Once again, I first must confess to a bias before making this case. "Big" by itself has never impressed me. "Big and capable" is another matter. So when I tell you that small banks have better technology than the giants, I'm ready to defend my statement with facts.

Also because the trade press loves to report on the giants, I find it necessary to speak as a lonely advocate for the little guys. Case in point: When the Wall Street Journal writes about technology in banking, they always interview the largest banks. Several years ago, the CEO of Bank One (please note it wasn't the CIO) became the poster boy for spearheading a new core apps development project that was going to leave every other bank in the dust, except Norwest. For reasons that I cannot understand even now, Norwest went along as a partner. I don't understand it because Dick Kovacevich was CEO of Norwest at the time and this man was one very level-headed guy in every aspect of bank management. He respected technology, but he never hyped it. The 12-year project failed. The two banks and the developer just thru in the towel and walked away. The best thing about that disaster was that none of the players showed up in a court room. I could have sized it up with two words - too big.

Small Banks

The most important reason that small banks have better technology can be stated in one word - integration. In 1976 when the developers - Jack Henry (JHA) and Don Dillon (ITI) - embarked on what today are the two most popular core systems in the U.S. (31% marketshare of all core systems installed), the design strategy was based on a simple command. "Let's build a core apps system that small banks can run themselves." In contrast, the wrong command would have been, "Let's build a new DDA system, or a new Installment Loan system, or a better CIF." The second best attribute defining these new systems was the adoption of development tools that heretofore didn't exist. In my opinion, these were programming languages that were clean cut and easy to use by normal people. A programmer no longer had to do all the housekeeping to get a computer "in the mood" to do some work. Programmers were able to focus on doing the work. The third best thing was database file structures instead of flat files. This capability represented the first example of computers being able to answer questions as opposed to just sucking up data and dispatching transactions. Today, these systems continue to grow by adding functionality, access to "outsiders" through Service Oriented Architecture (SOA), reaching to the "Big Bank Club" by proving they can do it. Today, small bank software vendors are sitting pretty. And it's not because they are "tweenies." Thirty-something systems are not young, but they are capable. The label that looks like the final nail on the coffin is "legacy," and that's where the 132 big banks are.

Big Banks

These banks spend tons of money because they have it, not because they have to. Look at this ridiculous hypothesis which conveys some good food for thought. If the top three bank tech vendors abandoned all their customers (that's the ridiculous part) and devoted themselves to serving the three largest U.S. banks, those three banks would cut their IT budgets by $8 billion. Large banks are throwing money out the windows of money center cities because the overhead to keep their 40+ year old systems running is enormous. Now here's the really bad news. Any large bank that decides to convert to a new core system could bring that bank to its knees. The reason is the risk of conversion. These banks are now looking at systems, whereas they should be playing what-if games, like what if the posting/updating run doesn't get to end-of-job on Monday night.

And you thought, along with every Wall Street analyst, that sub-prime mortgages, the credit crunch and investment banking woes were the killers facing Citi and most of the big banks.

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