining to cut costs in other areas.
At NexBank, Williams says that security software from TriGeo Network Security saves $80,000 annually by eliminating the need for a full-time technician to manage security and reports for audits. And this isn't just cutting costs; Williams says that because of the bank's improved security and reporting, the FDIC allowed the bank to increase its lending limit from $100,000 to $300,000 per loan in 2003 (which has since increased to $5 million). Williams credits the bank's growth from $32 million to $130 million in assets largely to higher lending limits.
No one can predict what interest rates will do. For midmarket banks, the best defense against such uncertainty is to seek new business and better serve customers.
Bob Violino is a freelance writer in Massapequa Park, N.Y.
An Insider View: Midsized Bank Uses IT to Reduce Risk, Drive Revenue
Amy Drake, Contributor
I've worked at Integra Bank for six years. We are a commercial and retail bank with 74 locations in four states. We have $2.7 billion in assets under management, and our primary focus is consumer and small-business banking. I head up an IT department with 25 employees. Right now it's a dynamic time to be in the banking industry. A lot is happening, and banks have many opportunities to use technology to improve existing services, offer new services and expand their reach.
Like many midsized community and regional banks, we want to expand our business. We have a desire to grow organically through our accounts and to grow by merger and acquisition. There's a huge opportunity for banks to retain existing customers through service and to acquire new customers.
CONVENIENCE AND SERVICE
For community banks, convenience and service are the major customer-driven issues. We have an extensive ATM network, and we've built additional branches over the past six years. We strive for a holistic view of customers: to understand their issues and needs and to provide them services through a variety of means. For example, customers can do phone banking, online banking, and banking at an ATM or in a bank branch. All should be convenient ways to do business, and customers should feel comfortable with and receive consistent information and quality of service in any venue.
Many of the issues banks face today are directly related to technology. In October 2004, the Check Clearing for the 21st Century Act, known as Check 21, came into effect. The act -- which allows banks to process checks electronically instead of physically sending them for processing -- aims to make the check-clearing process more efficient. Check 21 changed the strategic direction of banks like Integra by driving the use of imaging technology throughout the banking industry. The act had some requirements -- such as accepting a substitute check document -- that we had to meet by October 2004.
We want to expand the use of imaging with our commercial customers. We could use it to allow our customers to do remote check capture -- that is, to use a scanner to create images of checks and then send images electronically for processing. Many commercial customers either use couriers to send checks to their bank or send an employee to deliver checks. Commercial remote capture cuts out the physical step, providing a real convenience to businesses.
A constant challenge for me is improving our utilization of resources. I have to analyze how best to use the time and people we have to develop or implement the projects that create the best return.
ACHIEVING GREATEST IMPACT
I look at analysis as a three-legged stool. We evaluate a project in terms of its effect on risk management, efficiencies and revenue. We use a scoring process for every project. We evaluate the project based on how it satisfies one of the three areas: Does it mitigate risks, give us efficiencies, or drive revenue and reduce costs? We score each project with a number based on how it addresses each of these areas, then work with our line-of-business managers to set priorities. We work on activities that create the biggest bang for the buck. And right now, a priority for us is commercial remote capture of checks.
Given that there's currently little difference between short- and long-term interest rates, the banking industry is feeling pinched in terms of margins, so cutting expenses is a priority throughout the industry. A lot of banks strive to improve their efficiency ratio (noninterest expenses divided by revenues) by reducing overhead. That's a common strategy. So choices always have to be made. A project that has a risk focus, for example, often won't address efficiencies and revenues. So we have to strike a balance when it comes to choosing projects in light of the goal of reducing costs.
We've analyzed every expense we have in our department; some areas, however, aren't negotiable, such as disaster recovery and information security. We must continually work to improve our stance on these fronts.
Overall, there's a lot of opportunity in the midmarket, and technology can go a long way in helping us improve service and enter new areas of product offerings.
Amy Drake is senior vice president of information technology at Integra Bank N.A. in Evansville, Ind.