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The Search for Stability: Bank Tech Vendors Have Found It

Posted on October 27, 2009

If I read one more account of banks failing to get out from under the banking crunch, I think I'll revert to the First Local Mattress at Home. Bank tech is my business so here's what I see for the Big Three.

FIS

Bill Foley deserves a nice rest, as long as he doesn't turn off his brain. Buying 15 companies in six years takes lots of money and lots of spreadsheets, but he did it, and at least from where I sit, without defaults. I'm a little careful about "batting a thousand" because a few years ago, Ken Jensen, former Fiserv CFO, elbowed me in the ribs in a room full of high-bonus investment bankers when I said Fiserv had a perfect record of acquisitions. Ken said one was sour. Integrating the solutions of 15 companies is a nightmare for FIS's technical staff, and keeping them as stand-alones is a quarterly nightmare for the CFO as he reports their drain on earnings. FIS will be one very busy company doing overhead work (integrating) while trying to sell more than the two parts sold last year. So I see a revenue projection of $5.4 billion, if you add the full year 2009 revenues of FIS and Metavante including modest growth. In the near term, I don't believe 1 + 1 will generate a lot more revenue than two ones.

Fiserv

Fiserv put the cap on its historic record of stability about a year ago, reaching what I believe is every solution for every financial institution with every banker's dream for support service. But now Fiserv needs better sales performance. In my opinion, CheckFree wasn't that near-term answer because banks are not buying electronic payments solutions fast enough. A 1.9 percent organic growth rate for Fiserv is like telling an investment banker he got a 1.9 percent raise with no bonus. They aren't accustomed to that kind of poverty. But stockholders should be happy. They got a 36 percent raise. Fiserv knows its business and the business of its customers. Fiserv doesn't make big mistakes. It serves the welfare of its customers and employees in that order, and doesn't get sidetracked by Wall Street. What Fiserv can't do is solve the banking industry's problems, and you didn't have to hear that from me. For now, steady as she goes is something to be grateful for. Revenue should come in at $4.8 billion.

Jack Henry

I know two companies that won't like this paragraph. JHA is my idea of the perfect bank tech company. One guy created the mold 33 years ago out of tungsten steel, and no one could break it, nor would they want to. I never attended any vendors' board meetings, but I imagine if I was ever the proverbial fly on the wall at a JHA board meeting, the loudest sound might be the background music of "Home On The Range." Seldom will you hear a discouraging word and skies aren't cloudy all day at this peaceful campus in Monett. But in the competitive marketplace, JHA wins like a true champion with the goods, not the giveaways. I see lots of reasons why JHA will continue to be the group's leader in organic revenue growth rate so $810 million is a sound guess for 2009. Since $1 billion is the entry level of legitimacy in the Big Three, there's one acquisition out there that can do it. But that's like telling Janet to change the boardroom music to classical. Just as you don't tug on Superman's cape, you don't tell JHA how to run their business. And that's a good thing. McKinsey wouldn't last ten minutes.

It's a nice warm and fuzzy feeling to know that in the midst of calamity and chaos, there are some businesses that will do their job so bankers can at least put one piece of their concerns to rest.

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One Week Into a New Era and This Pessimist Sees a Glimmer of Positive Promise

Posted on January 27, 2009

After the events of last week in DC, things like the stock market, banking crisis, business closings, devastating earnings reports, CEO firings, and even banking technology seemed so insignificant in the scheme of larger issues. I was hearing about “a dream,” “change,” and values far greater than what Marketwatch, Bloomberg and the WSJ report. Why, I even got a temporary feeling of comfort yesterday when a pooch licked my knee during my trek at Katy Trail. The owner apologized, but I asked her if the pooch could do it again on my return. It felt good.

My favorite news clip last week was about the closing of Guantanamo. That’s a nice first step, but there should be more to it than that. I’m offering my plan even though no one asked for it:

The greatest piece of news to restore a bit of our self-respect would be if the U.S. bulldozed the memories of what’s on Gitmo land and turned title over to a country like Switzerland. A covenant would require that future use of the land would be dedicated to peace causes—call it a Peace Think Tank, but with no one in charge. I’m a little sour about former leaders right now, in both business and government, so I’m opting for none. Every country in the world would participate equally regardless of (insert the string of labels from President Obama’s inaugural speech).

President Obama would be a guest just like anyone else. President Raul Castro would also be a guest, although we wouldn’t mind if he provided the Cubano coffee and cigars after meals. If it were up to me, I’d like to see Fidel there also as a gesture of brotherly love and bygones be bygones. And the Jews and Palestinians could take a break from their wars to see how cool life can be if you’re not hating and bombing for 50 years. The general rule would be, if you can swim to Cuba, sail or fly in, you’re welcome to join in diplomatic discussions regarding what your grievances are and how many ideas you can bring to the beach.

Tables don’t work here. We tried round ones, trapezoids and vessels only to go back to feuding. One rule would prevail—Leave your “baggage” at home. I would suggest some recreation after the meetings. Golf, basketball, swimming, tennis, soccer and track—sporting events that aren’t just American. No bowling or skeet shooting, at least for the first couple of years, until we sort out our American strengths. No reason for us to be total losers in this new world of love and harmony.

I know someone out there is going to say we have a United Nations for what I’m proposing. And to that I say, the UN is like issuing free McDonalds gift cards to every obese person in the world. The UN doesn’t change or solve anything; it just feeds what’s wrong. Part of what I am reading about “change” is to go back and start over. Cuba is an adorable place that creates great baseball players. NYC is not adorable and it pays its baseball players far too much money. If President Obama and President Castro can shake hands and lift the embargo, it would send a great message to the world that we are a “sweet” nation. Even the Hatfields and McCoys would question the basis of that 46-year-old feud.

And there you have it, folks, one good idea in the right direction. The next one is to close down the wars. If we fix who we are, and focus on repairing our tarnished image, then the economy might just take care of itself. It has been a week already. Do the economists have a better plan?

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Where’s the Bank’s Internal Auditor?

Posted on December 08, 2008

Large banks and mid-tier banks have several. Small banks “have” one when the bank examiners show up. After conducting 321 projects for banks, I can definitely say I have met three internal auditors. Even though I invite every auditor to my work sessions, those three guys were in my face constantly. My kinda people. They would show up at interviews (not all, just select individuals) without notice. I wondered why. I found out at the end of the job. They still appear on my list of client references, even though they may pick me apart a bit. You can never please these guys and that’s why they are highly effective auditors.

Then, there were those auditors I met who were so passive that I wouldn’t have known them from the marketing guy. These are two very transparent positions in most small banks, and that’s not right.

If you want to know what the bank auditor’s traditional duties and responsibilities are, go to the BAI. If you are interested in my version of the modern day bank auditor, read on.

The traditional auditor is supposed to report to the Board of Directors. I can see why. Any internal exec could be the crook. But I’m not satisfied that any bank board is equipped to know what the auditor is all about, or how they can use what he’s telling them. What does a pharmacist know about financial irregularities. Crime prevention to him means locking the narcotics cabinet. And how effective is a stethoscope in detecting bank fraud? Will an MD be satisfied with an auditor’s report that says procedures are in place to detect fraud? Will a real estate broker sign off on the underwriting rules associated with mortgage loans? His living depends on a 100 percent approval rate. Will a lawyer overreact to potential threats? His attitude is that everyone is guilty unless they hire him as their defense attorney. In my opinion, the typical directors are outsiders (that’s good) with a personal interest in the bank (that’s bad) and no skills for the job (that’s a joke).

Auditors do an awful lot of checking. They send millions of confirmation notices to customers. That’s like walking into a seminary and asking, “How many of you believe in God?” If anyone knows of a time when an audit confirmation has uncovered any wrong-doing, I’d like to hear about it.

Auditors should take a much broader look at protecting the bank’s resources. For example, at least four areas are critical: lending practices, accounting procedures, IT systems, and screening of critical employees. The auditor should become the quintessential critic, cynic and naysayer. How many auditors were consulted about the viability of subprime mortgages? How many auditors have reviewed the bank’s web site to test improprieties? How many auditors have hired a specialist security firm to conduct an intensive test of the entire issue of data security? If the auditor’s answer is, “We use our external audit firm for that,” then I believe it’s not only Houston where “We have a problem.”

In my opinion, the auditor should be more powerful, have broader coverage, become more authoritative with increased levels of chutzpah and execution privileges (of his programs, that is).

There must be hundreds of books written about bank auditing. I think it’s time for one more, authored by Messrs. Prince, Mozilo, Killinger, Thompson, Perry, Daberko, and others on the way.

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Only One Reason to Call Customer Service--Solve the Problem

Posted on December 01, 2008

For years, I’ve been calling 1-800 numbers to get help and/or information (for business and personal needs), only to be disappointed that I hooked up with the rookie of the day. Solutions were hard to come by. I accepted it as a common condition and patiently waited for things to improve. I realize now that I’m a quintessential troubleshooter, brought about as a result of my occupation. Bankers hire me to fix broken things like their entire core system, not to brag about what works. But when something good happens, I’m ready to blog.

This week, the green flag went up as I witnessed a marked improvement in customer service, even though both experiences were from the same company--Bank of America.

As I prepared for my routine travel, item #18 on my checklist was “get cash.” I got the cash but I didn’t get my plastic back. The ATM screen said I wasn’t going to get it, but didn’t tell me why. Always expecting the worst case (I shoulda been in Risk Management), I called 1-800 to find out what I had done wrong. After two levels (CSR and Manager) of numerous apologies and “Hmmmm,” I gave up. That night I got an unexpected call from a real person whose name I knew, but never met. Two days later, I received my replacement card at my temporary location (1,700 miles from Dallas), and I was reunited with my checking account. My Dallas man solved the problem. Tip O’Neill used to say, “All politics is local.” I say, “Even in giant organizations, one local person is all you need to get results.”

As a traveling man, I don't have the luxury of doing my business chores during prime time. So I had to solve a banking problem on Sunday. If the rookies are taking calls Mon. to Fri., who do you think is answering on Sundays? After the first 23 seconds, I began to relax. Just from the tone of the CSR’s voice, I knew I could trust this guy to understand and handle a complex set of instructions. He solved my problem. One of the lessons I learned using 1-800 is if the first few seconds don’t work, hang up and call back. The second time is usually the charm. I now put old tricks aside.

Based on experience, I’ve come to believe the 1-800 number is OK if all you need is account information. But 1-800 is an unreasonable way to achieve problem resolution with regard to tech matters. For example, I’ve coined a new phrase for Apple Computer. “What happens in Cupertino, unfortunately, stays in Cupertino.” Steve Jobs has done a remarkable job for Apple in the development of innovative and ultra-usable products. But if you have to rely on an Apple store or 1-800 for technical support, you’re not going to get the same level of excellence that comes with Apple products. Everybody in the field is a rookie.

And from what I see, the rookies have been taught an escape routine when they can’t perform the main deed. It goes like this: 1) apologize a lot, 2) ask the caller to repeat the problem, 3) say “Hmmmm” a lot, 4) leave the line to check something, and 5) refer the caller to a third party scapegoat such as your Internet Service Provider. The closing comment is always, “Call us back if we can help you further.” Oooohkay.

Customer support is a whole lot better in the bank tech world, and in my opinion, it deserves a J D Power award of its own. Every year, I conduct a program called, “Makin’ The Rounds.” I visit core vendors to cover a broad range of issues and practices. Vendors are proud of their customer service stats as well as their people. In one case, the company presented several of its CSRs where I had been meeting, and I had a small conversation with each one. At the end, I surprised everyone by telling them they could now go back to their acting careers because I didn’t fall for the setup. They looked too happy, too well dressed, too candid, too rested, too confident and too quick to provide all the right answers. Only in the movies are things that perfect. I made a few friends that day.

Here are some of the reasons CSRs are good at what they do in the bank tech business:

• These are not entry level jobs. One has to build up to it in time and with experience.

• The arena, although broad, is defined. There are 132 applications in any bank tech system. CSRs specialize in a particular group. Customers don’t have to explain the obvious.

• Employee turnover is extremely low at these companies. As a result, CSRs have built a personal database of problems they have previously heard many times over. They remember the answers.

• Callers are usually predictable to some extent so there’s a better chance for understanding. In the generic world, a caller could be anyone from a seasoned 20-year user to a first-time ever computer user.

• CSRs not only solve the immediate problem, they provide value-add services by offering advice on how to prevent re-occurrences.

• CSRs are good problem solvers so they’ll get right to the issue, rather than stroke the caller’s ego (it’s that apologize thing again) just to provide a temporary psychological fix.

• Sometimes the phones don’t ring, so alert CSRs will follow up on a recent caller just to make sure the resolution worked. “Care” is not just a marketing word for these people.

I’m sure there are bankers out there who will disagree with my representation of the excellent customer service function at bank tech companies. To that, I would say that’s why, five decades ago, I stopped using the word “perfect” as it relates to anything in the business of Information Technology. I’m content with how far we have come.

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The Bad Economy Is No Reason to Starve Your IT Budget

Posted on November 21, 2008

Bank IT budgets are like an 800-pound gorilla—ya gotta feed ‘em no matter what the economy does!

I discovered, not to my surprise, that some pieces of the IT beast have to be fed, no matter what. Status quo just means no new purchases, but existing resources will cost more in subsequent years just to keep them running. The net result of this hypothetical exercise was that my “typical bank” was going to spend 6.9 percent more on IT in 2009 than in 2008. The line items in my 100 plus line items IT budget in this exercise that caused the increase were:

• Occupancy costs
• Vendor maintenance charges (hardware, software, support, special services)
• Mandated regulatory compliance
• Ad hoc audits that were mandated by the IT Oversight Committee
• Contractual commitments agreed to in year one that are coming due in 2009
• Salary increases (albeit modest) of bank personnel who are labeled as IT staff
• Arbitrary communications network price increases that were imposed by carriers based on an approved rate increase
• Insurance and property tax increases approved by regulatory agencies
• Increased processing volumes (if a bank should be so lucky) that propel the bank into the next tier of charges

My typical bank means it didn’t make an acquisition, it didn’t enjoy a surge in market share, it didn’t significantly grow its transaction volumes, it didn’t open branches and it didn’t enjoy a windfall. A cynic would have called it a dead-end bank somewhere in the middle of Wyoming. Also, in the list of 10 hot apps are some tech innovations that would give any bank CFO cause to break out the champagne–applications that would actually save the bank money on day one. But to maintain the spirit of no new spending, even money-makers like remote deposit, mobile banking, Internet-based cash management and electronic check clearing were not approved in this exercise.

It turns out that in the real world, most banks are not applying for bailout help and are on their steady strategic path of ready-to-serve. Based on a sample of those banks, the anticipated new IT capabilities will add 3 percent to 4 percent to the status quo budget increases.

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It’s Not Only the Economy, Stupid, It’s The Maturity!

Posted on November 17, 2008

I first became aware of banking technology in 1960. My company (Honeywell EDP) had sold a computer to the First National Bank of Boston (later Fleet Bank and now BofA), and that was a big deal because it was the bank’s first semiconductor computer. Vacuum tubes were old technology. The new computer meant everything had to be reinvented—mainly applications software. It would be eight years before the late Ken Kirchman would introduce the novel idea of banking software for sale. So every large bank was doing the same thing First of Boston was doing—building its own software. And most small banks were “hooked up” to their correspondent bank to get the daily work done. No one questioned that approach mostly because in 1960, we didn’t have the benefit of pundits like Gartner, Forrester, TowerGroup, Aite, Celent and Financial Insights to offer their guru perspectives. Today they have a lot to say about an industry that uses 60s technology.

The weird thing about large banks today is that 77 percent of the 128 largest banks in the U.S. are still using their homegrown 1960s software. Twenty-three percent of them switched to vendor supplied software (Fiserv, Fidelity National Information Services, Metavante, Jack Henry & Associates and Open Solutions Inc.), but that stuff is legacy as well. Why even M&I Bank (#23) whose estranged offspring (Metavante), a very strong leader in banking technology who should be directing its best customer to better systems, is using 43-year-old core systems. As weird as that might seem in a world where technology generally gets replaced every three years, I understand why 128 large banks are still using antiquated technology, and I’m not criticizing large banks for not making the move. Even though eight offshore vendors (Infotech, Infosys, Misys, Oracle Financial Solutions, SAP, TCS Financial Solutions, TEMENOS, and Wipro) are offering modern technology to banks everywhere else in the world, large U.S. banks aren’t budging.

If the large bank CEOs of the sixties were around today, I believe they would be asking, “Aren’t you fellas finished yet with what you sold me as a revolutionary generation upgrade of automation?” I would be happy to serve as spokesman for the IT group, and this is what I would proclaim. “Yes, gentlemen, we are now pretty much finished with core system development. We will always be adding to and modifying our core system, but the core system is like the foundation of the bank’s main office building—It’s a monument, and will remain forever.”

And this is what I mean about maturity. Some things have to end. After 48 years of development, it’s OK for CIOs to say, “We finished building our core system, and we are now committed to keeping it fresh as the business changes.”

Now how do I tell tech vendors that the largest single piece of business they sell is leveling off to buyers who represent only about 2 percent of the population? The simple answer is, you can be happy with stable, but modest growth, or you can become very inventive and create the new paradigm of banking technology.

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Failed Banks May Not Have Had Failed Systems

Posted on November 11, 2008

For reasons that I cannot fully explain, the quality of a bank and the quality of its IT systems may not necessarily correlate. For example, the three largest U.S. banks run on 40-year-old legacy core systems. Even though anything is possible these days, I don’t believe Citi, BofA or Chase will fail. I should know about this disconnect situation because I used to work for a first-rate bank (eventually acquired at a 40 percent premium by BofA) but our systems were “also-rans” at best. I believe one can find similar situations of non-correlation today with one big difference—the failed banks screwed up. Their systems did not.

Asking a failed bank which system they used is like going to a funeral and asking the widow which brand of scotch the deceased drank. Who cares now? So I have not tried to look at the 19 banks that failed so far this year to see which core systems they were using. Instead, I will list a few anecdotal experiences that relate to the disconnect between institutional performance and systems performance.

• In the mid-seventies, I worked on a consulting project, as a sub, to upgrade the admissions and registration systems at Georgetown University. Georgetown knew very well that its systems were cumbersome, antiquated, labor intensive, error prone, and plagued by negative feedback from innocent freshmen who were quite vocal about their frustrations. So I expected we would be doing site visits to some of the better institutions of higher learning to see what they had. But Harvard, Princeton, Yale, Dartmouth, Brown, Columbia, Cornell and The University of Pennsylvania were not the places we visited. They were still using quill pen and parchment. We went to a community college in Colorado to see the slickest admissions and registration system for educational institutions in the U.S. That was my first observation that institutional rank and systems excellence don’t necessarily match.

• Then I spent five years in the healthcare industry (thanks to a bank CEO who was a trustee at a top five medical institution) with particular focus on names that would impress patients who traveled from continents afar to seek the ultimate in U.S. medical excellence. Deserving as they were in their reputation as a healthcare provider, information technology was based on the Mont Blanc pen, paper records, lost records, and more important to physicians who had an ownership stake, lost revenues due to inadequate Medicare claims reporting. The electronic patient record was unheard of. The urgency of retrieving a medical record was reliant on the quality of the ball bearings of the skates worn by the retriever and his/her ability to track down the last physician who forgot to return the file when he/she was finished with the recording of procedure/diagnostic notes. One of my favorite statements delivered to medical practitioners was, “Financial institutions carry more bytes of data on a customer’s wealth than medical institutions carry on a patient’s health.”

• I’m not sure how much of BofA’s acquisition price was based on Countrywide’s technology, but BofA made strong statements to the press and Wall Street about the superiority of Countrywide’s technology. I don’t think they were referring to Risk Management.

• The 19 banks that failed so far this year probably did so because they made irresponsible loans and bad investments. The only other mistake that could have done them in was to go home without locking the vault door. To blame technology is so ludicrous that, so far at least, no banker has tried it. My logic is based on this. Seven companies represent 78 percent of the marketshare for U.S. financial institutions. They earned that sizable marketshare by delivering good stuff and people-based support to their customers. So I’m saying the 19 failed banks were probably using the systems of the seven most popular vendors. The challenge for any energetic skeptic is to see if the 19 banks were using systems delivered by 23 other companies whose technology may not be up to snuff. If that exercise proves to be correct, and in contrast to my reckless assumption, then the title of the skeptic’s blog should read, “Nineteen Banks Failed So Far This Year Because They Were Using Weak Systems.”

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So Just How Much Should Bank Technology Cost?

Posted on November 03, 2008

Forty-four percent of my clients will seek price concessions from their IT vendors. All kinds of prices seem to be going up where we never expected them to, but maybe my clients are using the price of gasoline as their indicator for action. Regular unleaded went from $4.20 per gallon on July 8 to $2.47 last week. Are banker’s now thinking there might be an “OPEC” in the bank IT services business that regulates prices based on self-serving methods? Or are they just looking for ways to cut costs to ease their earnings picture as a result of the credit crunch.

There has always been a sort of discomfort about what bankers thought IT should cost. After all, bankers don’t have to spend six ways from Sunday to figure out the price of their most popular product. They rely on one guy to do it for the entire industry.

I don’t have all the answers, and I don’t “negotiate the best price” for my clients. I determine the best value; they do the negotiating. But I have some comments on the subject of what technology should cost, and I offer them as guidelines to both vendors and bankers.

• Only a fool would select a service or IT product on the basis of price, whether it’s the highest or the lowest. I’ve heard some vendors say, “Price it high and bankers will respect it more.” They didn’t accuse consultants of that. In my own case, I maintain an updated guide of standard rates for every IT service. It looks like the report a lab produces from a patient’s blood test. If a number is outside the range, something’s wrong, or it requires an explanation.
• Some IT solutions appear to be commodities, but a careful examination will reveal that there is greater value in some solutions than others--thus the need for explanations when a price is outside the standard range.
• Transaction processing services probably are viewed by some as mechanical and thus without distinction. But the Brain Trust services are anything but mechanical. For example, risk management: How does one price three thousand transactions worth of risk management technology?
• Some services appear to be priced higher, and in some cases, a higher price is justified. You can pay for strong technology or you can buy cheap technology and add more labor.
• After decades of a relationship with one vendor, a banker may get the idea that it’s now time for huge discounts. That’s an individual case kind of argument. There’s no general rule. The only solution is to talk about it with arguable evidence. “I’d rather have the savings in my pocket than yours” is not arguable evidence.
• If a price seems unreasonable, a banker deserves a good explanation. On one procurement, a vendor charged a cool million dollars more per year than the field of other vendors. I asked why. They never answered the question. My client dropped the vendor from the list of bidders. Knowing the company, I felt it was their way of saying we’re not interested. That company has since sold its bank IT business.
• A banker has the right to know if the price he’s paying is due to a mistake the vendor made in delivering the service. When I worked for a bank that did IT processing for other banks, we used a time deposit system that was a dog. Our cost accounting system was so accurate we knew we could never charge our actual cost. So we offered it at market prices and ate the loss.
• At the same bank, we were selling a cost accounting system for trust departments. it was designed to earn higher fees for trust services, and it was the only one of its kind in the industry. we sold it to several of the major trust companies, and we commanded a price based on value. for example, our clients always got the courts’ approval for their fees when they showed up with green bar paper listings showing the time spent by trust officers managing the estates of their customers. How valuable is that?

I believe it’s smart for bankers to know what their IT expense is, and more importantly, what it should be. If there is reason to adjust the fees that IT vendors charge banks, it is more likely to be the result of changes in the way IT has evolved as opposed to the rate each vendor charges to process, for example, a DDA. The Brain Trust applications are inching up in terms of importance as well as usage. That’s the sector that will separate vendors into groups of “me too” transaction processors and value-add solutions providers. Pricing the latter becomes an exercise in business management that even the best cost accounting system can’t calculate.

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The Only Good Banking Stat These Days: Number of Bank Accounts

Posted on October 28, 2008

I never met a number I didn’t like. Numbers are absolute and they avoid confusion or interpretation. For example, .9999 is not a one, and that matters a lot when a computer is looking at the two numbers. My wife, the artist, sees a dozen “white” color chips and she can define the differences. “There’s a little bit of pink in Atrium White.” I see one white, not a dozen shades of white, each with an exotic name. When I buy paint, I ask for it by number. My wife is analog; I’m digital, but we get along fine.

There are 1.21 billion bank accounts (deposits and loans) in the U.S. these days, and growing. Two additional stats within that aggregate number may provide a little more meaning. Bank of America (the largest U.S. bank) has 138 million of those accounts (includes Countrywide but not Merrill Lynch). Fiserv (the largest core processor and software provider) represents 300 million of the 1.21 billion.

Customer deposit and loan accounts seem to be the only good numbers in banking that are growing. The number of financial institutions is dropping every year at the rate of 2.4 percent, maybe more this year. The number of employees in banking is dropping. I don’t know at what rate because banks like Wells Fargo aren’t telling Wachovia employees until after the conversion. Merrill Lynch is dropping 10,000 employees to soften the $50 billion purchase price that BofA paid. That’s sort of like buying a Bentley and running it on regular unleaded. I think there’ll be fewer branches after the past five-year boom of one on every corner. The trouble is this time there won’t be any new tenants like Starbucks and Blockbuster to move in. They’re cutting back also. In Dallas, Wachovia converted a gas station to a branch. Another bank converted a church to a branch. We may not need as many gas stations with the proliferation of hybrids, but if the world keeps spinning out of control, there may come a time when the only other bailout left will be more houses of worship. Or maybe we’ll abandon Earth for a new planet so we can start over.

The nice thing about bank accounts is they almost never go away. Even bad mortgages stay on the files so they can be tracked, and we might see the previous “home-users” returning after January 20 to pay their arrears, since they hopefully will be living in a better nation. Even though some little old ladies may be stuffing their money in the proverbial mattress, the number of new babies with college funds will more than make up for that tiny decline. Granny wouldn’t have had to worry about the safety of her $100k (now $250k) if her bank was part of the Promontory Interfinancial Network that technologically protects deposits up to $50 million by spreading them around. I’d like to see our next president use that kind of innovation to make government work better.

On a personal note, even my first savings account opened in 1945 is still active, and I have five passbooks to prove it. Mr. Tyler isn’t there anymore, but the memories are. I just hope Whitey Bulger doesn’t come out of hiding to rob the Winter Hill Bank for some pocket money.

There’s another interesting number that speaks volumes. With all the noise in the press about our gluttonous consumption and excessive credit, one wonders why only 7 percent of the 1.21 billion bank accounts are loan accounts. That’s when I turn to my analog wife for an explanation. She says, “It’s the amount that counts, not the number of accounts.” I knew that. Can you handle one more bummer? Why does it cost $1.09 per month worth of IT resources to process a Demand Deposit Account that averages 22 transactions while a commercial loan with maybe zero to two transactions per month costs $1.48? She says, “The devil is in the details.” I DIDN’T know that.

No matter what happens to the economy (“no matter what” is very unpredictable right now), bank tech companies can at least enjoy a small degree of comfort knowing that their financial processing factories will continue to grow and perform the increased workload that consumers and businesses depend on every day, every hour.

Disclaimer: Bank of America didn’t tell me how many deposit and loan accounts they process. I computed the numbers based on publicly available data, Automation in Banking - 2008 exhibits, Data Processing Cost Analyst models, extrapolation algorithms, and a glass of Georges Duboeuf Cabernet Sauvignon 2006.

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Now’s the Time for Bankers to Get Personal with Customers

Posted on October 21, 2008

I opened my first bank account at the age of nine. That event could not have been more personal. Mr. Tyler knew my first deposit was a Social Security Death Benefits payment that would repeat itself every month until age 18. He advised me that if I never made a withdrawal, I’d have enough money for my college tuition. He even told me the college I should attend and the major studies I should choose. Once a month he would wave me down to his station even though I preferred to wait in line for one of the pretty girls. All I ever saw of Mr. Tyler was his head and shoulders. He never stepped out from behind the wall of protection that separated him from his customers.

Today, branches have the feel of a Starbucks, but most bankers still have a mental wall of protection. I’m not suggesting hugs and kisses as a remedy. There’s a better approach in serving the needs of customers that uses technology to do all the “heavy lifting” coupled with the charm of a human being. I know what you’re thinking—a banker with charm is an oxymoron. Here’s how we’re going to fix that.

The real need in banking is the application of technology to develop customer knowledge to feed the relationship. “Have a nice day” ain’t gonna cut it. And please don’t tell me CRM is the answer. What I’m talking about is something that a bank can implement and use at least within a few months, not a work in progress for a lifetime.

Achieving a tech-based online “Know Your Customer System” involves the following:

1. The solution begins with a custom designed template of data elements that characterize the customer.
2. Then the development of a Relational DataBase Management System (DBMS), using, of course, a classic vendor-supplied generic DBMS (aka Oracle, MS SQL, Informix, Sybase and others).
3. A host processor (in-house or outsource) that will make available an updated customer database at a frequency to be determined (most bankers would gladly accept weekly).
4. Then a personal laptop equipped with an updated customer database CD and search criteria capabilities. The CD, of course, is locked until the banker provides an iris, fingerprint, dual passwords, and for the sake of tradition, mother’s maiden name.
5. Finally, and most importantly, a banker who can do two things at a time, like watch the game on TV and search his/her customer database.

The next day, that banker has his/her work cut out for him/her. Here’s an example of what I’d like to hear from my Premier Banking officer. Even though most bankers talk as if they are reading from a compliance manual, I’ll use my jargon:

“Mr. Gillis, I was surfing the database of my best customers last night as I watched the Cowboys get creamed, and I saw a bright spot when I pulled up your relationship profile. With 14 accounts, and a 13-year record of no defaults, and I’m assuming you’re not homeless, how come we don’t have a mortgage in the relationship profile? With a record like yours, you’re at the front of the line for good things we can do for you. You paid your dues with the Bank so we owe you something in return. We call it our ‘preferred rate.’ When can I come and visit with you?”

In 2008, the word is not “plastics” and the expression is not “it’s the economy, stupid.” In 2008 and beyond, the key phrase is, “Intelligence In Marketing.” And the technology is waiting to be assembled. What’s on your IT list of things to do?

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Making the Core Switch

Posted on October 13, 2008

There are 814 good reasons for a bank to switch to a new core system. One is usually enough. First, I should warn you that my opinions and consulting experiences are based on 321 client projects which today would represent only 2 percent of the population. I also do not solicit business, so the reasons these bankers approached me was one sided. They knew they had IT problems and they wanted help. If I were a good salesman and had an unlimited prospecting budget, I could find hundreds of financial institutions today that could justify switching to a better core system. Following is a summary record of why my clients switched.

1. In the mid-seventies, a major event took place in the evolution of computing. DEC, Data General, Prime, SEL and other engineering companies developed mini computers (aka mid-range) for engineers to use in solving problems, and to drive all manner of scientific instruments. As the proliferation took off, IBM, NCR and Burroughs (now Unisys) followed suit with their own mini computers designed for business applications. Two bankers and a salesman noticed this development and created companies (ITI [now part of Fiserv], Jack Henry and Florida Software [now part of Metavante]) to develop core banking software. As soon as their first products were released, hundreds of community bankers rushed in and bought turnkey systems that they would run as in-house systems. Bankers hired me to help them make the crossover from service bureau to in-house. To give you an idea of the energy level during this extraordinary period, each year, 8.2 percent of the FI population was converting to a better core system. Today, it is 2.7 percent.

2. In 1987, there were 113 core vendors. They were NOT all good. So as bankers realized their vendor was missing the mark and other vendors were hitting bulls eyes consistently, they moved towards the winners. Today there are 30 core vendors, and although they are not all great, most of them are good enough to keep their customers.

3. A shift in strategy results in the need for a different core system. As a result of the 1994 deregulation bill, the distinction of what is a commercial bank, thrift and credit union became less significant. As thrifts and credit unions acted more like commercial banks, they discovered the need for broader IT capabilities. They went shopping for new systems.

4. There are fussy bankers and then there are those who subscribe to “good enough for government work.” The fussy ones made their moves. The “good enough” will stay where they are until a vendor salesman, the likes of a hybrid made up of a Warren Buffett (for his sincere, plain talk skills) and Bill Gates (for his understanding of technology), steps in and wakes up the good enough guys. Make no mistake—highly effective salesmen can make a huge difference during a leveling off period such as we’re in now. To prove the difference between a plain vanilla system and a high-octane system, I had developed a chart called “Seven Degrees of Core System Capabilities.” One picture tells the whole story, step by step. If the good enough guys took a look at it, and they haven’t, I believe they would be in the market shopping. In one way or another, even though the chart was developed 10 years ago, it addresses nine nagging concerns that 16,000 bank CEOs are biting their nails about these days.

5. As long as the de novo movement continues, there will be new core sales. Last year, 39 percent of new core sales were to de novo banks.

In my opinion, there are 1,280 FIs that are ripe for a better core system and the only way they’ll get it is if vendors commission Buffett/Gates sales types to make it happen. Waiting for a brand new core system to make it happen, the likes of which the eight offshore companies sell everywhere else but the U.S., will only result in disappointment. Bankers buy functionality, not architecture, and today’s top U.S. systems have more functionality than the economy has bad news. In fact, some of that functionality (for example, Risk Management) helps to skirt the reasons for economic bad news. And remember, I’m not a salesman. I show up after the bank CEO bites the bullet to replace the core. With so many other bullets that bankers are dodging these days, I don’t expect I’ll get many calls.

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The Next Banking Crisis—Conversionitis

Posted on October 07, 2008

It’s a tradition in bank IT circles to break open the champagne after a major acquisition is converted to the system of the acquirer bank. My impression is that Denis O’Leary (former CIO at Chase and now a director at Fiserv, among other things) has earned more professional awards (CIO of the Year by Information Week and Banker of the Year by Bank Systems & Technology) than any other bank CIO. I also believe he spent more money on champagne than any other CIO. I know this not because of in-depth research but two very important reasons—O’Leary was an involved CIO and left nothing to chance. He also possessed the “Luck of the Irish.”

Conversely, last Friday the IT guys at Citi also broke out the champagne when they realized that Wachovia was going to Wells Fargo. Suffice it to say, conversions are nightmares, and there’s gonna be a whole lotta them comin’ down the pike. Words of advice to the IT guys: Before you order the champagne, order the Excedrin.

Personally, I have never done a conversion or was involved in any for my clients. My last task on a typical client project is to deliver the final report, get absolute confirmation that everyone accepted the plan, and then I bid them adios.

Conversions are the job of the successful new vendor and a team of bank employees. These days, the major vendors have it down to a science. That doesn’t make it easy; it just makes it less risky to what-if situations. And it takes a lot of manpower. When Jack Henry & Associates showed up in the small town of Lititz, Penn., the whole town knew it. They took over an old vacant industrial building in downtown, and the lights stayed on 24/7.

Two stories about conversions come to mind. The CEO of a small bank called me on a Monday morning, sounding quite relaxed. He felt guilty Sunday night knowing that two [Fiserv] ITI guys had been in his bank all weekend. He went in just to offer moral support, and send out for pizza, when he was overtaken by a sense of total security. The CEO noticed the ITIers hadn’t even unbuttoned their collars, let alone removed their ties (vestiges of the Don Dillon era). He stayed for a few minutes and then went home and slept like a banker with a solid loan portfolio.

The second story was not so nice. I got involved in the litigation as an expert witness. A large bank with 10 subsidiaries completed their search for a new vendor and signed the contract. For weeks, nothing happened, and the management didn’t mind because they had enough of the selection process. But the workers were ready to get to the nitty gritty, yet the vendor kept putting them off. “Don’t worry, we’ve done this before.” The long and short of it was the conversion was a disaster, and the bank was smart enough to revert back to their old system. It went to litigation, but it didn’t go to trial, because the loser was obvious. And lose it did. You won’t see the name any more.

I have learned to be very skeptical of comfort phrases. “Don’t worry.” “We’ve done this hundreds of times.” “Our conversion process is automated.” “Time is on our side.” “Our guys have done tougher ones that this.”

The next conversions will suffer as a result of the following factors:

• They are all huge.
• They are all surprises, no time to schedule comfortably.
• They involve one-of-a-kind systems that were homegrown—45 years ago. (What’s a COBOL?)
• The most qualified conversion vendors are as useless as neckties in today’s dress code.
• Even with 170,000 employees, Accenture can’t respond to every opportunity.
• The suits who bought into the projected savings will be expecting miraculous speed for their return.

There’s some good news, folks. Since Citi’s IT department won’t have anything to do, it may want to “bailout” BofA, Chase and Wells Fargo, for cash. Further, the last conversion disaster that I’m aware of occurred in the mid-nineties. Consolidations in banking are like exercise for couch potatoes. And there’s more. If any bank IT guy is laid off anywhere in the country, there will be plenty of job openings for at least the next five years in Charlotte, New York and San Francisco. Nice places to live when you’re getting the big bucks.

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Can’t Stand the Heat Of Banking? Try the Heartland

Posted on September 30, 2008

Even though I wasn’t looking for any special geographic influence in a recent analysis of bank IT spending habits, it became clear that the good news I was collecting was mostly from banks in the Midwest. In fact, 47 percent of the surveyed audience did business in the Heartland of America.

That in turn got me thinking about other aspects of banking in the news today. All the bad news was coming from the West (Countrywide, IndyMac and WaMu), and from the East (Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia, AIG, Goldman Sachs and Morgan Stanley. No bad news from Chicago, the financial capitol of the Heartland. And no bad news from Stephens Inc., the investment banking firm that one might imagine fell asleep on the train in NYC and woke up in Little Rock where it decided to establish its business.

Soon I was daydreaming, something I do a lot of since the only other living things in my office are a Ficus tree and a gold fish, and I realized what a peaceful and homey place the Midwest is. For example, on what other major street in a major city can you buy a box of popcorn right out of the popper? And where else can you come out of a swanky hotel like the Drake and walk to the beach? And where else but at Gene & Georgetti’s can you go for the best steak you ever ate and be treated as if you are family and just returned from the war?

Reading the comments from my Midwest clients gives one a huge dose of financial comfort. These guys are the salt of the earth. They’re not on anyone’s list, good or bad. Statistically, they represent 96 percent of the entire banking industry ($59 million to $2 billion), but all you read about are the bad guys. Even if all the big boys collapse and become pawns of the federal government, you’ll be able to rely on community banks in the Heartland to serve your banking needs.

I wouldn’t dare speak for them so I documented their exact words. Stay tuned for a strong dose of reality where straight talk abounds. Technology is alive and well in the Heartland. That means spending is in line with intelligent assessments of needs. Never before have I heard “ROI” mentioned so much by CIOs.

Here’s a simple calculation that might tell the true story about spending on new apps:
The average increase in IT budgets is right at 10 percent.
If you believe my hypothetical calculation that every IT budget has to grow by 7 percent just to stay even, then there’s only 3 percent that will be allocated to new apps.
Add that 3 percent plus X percent that some vendors are counting on as a result of robust salesmanship and strong growth banks, and you come up with the reasons vendors are projecting organic revenue gains of 5 percent to 7 percent for 2008, and even 2009. Not a great revenue projection, but anything in the positive arena is good news during the nemesis of a weak, getting weaker, economy.

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Congress Can't Waste Any More Time Debating Bailout

Posted on September 24, 2008

If the fear mongers in Congress take any longer to act on the bailout, we’ll all be picking lettuce in Mexico! The Congress acted quickly to go to war in Iraq. Is there anyone in the Congress today who would say that was a smart move? Certainly not the kin of 4,170 dead military personnel. Now the Congress is spending a lot of time about a risk of $700 billion.

Does that define America? Money over lives? All I can do as a tiny voice in this process is promise to pay my tax share of the bailout right now. I figured it out already. My cost of the $700 billion bailout will be $28,296. I’ve got the funds set aside, and it’s a cheap price to pay to keep our country above water until wiser men and women take over and bring the economy back to sound accounting integrity.

As a 17-year-old freshmen majoring in accounting, I learned the meaning of accrual accounting. Expenditures for capital equipment meant spending the cash up front, but expensing it over a period of years.

Let’s save our country and pay for it over a period of years. It’s worth it. Maybe we can pay for it by ending the stupid war. Saving the 4,171st life would be worth that, in my opinion.

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What, Me Worry? I’ve Seen It All Before and I'm Still Here To Blog About It

Posted on September 22, 2008

I was born right after the Great Depression. I never had a trust fund. I paid my own way through college. I owned one business and had three jobs before I went to college. My first job after college ended in six months, as did the startup maritime shipping company I worked for. The U.S. Air Force rescued me by activating my commission. I was glad to go even at the crummy pay for a second lieutenant of $222 per month. Three years later I was honorably discharged as a Captain in the Air Force Reserve without ever killing anyone. I was happy at 24, owned a ‘56 Chevy Bel Air hardtop and was looking forward to what turned out to be a very secure career, even after five bad economies.

I don’t deny that this is the worst economic trip to hell in a hand basket that I have seen, but our leaders were relatively inexperienced in 1958, 1975, 1985, 1991 and 2001. We’ll recover from this big kahuna because now we’ve gained some business intelligence from past events. For example, last week, the powers that be put away the band-aids and used the big tourniquet. That was not part of any political promise voiced by the two main wannabes. Today’s bureaucrats and Congress did it. There are additional high-powered tourniquets available that, in my opinion, could help the turnaround even before January 20. One of them goes like this: “This war will end 30 days from today. The U.S. is no longer its brothers’ keeper, just its homeland’s protector. Don’t mess with us.”

My own experiences have played a huge role in governing my behavior, and continue to keep me on a steady course, so here are just a couple.

1. Don’t just trust big names
Merrill Lynch was a name that represented security, confidence, strength and profit. I still remember the stocks the broker recommended for my $5k investment when I returned from my tour of duty in the Air Force--General Motors, Monsanto, General Electric and Trinity Industries. The portfolio lost money when I cashed it in to buy our first house. Years later when my retirement account grew enough to get some respect, I was advised again to seek a broker at ML. I waited seven years for some growth, but the account languished. The only good news I received from that encounter was a check I received from a class action suit regarding a stock that was strongly recommended by the ML broker. Last week ML returned to haunt me. This time, my bank bought the firm, and I have a feeling ML will now manage my retirement account again even though Bank of America has made it grow nicely without them. Don’t tell me the third time is the charm. Adios ML. And I have a suggestion for Ken Lewis who just a few months ago said, “I’ve had all the fun I can stand in investment banking.” Hello, Ken. What is ML, a mortgage company? Dump the name, suspenders and suits. Deliver investment gains to BofA customers, and BofA will earn its fair share.

2. Don’t let big guys push you around
In 1991, Fiserv acquired Citicorp Information Resources (CIR). I was hired to do a small amount of due diligence work. The buyer, seller, advisors, lawyers, accountants and little ol’ me met at Citicorp’s lavish headquarters in NYC. The mood was intimidating. The wealth factor in that room was in the billions even if you didn’t count my net worth. An attorney handed me (the only one out of 16 others) a 12-page nondisclosure legal document to sign right then and there. I took 10 seconds to scope the range of the document and I slid it back to the attorney on the slick mahogany table, scoring a perfect goal, something I was seldom able to do with a hockey stick. After I told him to shove it, George Dalton, the quintessential father figure of the bank tech world, took me outside and handed me a canary ruled pad. George told me to write my own statement of nondisclosure. I did on just one quarter of one page, and after a few nervous phone calls, the meeting continued. (Lesson #413--never sign someone else’s non disclosure unless your attorney works it over and the other attorney agrees to pay your attorney’s fee.)

Fiserv wanted the CIR acquisition and history proved it was a good thing. Citicorp was desperate to sell assets and wanted the deal to go through. At lunch the Citicorp execs tried to put on a face of confidence. They were hanging onto this phrase--“Too Big to Fail.” C stock was trading at $10 that day. It recovered very well since then, but it’s down to $20 now and I have my own ideas as to where it is heading.

May I suggest this: At an emergency Citigroup board meeting, where everyone shows up in a toga and sandals, resolve to put the company on the course of traditional banking. Hire a clone of the late Walter Wriston to drive the bank. Ditch the greed of global supremacy. Be a bank.

3. When you don’t have muscle, exercise the brain
When I created the first edition of Automation in Banking (AiB), I was innocent, naive and dedicated to delivering tech knowledge to bankers. What I got in return was stuff that a good research firm would find intriguing. The peripheral activities of managing this line of business speak volumes. Here is last week’s feed: Two prominent investment banking firms moved from the wings to center stage in the financial news. The same two firms just ordered my report within two days of each other. On Sunday, the Fed granted them extensions to become commercial banks. Coincidence you say? I’ve seen other inputs in the past 23 years that tell me AiB has a sixth sense about what’s going on. And this year it achieved a record year in sales.

What happens in AiB doesn’t stay in AiB? Everyone in bank technology shares the good news. That’s why I believe the bank tech future looks secure. While the big guys brought about the meltdown, it may be the not-so-big technology guys who will be the flux to bond the new financial services industry. I expect there’ll be some big good news and procurements for the bank tech world this year, and that’s at least a start towards partial recovery.

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A Private Equity Analyst Must Have had Thanksgiving Dinner With a Meteorologist

Posted on September 16, 2008

Three years ago, Silver Lake Partners (a combination of six investment firms whose names are as familiar to Wall Street as Kellogg’s is to cereals) bought SunGard. I knew nothing about the deal except that SunGard Availability Services and SunGard BancWare are “residents” of my report, “Automation in Banking.” Sometimes I can predict acquisitions before the first spreadsheet is conceived, but not this time. So following is my own frivolous account of how this acquisition came about.

During the past five or so Thanksgiving dinners, a meteorologist sat at the table of a large family reunion giving everyone his views about global warming and its potential consequences--hurricanes, for example. But Wally the Weatherman never got any respect from anyone in the group. “There he goes again,” was the usual reaction. And why not. How many times has your weatherman been wrong?

Then in 2005, Ernie showed up, for the first time, by special invitation from Anastasia, who was sweet on Ernie because of his high academic performance at the Kellogg School of Management (ranked by Business Week as the #1 MBA school in the U.S.). Ernie summarily ignored the cynics at the Thanksgiving table, especially when one uncle asked him, “I heeah yaw a smaaht fellah so why didn’t ya go ta Haahved?” In perfect nerd-like style, Ernie never uttered a word, because first, he didn’t want to offend Anastasia, but second, he was busy texting everything Wally was saying.

Later, in his closet-size apartment, while every American was digesting their gluttonous intake of turkey and trimmings, Ernie, now a rookie at SLP who turned down lucrative offers from Bear Stearns and Lehman Brothers, was hard at work. Ernie knew how to develop matters such as weather phenomena, which were seemingly incongruous with moneymaking schemes, into wise investment opportunities. He wrote a very impressive report and presented it to the partners on Monday. He tried to do it on Friday, but as everyone in the U.S. knows, Thanksgiving is a four-day lock down.

Not only did Ernie’s report stand on its own merit, because the name SunGard is #1 to disaster recovery just as Oracle is #1 to database systems, Microsoft is #1 to PC-based operating systems, and Hewlett-Packard is #1 (leapfrogging IBM thanks to the EDS add-on) to anything having to do with a computer, but Ernie also included a bonus in the deal. A unit of SunGard called BancWare is in the risk management business but hardly known to many businesses including Countrywide, IndyMac, Freddie Mac and Fannie Mae. The BancWare add-on, although small, contributed “afterburner thrust” to SunGard as the company that makes its living on disasters (natural and man-made). Investors love anything that can provide value-add to the main event in case something was “oopsed” in the due diligence phase.

The long and short of it is the deal was struck and it’s now, not just history, but I imagine a huge windfall for SLP. Why do I say that? Because there’s profit in tragedy. Disaster Recovery and Risk Management are now two of the hottest selling technologies in the banking industry. The reasons should be obvious to anyone who still reads a newspaper, has a radio in their car, watches the news on TV, or surfs the Internet--hurricanes and mortgages.

The happy ending of this story is that Ernie is now admired, not only by Anastasia, but by all the partners at SLP. There’s a story going around at the firm that the partners wish there were more Thanksgivings in the year so Ernie could come up with another brainchild. But the only child Ernie and Anastasia are thinking of these days is the Sarah, Barak, Joe or John they are expecting in a few months. That’s why they bought a $3 million condo, sans parking space (with an above-prime mortgage) in the Back Bay. They will allocate one of their five rooms to serve as a nursery. The large living/dining area will accommodate future family gatherings so that Anastasia can play hostess to her relatives. Ernie, of course, has more than altruistic motivation for this gracious display of family values. He’s looking for the next “Wally” because he learned, whether at Kellogg or just schlepping through the business world, that life is full of lemons, but things get sweeter when you possess the sugar bowl of an open mind. He’s got a great future, no matter what.

Disclaimer: This story is approximately 59 percent fiction, and it’s the result of a blogger’s occasional need to lighten up. I’ll get back to my normal fact-based blogs now that summer and fun are over.

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There’s A Perfect Correlation Between Need and IT Procurements in Banking

Posted on September 09, 2008

A comment posted on last week’s blog got me thinking. Why ARE bankers buying the Ten Most Popular Apps for the past couple of years? The reasons between need and buying habits are as congruent as the head gasket on a Jaguar engine block--perfect fit.

Let me demonstrate. Here’s a list of The Ten Hot Apps followed by my idea of what is making them hot:

1. Disaster Recovery and Business Continuity
Arthur, Bertha, Cristobal, Dolly, Edouard, Fay, Gustav, Hannah, Ike, Josephine, just to name this year’s hurricanes. Disasters are here to stay, not just in the form of nature’s deeds, but also terrorist attacks and plain ol’ bad guy destruction.

2. Remote Deposit
The price of gas, but softer factors as well--employee disruption caused by traffic, lines at the branch, and rejected items that show up the next day that could have been caught at the “port of entry.” This is about as common sense self-service technology as the ATM was in the ‘70s, and you don’t have to hit a banker over the head for him/her to see it.

3. Mobile Banking
Young people are the popular banking demographic, and they can’t sit still. They’re always on the go so their bank is their cell phone.

4. Data Security, Fraud Prevention, Compliance
Growing regulatory demands, increased Internet intrusions, increased Internet dependence, increased fraud during times when people feel cheated by expectations that weren’t delivered by the “establishments.” “You cheated me. I’ll show you!”

5. Electronic Bill Presentment and Payment
Forget the mail. Let’s just do it all now!

6. Business Intelligence/Risk Management
Duh, I didn’t know we had that many subprimes. Duh, I loved that restaurant’s sushi. How was I to know they were losing money and can’t pay the loan?

7. Electronic Check Clearing
Check 21 legislation is the most commonsense law to hit banking. We know it’s a check without having to touch the paper.

8. Wealth Management
Don’t tell the top 1 percent of U.S. citizens there’s an economic crisis. According to some experts, it now takes $5 million in liquid assets to be considered rich, and banks need to know who the new 1 percent are.

9. Credit Quality Technology
“As head of the Loan Review Committee, I now require 83 spreadsheet reviews defining every what-if situation the loan applicant will be confronted with. Our new technology will take the grunt work off your backs but not the brain work. This technology is your friend, job protector and conscience.”

10. Internet-based Treasury Services
“If you can’t give me real-time, the de novo on the next block can.”

Folks, if ever there was a period when bankers used commonsense to invest in technology, this is it. An overwhelming (and refreshing) input from bankers in my recent conversations about IT investments was the idea that any good ROI analysis would gain approval and funding. The 10 would pass all tests in my opinion, even if presented by a summer intern who completed Accounting 101 during freshman year. These technologies are good. What’s on your to-do list?

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Shrinking Earnings + Continued Credit Crunch = Increased Bank IT Budgets: What’s Wrong With This Equation?

Posted on September 02, 2008

Bank earnings are shrinking; bank tech vendors are warning Wall Street about weak revenues; Ben [Bernanke] continues to report the crunch isn’t going to end soon; but bank IT budgets are increasing at a very nice clip. What’s wrong with this equation?

It just doesn’t add up, folks. I’m having trouble reconciling this contradiction, because in previous “bad times,” IT always took a hit as if it could afford to. Now, IT appears to be the “good guy.” Investors, in particular, have concluded that all the bad news will have a negative impact on IT. So to resolve the dilemma, I did what any other good consultant would do--“borrow my clients’ watches to tell others what time it is.”

I’m not a big fan of surveys, so my investigation is more like having an “electronic conversation” with people I know in the trenches. The early returns are so refreshing and upbeat that I can’t hold back. Before I wrap up my findings, here is a synopsis of what I learned:
• IT budgets for 2009 will increase among most banks at 10 percent, some higher, some at 7 percent, NONE flat or negative.
• Everyone agreed with what have been the nine popular apps for the past two years, with an additional one -- Business Continuity and Disaster Recovery Preparedness.
• These apps can be categorized as “contributors to efficiencies and protection:”
- Protecting the tech, lending and assets environment;
- Replacing 50-year-old manual operations with electronic solutions;
- Adopting new payments infrastructures that depend on technology;
- Using the Internet more and from anywhere;
- Gaining intelligence from “yesterday’s production.”

For the first time in four decades, I’m seeing strong evidence from business-oriented CIOs who are fighting to inject intelligence into the nail-biting environment of banking. In the old days, the attitude would have been something like staying home from work to save money on gas.

But just as “One swallow doesn’t make a summer,” I should warn you about the residents of my database. Numerically, they don’t even represent 1 percent of the universe. What’s worse, they are the cream of the crop as are their banks. If 16.4k other financial institutions were flies on the wall as I “talked” to my colleagues, and then followed their navigation, we’d all wake up to a much better banking world.

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Bremer Bank is a Perfect Example of How to Succeed in Banking—Tech-wise, That Is

Posted on August 22, 2008

DISCLAIMER: I don’t believe I had ever heard of Bremer Bank, and I know I never talked to anyone there. Fiserv doesn’t know about this blog unless they read it today. ITI never sends me news about their conquests even though their sub, Precision Computer Systems, sends the nicest notices—“Look what we sold this quarter.” CheckFree wasn’t big on news as an independent company, so now Fiserv solved that problem. And, folks, I was having root canal work on August 12th when the press release about Bremer arrived in my e-mail hopper. I went to work that day but the last thing I wanted to do was read press releases. So this is my way of saying I don’t do testimonials, not even for money.

I coulda saved 1,469 words in last week’s blog by writing about Bremer Bank instead. They proved many of the things I was saying about why banks don’t switch vendors like they used to 30 years ago. Here’s what I learned from the press release, a couple of days after I wrote the August 18th blog.

• Bremer fits into the top tier of U.S. banks at $7.5 billion in assets. That’s the group I said was dug in like a 300-year-old oak tree. Adding CheckFree’s Small Business solution doesn’t sound like Bremer is gearing up for a big RFP exercise. The Fiserv roots are spreading.

• Bremer brought in ITI’s core system in 1986. Once again, an almost perfect fit in that more banks were switching to new core systems in 1984 than any other year. Maybe Bremer management hired a consultant who took a little longer than expected to deliver the recommendation.

• Bremer is described by Fiserv as a user of “a wide variety of software and services.” I said that about all the top tech vendors. They provide everything, so there’s no need to shop outside the “Wal-Marts” of tech services.

• Bremer uses IPS-Sendero for Asset/Liability Management and other brainy chores. Why did they wait until 1998? In 1985, Dow Jones-Irwin published my book, Microcomputers in Financial Institutions. In that book, I listed 21 PC-based software companies that provided must-have solutions for any bank. IPS was one; Sendero was another; and there were two others adding up to only four survivors today. Thanks to Fiserv’s sixth-sense genius for acquiring the companies banks would buy stuff from, the Wal-Mart idea was proven again by Bremer. They trusted their primary provider to do the integrating and leave the using to the bankers.

• Bremer signed on with Corillian consumer online banking after CheckFree had acquired Corillian. Maybe they didn’t like what Fiserv had to offer. But now that CheckFree and Corillian are part of the Fiserv family, one wonders what kind of forward thinking genius the Bremer guys possessed to make a best-of-breed choice while protecting the 11th commandment of “thou shalt stick with one vendor.”

• When Fiserv announced the CheckFree acquisition on 8/2/07, I enjoyed seeing my prediction come true. “Every tail needs a good dog to wag it.” But every surgery requires a long recovery period, and I was saying it would be five years before Fiserv sees real financial benefit from this mucho costly acquisition. I might have been wrong because David J. Whitaker, VP of eCommerce at Bremer, used the word “integrating” and based on everything else this bank has done, I’m confident they know the true meaning of integrating.

• I may be preaching to the choir about Bremer. The respected bank tech research and advisory firm, Celent, had already recognized Bremer as a “model bank based on its strong retail online banking platform.” Why stop there? It appears Bremer does everything right.

• Oh, one other thing I discovered about Bremer. You can’t buy the stock. The employees and the Otto Bremer Foundation own it, and if you detect any signs of greed here, it’s for the benefit of all the charitable recipients. That’s the one piece that doesn’t fit my perfect model for any bank.

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The Real Reasons Banks Switch to New Core Systems

Posted on August 18, 2008

I’ve written my share of articles for the trade journals about why bankers switch to new core systems, and I’m probably guilty of presenting, in part, the theoretical (or conventional wisdom) reasons. Now in this era of blogging, where spilling your guts is an OK thing to do, I decided to look back at the 321 projects I worked on to present the REAL reasons as expressed to me by REAL bankers while reclined on the VIRTUAL “consultant’s couch” in private and behind closed doors. That’s right, folks, there’s a lot of emotion and Kleenex involved in this decision process. Some of the statements I heard are as clear to me today as they were decades ago.

Here’s what some bankers told me: “Our mother (bank CEO) cares more about her girls in bookkeeping than she does about moving the bank into the era of technology.” “Our CEO said we could get an in-house system as long as it’s after he retires.” “My brother is my biggest problem because he owns half the bank and he’s totally anti technology.” “My first priority as the new CEO is to take this bank forward in the use of technology, and the system I had before I came here is the answer for this bank.” “My cousin uses the system he chose and he swears by it. So I signed up as well.” “We’re always asking our provider for new things. We’d rather hear about the new things he has to sell.” “Six banks signed up with a new vendor based on the demo, but we didn’t realize we were buying vaporware until it was time for the conversion.” “I want to have a loan machine in every branch and every 7-Eleven in our market.” (That was long before the cavalier attitude of subprimes). “We’re tired of complaining to our service bureau, even though they mean well. It’s time for us to do our own work because we’ll always be #1 on the priority list.”

To best understand this gut-spilling story, the reader should keep in mind that the 321 projects occurred during the past 35 years. The turf was a lot different in the earlier years than it is in the current environment. So I divided my experiences into the first two-thirds and the current third. I should also point out that I apparently possess a significant amount of threat to my clients because during the orientation briefing of each project’s first day, I open with this remark: “This will be the last conversion you will ever have to deal with at this bank even if you live to be a hundred.”

Every client is still using one of the recommended systems (11 of them in all), and those recommended systems are still viewed by many as the right places to be—vibrant, up to date, supported by experts a phone call away, owned by reliable companies, and delivering strong and relevant capabilities no matter what comes down the pike. Please understand, I’m not a handicapper. I picked Big Brown to win the Triple Crown, I gave up on the Red Sox before they made their comeback, and I hire experts to manage my retirement fund and all my accounting and tax work. So I’m not good at many things, but I wouldn’t trust anyone to make a better core system decision than my 36 tools. Bragging is also OK when it appears in a blog.

1974 to 1997
• Almost all large banks provided data processing services to their down-line correspondent banks. During the early ‘80s they discovered two things—they sucked at it, and they lost money doing it. M&I Bank was the only large bank that made a go of it, and a handsome one at that.
• In-house systems were “born” in 1976, and they had a lot of appeal because community bankers embraced the idea of independence—freedom from their service bureau. Large banks got their wish—“Are they gone yet?” Independent companies like Fiserv realized a near epiphany and wasted no time seizing the opportunity.
• This period marked the beginning of the awareness that record keeping systems were becoming more than just posting machines. Bankers called it “Management Information,” and they were hooked.
• The PC played a big part in releasing bankers from their bondage to the mainframe. So even outsource customers downloaded and didn’t have to ask permission from the “czar.”
• With the PC came the greatest invention of all for the thinking (analytical) banker. Spreadsheets were a fantastic cure for lazy. Instead of one iteration of a forecast, bankers could do a hundred by playing what-if games and letting the system do all the grunt work. Good-bye Ticonderoga, Eberhard, Standard Register and HP calculator.
• Consolidation of vendors created several millionaires, but it also stabilized the industry. In 1987 there were 113 core vendors. Today, there are 30. Most of the good guys got acquired; the bad guys vaporized; the half-hearted gave it away to any bidder. What’s left is pretty good. Now bankers are more thoughtful about switching because they are no longer hemorrhaging.
• Vendors with names that were synonymous with banking finally caved in to the realities of technology—ya gotta keep on delivering. So NCR and Burroughs threw in the towel as core providers. IBM stuck their big toe in only by “rubber stamping” selected vendors. The plunge didn’t occur because they were picking the losers.

1998 to 2008
• Technology is getting more complex and bankers are turning the task over to experts. Outsourcing is becoming the method of choice. Let the other guy do it. Maybe lending is next.
• The good tech companies in today’s market are looking more like the safe bets. If a bank is in the safety net, why switch?
• Even though the new technologies are appealing, every top vendor has them. One more reason to stay put.
• For the first time in over four decades, the banking industry is without a dramatic new silver bullet technology. What a relief for bank CIOs. What a disaster for bank tech vendors.
• You won’t hear this from any bank tech provider, but bankers are up against far more critical business issues now than to pay attention to technology. That’s a bad thing for vendors. But if you need some good news, bank tech vendors had nothing to do with subprimes, the credit crunch or the weak economy. Most tech companies are admired these days for doing their job with excellence. Not being in the limelight is like last year’s academy award actor who can’t get a job this year. Bit parts may be the answer until the next big break comes along. For vendors, that may mean a paltry 4 or 5 percent internal revenue growth rate for the next few years.
• Today’s core system buyers will include three types of financial institutions: 1) de novos, 2) credit unions that are finally realizing they are more like a bank than a club, and 3) banks that procrastinated the inevitable move and are now biting the bullet.
• There’s a fourth group that I call the perfectionists. They are never satisfied. They’re in the group of my 11 top solutions, but when a banker looks at the other 10, he realizes there’s not enough upside benefit in a switch to justify the pain of a conversion. So they temper their perfectionism.
• If you’re looking for the big banks to make the move, you better have a Plan B because they are as dug in as a 300-year-old oak tree. And the average age of a big bank CIO is about 10 years from retirement. He also knows the science and art of risk management better than any lender in the bank. Interesting that what a community banker in Iowa once told me is the same thing that a sophisticated million-dollar-a-year CIO in a large bank is thinking—It’s OK to do it after I retire.
• Technology has been very popular for four decades. Now, cruising in calm waters is not all bad, and in fact may be a good thing in order to rest up before the next tech boom.

I never claimed to be a visionary, but I listen to my instincts. Somewhere in a garage, loft, coffee house, basement, Bangalore office, or Beijing factory, someone is creating a new idea for banking that will make every DDA system obsolete. If that happens, 16,375 (net of the Countrywides, IndyMacs and maybe 88 more) financial institutions might be buying new core systems. Is that a dream you don’t want to wake up from

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Compared to Lawyers, Other Professionals are Slackers

Posted on August 11, 2008

Put your lawyer jokes away, folks. I have worked for 22 law firms as an expert witness, and I have seen how smarts and hard work pay off. The midnight oil has burned a few times for me as a consultant, but lawyers have demonstrated a new meaning for "hard work." There's no bias in this message. The lawyers found me. I didn't know them. Do my impressions represent the total population of lawyers? Of course not. I can only speak about 22 experiences, but that's enough for me to establish a very high opinion of the profession. Maybe the credit should go to their clients who chose them. Here's what I discovered about all of them (small firms as well as the well-known).

• Humility: OK, bring on the wise cracks. Every lawyer told me they didn't really know the business of bank technology the way I did, but they wanted to learn. And learn they did. Maybe it happened in law school or even kindergarten, but these guys are the proverbial sponge in the business of learning. You can't ask for a better audience if you possess the passion to teach.

• A Clear Head: We all know that a good lawyer always thinks his client is innocent. The guys I worked for covered the entire space, often times leaving me to wonder whose side they were on. That was none of my business. The answers I delivered were my own. I never wanted to be the judge or the jury.

• Smart: I've said it about people who work in the IT industry; IT people have to have a high level of smarts, regardless of how they dress, smell or communicate. With lawyers, it's the bar exam that initially tests smarts, I think. I knew they were smart because they got everything right the first time new material was presented, and they challenged the "teacher" when it sounded a bit unbelievable.

• Very Thorough: Because I'm on the meter, I try to take intelligent short cuts to prove a point. Not them. They know an antagonist will accuse them of guessing if they don't deliver reliable evidence. When the FDIC sued a large holding company, there was some question as to how fairly the 23 banks were being charged for computer services. I had the "fairly" answer and suggested one representation could be used for all 23. No way. I ate delivered pizza the next couple of nights, but I produced 23 accurate IT "invoices" for each of the banks.

• Drill Down to the Details: My resume is called "Full Disclosure," but that wasn't enough for the lawyer who was interrogating me for qualification.
Lawyer: Have you ever invested in Computer Associates International?
Me: Yes.
Lawyer: Why?
Me: To make a targeted profit.
Lawyer: Did you sell the stock?
Me: Yes.
Lawyer: Why?
Me: I made the targeted profit.

• Honesty: The lawyers presented me to the court for what I was, not what I wasn't. On one case the opposing lawyer spent a half hour proving I was not a computer programmer in order to disqualify me. The judge got impatient and interrupted him with this remark, "If Ross Perot were sitting in Mr. Gillis's seat would you be asking him those same questions? Even I understand that Mr. Gillis is not a programmer by simply acknowledging his billing rate. Move on."

• Completeness: My day of testimony was set, and I flew to Atlanta for the day. My wife saw me packing for a week and was a bit suspicious. All I could say to her was, "Nothing is predictable in a courtroom." Lawyers refer to my testimony presence as "wait time." While I was waiting, I went to the work room (an entire floor) at the hotel. There was enough documentation in the room to cover the Iran Contra, Guantanamo Bay, Watergate and any other high profile case. I didn't examine any of it. I had a very well defined task and I was very well prepared. When my time came, I was asked to defend statements in my annual report (Automation in Banking) published for the banking industry. The opposing lawyer presented a copy of my report to me to make sure I could validate excerpts. I observed a serious violation at the outset. The reproduced report was a bootlegged copy and thus a violation of the copyright law. Not only was the gun still smoking but everyone in the courtroom saw the crime. Not a nice place to be for that rookie lawyer. The lawyer in charge of the opposing team stepped in and withdrew the challenges. I went home that night after a clean testimony (and clean laundry).

• Diet: You know a good lawyer by the food he/she consumes during a case. Lawyers live a 24/7 life during a case. They order out and they order the best. And they order tons. The next morning you go back to the scene and it's clean, open, fresh, full of energy, and everyone is ready to slay the dragon.

Lawyers have the right formula—smarts and hard work. Both are essential. The wrong answer plus a lot of hard work just makes the outcome more disastrous. Every banker knows that now. Even "above-prime" mortgages will now get a thorough work-over.

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Small Bank Tech Companies Pack a Strong Wallop

Posted on August 01, 2008

There are 60 bank tech companies in Automation in Banking - 2008; 32 percent of them are small companies (six to 52 employees). The criteria used for entry (all companies) were subjective:
• Some were included because they are ubiquitous. Five company names appear somewhere in the total Financial Institutions population of the U.S.
• Some were included because they offered a specialized product or service that's in demand.
• Some were included because their category was defined as "every....." For example, every core outsource company and every core software company.
• Some were included because they were in my first book, Microcomputers in Financial Institutions, 1985, Dow Jones-Irwin. How's that for subjective?
• Size of company was never a consideration.

This is not intended to be a sales pitch for small companies. Instead, it's designed to balance the scale.

I realized that 96.3 percent of my blogs cover matters that large bank tech companies are involved in. For example, last week's blog was about mergers and acquisitions. The 19 small companies do not have a single M&A transaction in their history.

The 19 companies represent the following applications services:

Core Software/Outsourcing: 6
File Conversions: 3
Cash Management: 2
Mortgage Lending: 2
Asset/Liability Management: 1
Check Imaging: 1
Document Imaging: 1
Marketing Services: 1
Platform Automation: 1
Collections: 1

In fairness, the large companies do everything these guys do, and it's safe to say no company has a lock on any banking application, and I've never heard a salesman say, "We are the only bank tech company that..." unless it was to say "...is located in Laurel, Mont."

Some common characteristics of the group include:

• Sustenance—these are not startups or wannabes. Some of them have been around forever.
• Privately owned, and because I know most of them, enjoying their independence and freedom from reporting burdens.
• Successful, as defined by the owners. I would add, "Happy to go to work every day."
• Competence that is proven—one company has 8,000 customers, including 9 of the top 10 U.S. banks.

If there is a sales pitch to any banker in this blog, it would be, "Whenever you see the words 'small company', take a moment to read further. There might just be a very large amount of competence in delivery."

DISCLAIMER: None of the 60 companies asked to be in this report. I invited them.

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When Two Tech Companies Merge, Banks Want to See Integration of Systems but Tech Companies Focus on Integration of the Businesses.

Posted on July 28, 2008

Two weeks ago, I blogged about the language that vendors use, and yet, I committed a faux pas by not explaining the dual meaning of integration. One meaning has to do with the task of the acquiring vendor's CFO. His job is to eliminate redundant positions, consolidate real estate and leases, slash overhead, consolidate data centers, consolidate software licenses, regulate purchase agreements, neutralize human resources policies such as benefits plans, and try to get the acquired company to adopt the acquirer's culture. Except for the last goal, the task of consolidating the business aspects of two companies takes about 90 to 120 days after the merger is finalized. It's a tough piece of work but doable, especially since good CFOs are constantly looking for ways to cut costs. The other meaning of integration has to do with how the disparate systems of each company will be meshed harmoniously, and that's the job of the CIO plus hundreds of techies. That task takes about five years and lots of money. Even after it's done some people will never be satisfied because "foreign" systems are never consolidated as well as single-designer systems.

The reason this is an important thing to understand is that the interchangeable use of the word "integration" causes confusion. For example, investment analysts want to know that an acquiring company has integrated the business pieces. Bankers, on the other hand, couldn't care less. They care about the benefits they will derive from the integration of systems. The difference between 90 to 120 days and five years tells it all.

If this blog were a Harvard Business School case study, two companies would take center stage—Fiserv and Fidelity National Information Services (FIS). The reasons should be obvious. Fiserv's middle name is acquirer—more than 150 in 23 years. FIS wouldn't exist today if it not for acquisitions. The company never owned anything organic.

The complexity of integrating disparate systems can be demonstrated in part by just a few considerations that developers view as sacred. Once recognized, it then becomes rather clear why systems that were created years before a merger, in completely different "camps," can't possibly be suited for perfect integration today. Please note that "perfect" is a word that has never been part of my criteria in the selection of a system for any bank.

A Few Characteristics of an Integrated System:
• The adherence to strict standards created by the chief architect of a system; (usually unique because industry standards don't exist). By the way, does any company have the title Chief Systems Architect (CSA)? In Automation in Banking - 2008, only one company lists a close facsimile—Jack Henry & Associates with Chief Technology Officer (CTO).
• Tran codes that cross boundaries of all applications within a suite so that meanings become common;
• Field designations (data elements) that are common in all applications;
• DBMS rules—There shall be one and only one. Can you imagine integrating two applications, one that uses Oracle and the other Sybase or DB2? Worse yet, what if one used Informix?
• Data entry rules using a consistent set of integrity tests;
• Data security rules that follow a prescribed set of intensity tests, unlike for example, the variety of TSA screening procedures at various airports even within the U.S.;
• Common programming conventions and languages;
• Standard user manual formats;
• Standard systems documentation.

The cost of integrating systems is very high, but never revealed. Fiserv paid $4.4 billion for CheckFree. Owning the #1 Electronic Bill Presentment and Payments system is a very good thing, but it also brings with it greater challenges such as integrating it with 18 Fiserv-owned core systems. I don't believe Fiserv acquired CheckFree just to leave it on an island without some connection to its core systems.

On the surface, it looks as though FIS made 14 acquisitions in five and a half years. But if one peeled back the onion a bit he/she would find that InterCept and Aurum Technology had about 19 acquisitions that were still dangling as "island" systems. All told, FIS is a company consisting of not 14 companies but 41 companies in terms of systems owned.

I don't think acquisitions are wrong or that they should stop. I just believe that after the businesses come together, one should be able to see a clear picture of the resulting system mosaic as opposed to an abstract image of lots of pieces glued together.

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If You're a Small Credit Union, a De Novo, or a Tardy Commercial Bank You Might be in the Market for a New Core System This Year

Posted on July 18, 2008

If history were to repeat itself, and it often does in the pattern of behavior regarding bank tech activities, there will be 409 conversions to new core systems in 2008. Not one of them will make the news, because small financial institutions (FIs) are not usually noticed by the news media. On the other hand, if one of the 137 large FIs in the U.S. (over $8 billion in assets) were to convert its entire core system, you'd hear about it even if you were on sabbatical at the island of Tristan da Cunha.

This slow-down in core conversions presents three situations, depending on what your role is:

1. 87 percent of all FIs: Most bankers love the fact that they are done. It's as if they have had root canal work on every tooth, installed brilliantly white crowns, and have no feeling in their choppers even when they crunch down on a popsicle. They're done with pain.

2. Vendors: The core vendors are showing a stiff upper lip, but deep down they're saying, "What are we gonna do now?"

3. The 409: Although I don't know all of them, I will volunteer the reasons why they are in the "mall."

• Do I have to explain the motivation for a de novo? I think not.
• In the past 10 years, credit unions realized they are no longer just a club. They can do anything a bank does, as long as they have the systems.
• When a new CEO arrives at an FI he or she usually likes to shake up the status quo.
• The resistance to change has finally kicked in because tech-dependent employees are about to walk out, and the old-school management has caved. Forget healthcare, decent wages, and equal rights: "We want a system that does the work for us."
• Banks that have been tolerating their dead-end vendor with "good enough" technology have finally discovered, unlike politics, that all banking is not local, and they're ready to compete with the best of them.
• Banks in 21 states have discovered that a bank customer in Idaho is every bit as savvy as one in California. You'll never hear this from Gartner, Forrester, TowerGroup, Aite, Financial Insights or Celent, but all bank tech innovation occurs in 29 states. I discovered that by chance, but once I found it, I tracked it on all new events, and for the past 20 years, it has been validated. Now the laid-back banks in the 21 states are ready to act.
• FIs want access to anything that might appear on the horizon without reinventing the system's infrastructure.
• FIs want reasonable integration so that all apps know how to work harmoniously.
• FIs want to be mainstream players. Once, NCR was mainstream. Not anymore. When prime vendors make faces and roll their eyes about your present environment, you're not mainstream.
• All FIs want tons of functionality. When some vendors ask you why you want to do it that way, they are really saying we can't do it your way. The prime vendors cover all the bases.
• Most FIs want to say "YES" to customers that express sophisticated, yet legitimate, needs in the way they use the 132 pieces of the technology pie.
• Some banks grow out of their core system. In my opinion, that says their first choice was short sighted. The right core systems can go from de novo to several billion.
• In the past three years, protection has been the name of the game in banking, and technology has risen to the occasion. Good systems offer compliance, security, risk management, fraud detection, business intelligence and warnings that examine every suspicious transaction in last night's posting run. However, making bad loans is still an art form that only bankers know how to paint. Find a solution to that problem and thousands of banks will be at your doorstep.

Several years ago, I thought I had found a reasonably thorough tech method to detect risk in lending. It never got off the drawing board because my focus group advisers had a biological technique that they trusted. 1) I look them straight in the eyes and know if they will payoff or default. 2) I use seat-of-the-pants judgment. Is it any wonder banks are currently adding considerably to their reserve for loan losses?

Prime core systems can't do everything, but it sure doesn't make sense to be stuck with an impotent core system when there are at least a dozen good ones ready to serve today's needs and can continue to grow for the future.

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The Language That Tech Companies Use Needs Another Makeover

Posted on July 14, 2008

Whoever is writing the marketing announcements that tech vendors are using today, ought to get a makeover to remove the meaningless phrases that are just as bad as comb-overs, brilliant Chicklet-like teeth, and shiny stretched skin that makes the beholder's eyes pop out at you. You know who you are Donald, Kenny and Wayne. Is this what banking is all about today?

I blame this current phenomenon on Las Vegas. Bankers love to go to Vegas for their conventions, and some marketing guru must have figured out that behind that gray suit lives a life of fantasy, hype, dreams, and short memories (sub-what?). Conclusion: Feed the desires. This problem could have been avoided if bankers went to conventions in Lincoln, Neb., or Boise, Idaho, or Duluth, Minn., even Cleveland.

Here are some of my favorite targets regarding meaningless language:

World Class: Does that mean a vendor that has a customer in Bangladesh or Kazakhstan qualifies as world class? Should I call my report "world class" because it now includes companies in Bangalore, Mumbai, Beijing and London? Would Midwest Software be upset with me because it's in Laurel, Mont., (another world) and I never called my report a world class report? Here's my advice. Drop the "world class." It's two words that mean absolutely nothing. Even "More Doctors Smoke Camels Than Any Other Cigarette" at least meant something, whether you believed it or not.

Reach Out to You: Here's another politically correct expression that has modern tones taken from the Great Society days of the Johnson Administration. Back then it was called Outreach by the Labor Department. As a consultant with a large international firm, we were hired to make the Great Society work. So behind the euphemism of "Outreach," what really happened in the ghettos was a bunch of local workers knocked on doors and yelled, "Come on down to the center so we can show you how to get a job!" Now if a vendor wants to reach out to a banker, there's a better way to do that, and it's not by flipping the words. What's wrong with, "We'd like to talk to you about..."?

Share With You: The word "share" seems to imply we've got something that we'd like you to have. In other words, "we wanna sell ya something". The last time I liked hearing "share", I was 16, at the Capitol Theater, and my date wanted to share my popcorn because she couldn't eat a whole box by herself. I saved two bits that day and that was good thing. Since then, however, every time I heard "share", someone was trying to con me.

Fully-Integrated: There are 61 brands of core systems in the bank tech marketplace. Every vendor would have you believe they are "fully-integrated" systems. Not one is. According to my definition (and I believe any astute banker's definition), they are a far cry from fully-integrated. More accurately, they should be described as, "Mostly integrated plus third-party solutions that are interfaced." Dump the "fully" part because it's a lie. Even though "integrated" is far more elegant than "interfaced," it's often the only way to get the whole enchilada.

In-Depth: Is anything tech not in-depth? "Oh, we've got this skim-the-surface kind of Business Intelligence model that will disclose 5 percent of your loan risks."

Partner: I prefer telling it like it is, "I'm the vendor; you're the customer." I thought partners were people who divided everything up in equal parts—profits, losses, defaults, embarrassments, assets, children. "Our subprime portfolio has been declared valueless. Since you have been processing our loans as a 'partner,' how much of the loss are you going to take?"

Speaking of the Great Society reminded me of a partner at Booz Allen that I worked for. Hal was from Maine, sharp as a tack, and smarter than any slick-dressed Fancy Dan. After I'd prepare the usual 50-page proposal to a government agency, Hal would write the cover letter. After seeing the cover letter, I would usually say, "Hal, let's dump the proposal and just send in your letter." He would then invite me to "lunch" to talk about it, but lunch was at the gym sweating out the 60 minutes more than an Enron exec under Mike Wallace's hot seat interrogation. After a shower and a ten minute walk back to the office, I knew we had a winner. And win it did—my detailed substance plus Hal's down to earth charm.

Learn from that folks. Bankers put their pants on one leg at a time, or pantyhose sitting down. They won't fall for meaningless marketing language any more than they'll ever accept a phony credit application.

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Can You Prove Who You Are to a Stranger? Your Utility Bill May Be the Answer

Posted on July 03, 2008

In last week's blog, I attempted to alert the "suits" in banking that there are some downsides to the proliferation of the hottest new banking apps in the past two years. Security systems, fraud detection systems, risk management, regulatory compliance measures, dual authentication for online users and anything resembling protection are in vogue whenever bankers get squeezed by the unexpected. But when these systems do their job, they also create a huge workload for bank employees as they are now required to test all possible suspects. In other words, for every good technology there's a "gotcha" somewhere that no one anticipated. The CIO is claiming victory, but the head of operations is cursing.

This week, I was thinking about some of the current challenges in proving to a legitimate tester who I really am. In one case, I was well-prepared. You see, decades ago my widowed mother was forced to enter the workplace. Almost overnight it seemed this sweet lady turned into one kick-ass first sergeant, and was assigning duties to all of us. She chose her youngest son to run the household. "And don't forget to save the receipts when you pay the gas and electric." I never forgot. In fact, today I have trouble discarding 20-year-old utility bills, and what a blessing. The utility bill these days is the most popular method of proving who I am after all the hi-tech methods fail. I kid you not.

When I bought a new pair of jeans at Macy's last week (the first in about 15 years) the lady insisted I open an account to save another five bucks. I resisted. She won. In front of some other shoppers at the register, the online credit approval system came back faster than I could say "new Levis jeans" with "DECLINED." I knew better than to ask why, so I quietly walked away while thanking the Big Guy in the Sky for fighting my battles for me. I really didn't want another plastic.

Five days later, the credit bureau sent me a letter saying they couldn't match my name on my driver's license with the name on my credit file. They asked me to send them a utility bill. Even a credit score of 850 and a little more checking as to why I don't use my archaic baptismal name anymore couldn't do the job that a utility bill could. Thanks, Ma, for all the lessons.

I'm beginning to feel more optimistic these days because I believe some special rule of physics is taking over. If good things have their downside, I wonder if bad things will have their upside. We know, for example, that the high price of gas is a bad thing. I'm now looking forward to the upside, when finally we'll drastically cut the use of oil. Hopefully, some day the only time we'll refer to oil will be the olive type in a nice salad with tomatoes that won't kill you. Hang in there, folks, all kinds of good things are about to happen.

So you'll know who I am,
Menelaos Arthur Parianoglou Gillis

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New Technologies in Banking are Changing Work Habits—Bankers Are Working Harder

Posted on June 30, 2008

Bank of America announced last week it is cutting 7,500 employees. Unfortunately, it's not because of improved technology—it's because of Countrywide. The best employee-reducer in banking is acquisitions. I'm sorry to report the bad news, but today's technologies are going to make bankers at the top work harder and overworked bankers at the bottom will be welcoming additional coworkers. Before you take that double-shot of Jose Cuervo, hear me out.

It's simply a question of physics, folks. For every action, there's an equal and opposite reaction. Add a new technology and more labor is needed to react to the tech resource. Give a banker more IT tools, and they'll work their butts off using them.

I used my report (just published) as the basis for this blog. See if you can shoot holes in my claim.

Exhibit 85 shows there are 132 pieces in a typical bank's technology pie. Nine are highlighted as taking center stage in 2007 and 2008 as the hot apps, and will continue for a few more years.

1. Compliance, Security and Fraud Prevention
After the techies complete the implementation and set the go-live date, do you expect it will be business as usual? I don't. The compliance officer will be overwhelmed with new reports producing thousands of entries on suspect lists. Who's going to work those reports? Call center employees will get blasted by irate customers who have been blocked because the techies set the controls at "intense." Who's going to answer the calls? IT people will be on the phones listening to users who want explanations that the techies haven't been trained to answer. Who's going to provide answers? Servers will crash because they weren't expecting volume spikes like these. Who's going to re-architect the configurations? Fraud detection systems will probably catch one bad guy and irritate thousands of good guys. Who's going to handle that upheaval?

2. Electronic Bill Presentment and Payments
Is this one of those technologies that the customer runs? What happens when he needs help? Who's he gonna call? A help screen? How many bank employees will it take to support the EBPP system?

3. Business Intelligence/Risk Management
This is like #1. So you now discovered the bank is in trouble. Do you sit back and say, "Hmmmmm. Who's gonna fix the problem?" The BI system might give some clues, but Artificial Intelligence isn't as good as the real kind. People have to analyze clues to separate warnings from actual failures and then act. Who will do that? It's sort of like your home alarm system that goes off at 3:00 AM. It's four cops in five minutes surrounding your home that will finally ease the tension, not the noise.

4. Electronic check clearing—Check 21
A nice piece of legislation—eliminate the paper from the item processing equation. But bankers knew they'd have to build the infrastructure (aka people) to handle the system. And will check processing vendors introduce new reduced rates because of reduced paper handling?

5. Credit Quality Surveillance
Like #1 and #3. How many people does a bank need to follow up on deadbeats and future suspects? Is the system going to do that with automatic call generators? Does a bank farm it out to Bangalore? Knowing there are bad credits in the loan portfolio doesn't make them go away. People do.

6. Wealth Management
The system can now segment the big players, and maybe it can match them with products. Now who's going to go out and get the business? Bangalore is not an option.

7. Cash Management and Treasury Services
This is a pleasant surprise because new versions of cash management put the system in the hands of corporate treasurers, and that's a good thing. Unless of course, something goes wrong. Your call center support group will now be talking to all manner of self-service customers. "The ATM ain't giving receipts" and "All my accounts are out of balance because of an apparent day-delay posting in your system" require more people and different kinds of people.

8. Remote Deposit/Merchant Capture/Teller Truncation
What the bank used to turn over to item processing vendors in big batches now is spread out to millions of customers and branch employees. Making customers work is a good thing for banks. Adding more work for tellers isn't.

9. Mobile Banking
Giving customers more channels to suit their habits is a plus. But on-the-fly habits demand real-time support. Will the mobile customer wait for "the next available service representative" as she hails a cab to downtown?

In case anyone has forgotten, for every technology, there's a bunch of people needed to make it work.

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Five Indicators Point to a Modest Year for Bank Technology

Posted on June 23, 2008

When vendors tell Wall Street not to expect much in 2008, you know we're in a leveling off period.

Here's my take on the subject.

1. IT maturity has arrived after at least four decades of successful evolution, and that means new implementations of anything tech will be modest. Not a bad thing, actually. Isn't it nice to be able to say, "We're done"?

2. The position of bankers as they view further investments, maintenance of the "production factory," evaluation of their "enterprise system," and the short term/long term earnings condition of their banks will be a critical factor in the future of technology. Right now, any bank CEO that has a loan portfolio is running scared, and technology is the last thing on his or her mind.

3. The ability of tech companies to exercise an increased business sense about the role of tech products and services, and then follow through with proactive initiatives that will translate into provable value for their customers will identify true winners. Are they up to the task or is it business as usual?

4. The role of Wall Street and private equity firms as they decide how "the banking crunch" will impact tech companies will have a bearing on some vendors that pay too much attention to the performance of their stock. Given other factors in a world of negatives, every ounce of management's attention should be focused on what the company is selling and how much it is selling.

5. The current absence of visionaries and/or inventors (unlike previous years), at least on the covers of tech journals, at conference podiums, and in converted garages and basements, is more than a weak PR campaign. There are no new apps on the horizon. Even Congress isn't adding anything like another Check 21. It's more worried about bank bailout than tech innovation.

Maybe now's the time for CIOs to clean out the three-year pipeline of user requests.

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Pay Attention to the Bad News When Converting to a New Core System

Posted on June 16, 2008

There's a bit of an uptick in the marketplace right now regarding core conversions among banks of all sizes, even the giants. But be aware that this is the kind of stuff that arrives at the Gillis Gossip Gateway. It's mostly hearsay, whereas I deal in proof as supported by numbers. In 2007, the churn rate for core conversions among the 16,881 financial institutions was only 2.7 percent. It's been dropping every year for at least the past six years. So the accurate realization will arrive this time next year when the numbers roll in for 2008.

In the event, however, that this time there will be a hockey stick rise in the core sales business, I believe a few words of caution are appropriate for every banker facing a core conversion.

Here are some vendor promises that should get you to break out in a cold sweat:

We'll have a conversion team (no staff numbers offered) here two days after you sign the contract.
Don't worry about a thing. We'll take care of the entire conversion project.
This will be a slam dunk. (After George Tenet used that one, I thought it would have died.)
This conversion will be a piece of cake.
We've done thousands of conversions. It's a routine project now.
We've converted several banks that were using your old system. We're ready to go.
Everything will look transparent come Monday morning.
Your customers won't even know you changed systems.
Our system is so intuitive that you won't have to train your employees.
Don't even think of ordering new forms. Our system will change to suit your forms.
Our data mapping programs will load your system records without manual intervention.
Leave the Excedrin in your medicine cabinet. Just bring the champagne.

If your vendor sounds like that, then the bad news is you made the wrong choice. Conversions are still a nightmare, not to be treated lightly. Here's a story about treating conversions seriously, and how one vendor knew when to say "NO."

I was hired by a $4 billion bank in 1997 to do the grunt work (analysis) to find a replacement for the bank's outdated core system. In fact, "outdated" is a mild word. The vendor had walked away from their system years before and the bank stepped in and performed maintenance of the system. That was my first clue of this bank's gutsiness, but there was more to come. My recommendation at first was not widely accepted, but this bank had a science-like ability in evaluating the results of my 36 tools.

So after I got paid and sent home, the bank was comfortable, but still not convinced about the vendor. The CFO then organized his own study team and asked the CEO for 30 days to confirm the consultant's recommendation, or start over. His approach was to interview some of the recommended vendor's customers. He returned with an overwhelming acceptance of the SilverLake system from Jack Henry & Associates. Then the fun began.

The bank had an early window in which to fit the conversion. They called me back to see if I could influence Jack Henry to put the bank in the #1 spot for implementation priority. I took the challenge, but I knew my job was to adjust the bank's expectations, not to twist the vendor's arm. I still remember the position of the Manager of Conversions, who today is one of seven execs who run Jack Henry. "We have six top notch conversion teams that are assigned to new clients as they come due. Any one of them could do this job the way it should be done. But they are all committed to clients that signed contracts before you did. And we don't know the words we would use to convince a scheduled client to give up their position for another bank. We have to stick to our promised schedules."

The bank's CIO bitched about it for a couple of days, but Jack Henry stood firm. Today, that bank is Jack Henry's largest SilverLake customer at $13.1 billion in assets.

Sometimes it's very comforting to hear a vendor say "no." That's when you know you're in the right hands.

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Fidelity National Information Services, Fiserv and Metavante Ought to Be in New Zealand Right Now

Posted on June 09, 2008

I'm not complaining about the large number of daily news items I receive from Google, because I asked for them—intelligently I might add, according to a few key words. So when I read about a report last week of IT glitches that blocked New Zealanders from using their banks' services, I wondered if those banks were using FNIS, Fiserv or Metavante. Nah.

Here's a list of popular complaints as reported by a Unisys Trusted Enterprise survey:

Bank's website was down;
79% of consumers say their bank's IT is undependable;
Slow Internet banking;
Customers are asked for the same information multiple times;
Customers now rely more heavily on high-tech channels to perform their banking chores, but those channels aren't dependable;
Customers expect their banks' access points to be available at all times.

What's worse is that bankers were not surprised at the results of the survey.

I have never been to New Zealand, but I wonder if they've got indoor plumbing. With problems as basic as these, it appears to me banks in New Zealand need a new technology provider. Either that or New Zealand needs to be acquired by another country. It's sitting out there all by itself in the middle of the South Pacific. So who can get there to solve problems that early adopters in the U.S. had, solve, and now joke about them?

Sorry folks for the sarcasm, but Automation in Banking - 2008 is three weeks shy of hitting the streets, and I feel like there's one problem that the U.S. doesn't have to worry about right now—we've got the best banking technology in the world.

Do you know the way to Whangarei...

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Have You Ever Talked to a Corporation? I Talk to People

Posted on June 02, 2008

Throw vendor brochures into the recycle bin before you read them, and don't waste your time attending a vendor dog and pony show. If you want to know which vendor you should be entrusting the future of your bank with, go talk to them. Following is an excerpt of a chapter in my report.

Last year, I launched a new idea, with a borrowed name called "10 Questions for the CEO." I got the idea from Time magazine because every time I read an account of their Q&A, that has been directed to a highly diverse range of popular people, I gained a whole new perspective of the person they had interviewed. Not the stuff their PR agent directed, but very real and sincere stuff, it seemed to me. If Time ever does Britney Spears, I wonder how many 20-something year old guys would say, "That's the kind of girl I want to marry." My interviews with the CEOs of prominent bank tech companies were gems. I'll keep them forever. Since then, one of the CEOs got a promotion. Another one was elected to the board. One is now CEO of a company that went public; that's a promotion, but a lot more work for him. One left the company, no reasons given. The other two are relishing their credits, at least I would, for leadership performed according to the expectations of any "C" position.

This year, I changed the agenda simply to avoid repetition and boredom. I didn't want to hear six CEOs say, "Is it a year already since we talked?" So I left it up to each company to select the people, the place, the date, the agenda and the spirit. How's that for trust when you invite a vendor to take charge. I'd do it all over again. All the marketing programs, collateral material and presentations wouldn't do a thing to display these companies for what they really are. Let people talk for themselves and you'll get the skinny that really means something. I got it!

The companies that participated this year are (in the order in which the interviews were conducted):

Fiserv, Inc.
Jack Henry & Associates, Inc.
Metavante Corp.
Harland Financial Solutions
Fidelity National Information Services
COCC

I confess to some bias. I knew every one of the guys I interviewed. They knew most of my positions regarding key issues, and they thought I remembered everything they had told me in the past 10 years. So there was continuity in what was discussed, as well as accountability. It's easier talking to these people than some of my bank clients. That's why in my consulting projects, after I make my final recommendation, I tell my clients to visit with the successful vendor and talk to their people. They do it, and return with signed contract in hand. After the techno analysis is done, it's all about people.

You might also like to know that these sessions were very businesslike. There were no lunches, maybe a coffee or bottle of water, and when we were done, it was really done. On the way back to the airport, one of the limo guys gave me 10 minutes on the benefits of online bill pay. His is free, but he'd be happy to pay for this wonderful service. It never ends when you're on a roll, folks.

For the benefit of this blog, I put a dollar value on the sessions. Trimming out the tiny bit of social talk, 13 people (sans me) with collective experience of 309 years, passed on their wisdom to me, and now to my readers. Using my billing rate (they'll be proud) as a guide, that block of work is worth $16,900. Some day, I'll publish my list of stupid words marketing people use over and over and over again. I never heard any of them used during these knowledge-transfer sessions. I gotta get out more.

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HP and EDS -- Is it a Win-Win? I Predict a Lose-Lose

Posted on May 27, 2008

My experience with EDS goes back to 1962, not because it was day one for EDS, but instead, to tell you how bad I am at predicting success stories. What I'm good at is predicting failures.

I had read in one of the trade journals that a guy in Texas started a new service bureau. If you were in the biz in 1962, you would know that running a service bureau was like running a janitorial service, or a maid service, or a trash disposal company—not very glamorous. Even the #1 payroll processing company (ADP) was steeped in the boredom of "It's payday again." Working for a major computer manufacturer was where the action was. Even though IBM was king, there were several aspirants that felt they had a chance at this new and exciting industry, like Control Data Corp., Sperry Rand, Burroughs, Univac, Philco, RCA, Honeywell, GE, Cray Research, and maybe some other wannabies.

I asked myself, "Why would a guy with a great job and successful track record with IBM leave all that behind to launch a grunt-type company doing what others didn't want to do for themselves?" Well, 46 years later, only one answer would be enough—for a current net worth of about $4.4 billion. It's pretty clear that Ross understands the adage of "Timing is everything." EDS has never been the same since Ross took his check for $7 billion from General Motors. And in recent years, EDS tried all kinds of remedies. This merger looks more like the last straw as EDS gave up and threw in the towel. Do you need proof?

• Several new executive managements have been tried but didn't have the propulsion magic. In my opinion, EDS directors looked to the "has-beens" instead of the "will-bes" for recovery, and they failed because the tech world no longer caters to old paradigms.
• EDS replaced starched shirts with turbans at one-sixth the cost of a techie, but apparently the cost of EDS's only revenue producing resource wasn't the only problem.
• EDS acquired a boutique consulting firm just to get a few whiz kids to wave the magic wand. Stockholders paid a premium for that; the whiz kids made a killing; the magic wand never showed up.
• EDS shed some businesses, but unlike other successful turnaround efforts, EDS never acquired a strong, in-the-groove company to enrich the revenue stream.
• Speaking of revenue stream, it languished (2.8 percent increase in the past six years is not what big bucks are paid to execs for), and so did that of the industry. Eleven companies make up the field of "We'll do it for you" tech services companies. IBM Global Services and Accenture are the only two that understand what it takes to succeed.
• The current claims of the dealmakers need to be checked. Even after the announcement, EDS stockholders are still in the red. EDS employees will put their personal welfare way ahead of client needs and corporate loyalty. FUD will affect morale. Air travel between SFO and DFW will skyrocket, as well as other expenses to integrate two highly disparate cultures. Don't look for any growth in the next few years.
• What the dealmakers are counting on is "biggest," and therein lies their next mistake. What HP/EDS will need is new thinking, and they won't find that in either of the two pieces.

In my opinion, the brain drain of the dealmakers is still what is plaguing the hope that bigger is better. HP and EDS now believe that a $33 billion company is going to give IBM Global Services a run for its money. Add that as the next big mistake EDS will be part of.

Truth in blogging: EDS is included in Automation in Banking - 2008 because I invited the company several years ago, and they continue to provide updates to my annual requests. HP has never been in my report even though I have invited the company to participate. ACS, CSC, IBM-GS, and Unisys are in the report. I have never owned stock in HP or EDS.

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If You’re Not Happy With Your Bank’s Core System, There Are 101 Solutions Offered by 32 Vendors Who Would Love to Talk to You, Maybe

Posted on May 19, 2008

First, a few definitions for the sake of context clarity -- A “solution” is any brand-name system offered as an in-house system or outsource service, and driven by the owner of the system, or a third party. The group of 32 vendors includes any company that has customers that rely on that company to keep their core system running, but all 32 vendors may not be in the business of selling their system to the entire U.S. population of Financial Institutions (FIs). Thus the reason for the “maybe” in the title. The distinction of selling core systems to any FI in the world applies to about a dozen companies.

There are 57 unique brands of core systems in the marketplace, but unlike the Heinz 57 Varieties, these core systems are more like 57 types of ketchup. Some of them won’t top the list of most widely used systems, but try telling Bank of America they should abandon the core system that Fidelity National Information Services supports because it is not one of the most popular ones.

Fiserv’s ITI Premier system is the most widely used core system by third party processors. Fiserv’s P&L doesn’t mind that kind of competition. But why is Fiserv’s M&A guy sleeping at the switch? There are a dozen good old-fashioned acquisitions sitting out there, just like the ones George used to pick, like ripe plums off a tree. Maybe it’s because they look more like clubs, owned and operated by their members.

Exhibit 68 (the 101 solutions) was originally created as an educational tool. It was important for my clients, who hired me to recommend a core solution, to know what the entire playing field looked like. Experience taught me there will always be a “Monday morning quarterback” who will challenge Sunday’s game decisions. It’s true in banking, whether it be a bank examiner or the pharmacist on the board of a community bank who thinks he is a computer expert because he owns a PC. With my list, the CEO of any bank will be prepared to take on all critics. For example, he might say, “We looked at ABC and disqualified the solution for these reasons,” or “There’s no such company as XYZ that offers a core solution for banks,” or “That’s a credit union system, and we’re a commercial bank,” or “As a de novo, we don’t have $25 million to license the Hogan System,” or any number of other challenges from the “Monday morning experts.”

After 321 assignments, I believe I’ve heard every challenger’s after-the-decision alternative choice except maybe, “My brother in law is a banker and he picked up a great system that fell off the back of a truck.” The closest was, “My brother in law uses that system and he swears by it.” “That system,” by the way, is now catalogued under the heading of vaporware, along with ten other solutions that created an initial stir but didn’t last.

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Outsourcing is Now More Popular with Banks than In-House, and Bill Gates Knows Why

Posted on May 12, 2008

First, I want to be clear about the word "outsourcing" because many writers today use the word to mean "offshore contracting." In this bank technology context, outsourcing has nothing to do with geography. I'm talking about the banking industry in the U.S. where outsourcing was known, 45 years ago, as "service bureau" or "third party processing" or even "correspondent banking." The outsourcing word was adopted as a modern word in 1989 as a result of the IBM/Kodak deal.

Now, what does Bill Gates have to do with this subject? Simply that Bill stated at a conference, "Technology is still too complicated and we haven't done enough to simplify it for the ordinary citizen." Maybe Steve Jobs has, but that's another blog. In my opinion, Bill's quote applies perfectly as to why banks have been favoring outsource mode in recent years. "Enough already, let the experts deal with it."

In addition, while technology increased in complexity, it also got broader for both good and bad reasons. Regulatory add-ons increased the burden of IT people and many of them couldn't keep up. And it's pretty clear that when CEOs go home at 5:00 p.m., they too may get a call at 3:00 a.m. The good part, of course, is that bank technology does a lot more work now than it did just five years ago (44 percent more solutions in the past five years). But there's a price to pay for everything, and the outsource experts know how to handle and leverage the burdens, thus making the cost scalable and very reasonable.

Here are the current stats to prove the recent increase in outsourcing:

70 percent of new core sales to financial institutions in 2007 were for outsourcing.
30 percent were for in-house systems.

Three years ago, it was almost a flip-flop—77 percent for in-house and 23 percent for outsource.

If the current rate continues, there could be a shift in the base of FIs using core systems. But currently there is still a slight preference for in-house systems as it relates to the total installed base of 16,881 FIs.

53 percent of all FIs use in-house.
47 percent of all FIs use outsourcing.

There are some significant details behind this mix. Very large banks prefer in-house; very small banks prefer in-house, but for entirely different reasons. Large banks are constantly making changes to their systems to achieve uniqueness, whether real or perceived. Large banks are also psychologically strapped to the idea that they can do IT better than even the largest IT vendor. That mentality is fed, at least in the top three banks, by the fact that each one spends more on internal IT than the largest IT vendor's total revenue. Small banks, on the other hand, use their systems like a PC—buy it, use it 'til it breaks, never look inside. Small banks also love their 1-800 number because it doesn't have a SSN. Who can blame them?

One thing is certain. The top seven vendors of core systems now offer solutions both ways, and it wasn't always like that. It took one of them 40 years to break away from the Henry Ford attitude— tYou can have any color (method) you want as long as it's black (outsource).

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Today’s CIOs are No Better Than the CIA When it Comes to Giving Accurate, Defendable and Persistent Advice to the Boss

Posted on May 05, 2008

In 1983, I published a set of guidelines designed to protect data (aka electronic money) as gazillions of bytes traveled through copper and chips. Ah, those were the good old days. I was confident I had every threat pinned down to 39 rules. At the time, 39 was about 30 more than the ordinary CIO had identified, and what was worse was most CIOs weren't even worried about any breaches because they relied on one pervasive safety net called "It won't happen to us."

CIOs are better at the task of securing IT these days, but the "openness" of self-service, "friendlier" technologies, and an increasingly larger population of electronic "Bonnies & Clydes" will all contribute to putting the safety of banks back to the nineties, instead of ahead of the bad guys. And what with the crunches that are hurting many banks these days, CIOs aren't stepping up to the plate to insist on more funding to protect against what might happen.

Solution: Nagging persistency from the CIO to the guardians of Noninterest Expense and Risk Management.

When I worked for a bank in the seventies, I was known by the bank's executive management as one royal P.I.T.A. The third time was the charm, but my fourth, fifth and sixth times got me what I wanted. CIOs need to adopt my persistent approach because "subsecurity" will hurt banks a whole lot more than subprime. And some bank CEOs need to be hit over the head several times before they get it, even though they are the ones that will be charged, at least by the press, with mismanagement (or nonmanagement) after the threat hits.

The following story, from 1981, is about a very alert bank CEO and a very insecure CIO. A $5 billion bank in New Orleans was governed at the time by a CEO who had great intellectual capacity, and the perfect amount of paranoia. Yes, folks, a certain amount of paranoia is a good thing for bank CEOs, as Andy Grove told the world in his book, "Only the Paranoid Survive." After returning from an executive seminar, probably held at a luxurious resort by a prestigious IT guru such as Gartner, the bank's CEO hired me to look for security breaches in the bank's IT department. When I showed up for work, I noticed a few peculiarities. The security guard at the executive suite frisked me before I could enter. When I got to the CEO's office I had trouble concentrating on his instructions for good reason. There was a 357 Magnum on his desk whose barrel was pointed right at my heart. When he introduced me to the CIO, that guy was totally hostile. It was beads of sweat on his forehead, rather than the 357, that gave me reason to wonder what I was getting into. But, like any other consultant, I took the job because I needed the money, and in truth there were two more reasons. I enjoyed the challenge, and I knew every top restaurant in New Orleans from my previous life as a contractor at NASA's Computer Center at the Michaud Saturn Five Project.

On the second day of my project, the CIO instructed the Security Department to charge me officially with a breach of security. They claimed I was in the computer room without my badge, even though my badge was on my shirt pocket rather than my suit coat pocket. Confessing to a discomfort about being someplace where I wasn't welcomed, I decided to cast off my three months of New Orleans cuisine, and told the EVP of Operations it would be best if I left. Without the CIO's confidence, I would be worthless.

If I haven't convinced you yet of the veracity of this story, this should do it. Problem solving in New Orleans is handled by going to lunch. So the three of us sat in the main dining room of the Fairmont Hotel where two guys were popping Tums while I was happily selecting my "last supper." At the end of it all, I casually asked my "clients," "What should I tell the guy who hired me why I am quitting?" By the time my rum-based bread pudding arrived I was back on the job, and we were all buddy-buddy.

Sometimes consultants get lucky. While examining exception reports it was glaringly obvious that the CD portfolio showed daily increasing OD balances. When I asked the reconciliation clerk what that was all about she responded with, "Don't worry about that, baby, we're beta testing the Hogan CD system and that ain't real." It was real enough for the customer to cash in on hundreds of thousands of dollars of luxury purchases, a Rolls Royce, and Vegas joy trips, before the bank charged him with over $700k of fraud.

There were 39 guidelines on my list. Number 25 appealed to me because, in this era of risk assessment in banking, I wanted to see if I was alert enough to have covered all the bases. This is what #25 said:

"Usually, the effectiveness of a computer security audit is realized only after the violation occurs."

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If I were the CEO of a bank, I would....

Posted on April 28, 2008

1. Hire a personal auditor, but not a partner of the bank's audit firm, and not one of the Big Four.
2. Hire a personal attorney, not from Philadelphia, but nearby from the Bronx.
3. Outsource all personal expense report submissions to an independent accounting firm that has no ties to the bank, and no ambitions to be there.
4. Hire a personal devil's advocate as an independent contractor with a guarantee tenure to make sure I uphold moral, business, ethical and fairness rules as the contractor may prescribe.
5. Hire an attorney who specializes in SEC matters to make sure all my Wall Street transactions are legal. ...

6. Hire an ethics professor at Harvard to make sure all my Wall Street transactions are moral.
7. Pay for all of the above out of my W-2 income after discussing same with my wife.
8. Talk to "60 Minutes" only if ABC, NBC, Bill Maher, Bill O'Reilly, and all of the above are in the room with me.
9. Never have one-on-one discussions with members of the press. Include third parties such as Alan Greenspan, Pope Benedict, Sandra Day O'Connor and Bill Clinton.
10. Make sure my personal secretary, if it is a woman, has been screened by Billy Graham as to not just proper behavior, but what adversaries might dream up if ever my office door was closed while she was in there with me.
11. Avoid any PR-suggested changes, including dress code, cosmetic makeovers and excessive photo exposures in trade journals. Clue: Don't go to the Donald's barber, dentist or haberdasher.

In addition to all my personal risk-avoidance measures, here are some things I would implement to protect everyone else:

1. Hire SAIC to work with the bank's CIO to build an early warning system that identifies future possible disasters in the bank long before they bite us in the ass. Focus on lines of business that are "unbelievably profitable."
2. Provide the bank's CIO with my idea of the top 10 critical discoveries of potential risk detected from last night's posting run. An example might be, What is the amount in the suspense account right now? What was it the day before? What has it been in the past 30 days? How much of the balance has been resolved? How much of the balance never goes away? Who isn't offering legitimate reasons for the balance? What does it take to reach a zero balance? How often have the bank examiners written us up on this?
3. A report showing who the top credit risks are (1,000 customers per billion dollars of bank assets)
4. A report showing how many employees resigned yesterday; how many were fired yesterday; how many were hired yesterday.
5. A list of customer complaints that occurred yesterday. What do you mean you can't get it?
6. Who actually listened to call center recorded messages from our customers? Give me a CD of those recorded yesterday.
7. How many accounts were closed yesterday? Opened? Why?
8. A list of the largest loan applications rejected yesterday by the loan committee. A list of the largest applications approved.
9. A list of our 100 largest customers. A list of our 100 smallest customers.
10. Show me every story about our bank that appeared in any newspaper last month.
11. When was the last time our investor relations department communicated with Evelyn Davis? Is she attending the next stockholder meeting?
12. Which officer is dumping his bank stock?
13. Has anyone sued the bank this week?
14. Explain our fee strategies as if you were the governor of our state. For example, why do we charge a good credit card customer, who has never defaulted in over ten years a 24.24% interest rate on the unpaid balance?
15. Make sure one nasty SOB that everyone in the bank hates has a position in the Executive Suite. Enough said, except that I will have the right to tell her when she crosses the "Leona line of indecency."
16. I hired an engineer from MIT's lab to modify my workstation (hardware and software) so as to detect any e-mail with a secret code prefix in the subject field. It will set off a siren and red light whenever designated officers of the bank use the code. If you use the code, I'll never say, "I didn't get your e-mail." You better not use that excuse with me.
17. Make sure our CIO is reading www.banktech.com/blog every Monday.

And now for a little compassion. I've been tested and examined hundreds of times. The 22 times I served as an expert witness were the toughest. The 321 times I was tested by bankers were the easiest. So who am I to say how bankers should be tested? I don't know if any former bank CEOs are in prison, and yet, the public has watched "60 Minutes" enough to know that CEOs in healthcare, telecommunications, energy, investment banking, politics, multifaceted conglomerates, home fashions, pharmaceuticals and computer software industries have served or are serving time. I am not 100 percent pure, so I call my 33-page c.v. "FULL DISCLOSURE." It worked for a banker in Central America when he spotted Hillary Clinton's former law firm on my list of 22 law firms that had hired me. I didn't use her name but he made the connection.

It's a tough world for bankers because of a higher standard, and a word that is often part of the bank's name -- "trust." For the past two years Compliance Solutions have been the hottest apps sold by bank tech vendors. The reason is regulatory mandates, and in my opinion, that's not good enough. I'd like to see some CEO mandates, for no other reason than to CTA. Information systems can do the job if only someone would wake up and build the technology.

Disclaimer: Art Gillis worked on a major project for SAIC 12 years ago. SAIC is not one of the 71 companies included in Automation in Banking - 2008, never has been. Art Gillis does not own any SAIC stock. Art Gillis doesn't know anyone at SAIC today.

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The Price of a Stock has Never Influenced My Recommendation of a Bank Tech Vendor

Posted on April 21, 2008

With all due respect, I realize that my bank clients and private equity clients care a lot about the performance of their investments in the stock market. I’m simply saying that as an advisor to banks that are searching for a new core applications software or service company, I deal with 814 criteria in making my final recommendation. The price performance of a vendor’s stock is not one of the 814.

That’s not to say I don’t play a game with stock prices once a year. There are two exhibits (out of 80) in my report that track stock prices. One is year-to-year, and the other is for the past 11 years. This is the story that one exhibit tells.

The period tracked is from April 15, 2007 to April 15, 2008. The IRS had nothing to do with my choice of dates. It’s just a date close to the cutoff date of my publication. There are 71 hand-picked vendors of tech software and services in the report. “Hand-picked” doesn’t mean I’m an elitist. Every year I invite companies that I believe have something good to offer financial institutions in the conduct of their technology-based operations. Some first-time invitees give me the brush-off, or they’re too busy to bother, or they say, “We get ten requests a day.” Suffice it to say I sure do have a bias for the 71 hand-picked. They range from IBM at $99 billion in revenue to small privately held companies that do $1 to $5 million in revenue. The small companies earned a place in the report, and the reasons are very obvious as one reads their company profile.

28 of the 71 are public companies.
12 are public companies whose entire business (or at least 95%) is bank IT-related.
This year, only 3 of the 12 showed an increase in the value of their stock. They are:
Yucheng Technologies (YTEC) 74%
Bottomline Technologies (EPAY) 17%
Computer Services, Inc. (CSVI) 6%

Whether performance as a tech company serving FIs and performance of a tech company as an investment have any logical correlation is for others to decide. Bank tech vendors have their job cut out for them during good times and bad times. And it’s pretty certain that 16,881 financial institutions in the U.S. aren’t going to scale back their IT engines the way mom controls the thermostat when energy prices hit the roof.

Disclaimer: Art Gillis is not an investment analyst, even though he delivers answers to questions from 92 private equity firms. He also admits that he doesn’t understand the ups and downs of the stock market, and thus, uses his bank to manage the household’s investments.

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Fewer Bank Tech Vendors, but More Solutions to be Had

Posted on April 14, 2008

Today, there are fewer bank tech companies, but more solutions in the marketplace.
In 2001, there were 165 companies selling 223 solutions to banks, thrifts and credit unions.
Today there are 71 companies selling 306 solutions. That's 57 percent fewer companies; 37 percent more solutions.

During the past seven years there were a total of 162 mergers and acquisitions in the account processing sector of banking technology.
Today there are 26 companies that offer core solutions.
15 of them do it both ways—outsource and in-house.
9 of them do outsourcing only.
2 offer software only.
The list of the Top 8 core companies hasn't changed in the past two years. That's a record. Previously, the lineup (players and rank) changed every year because of acquisitions.
The Top 8 have been around for decades except for Fidelity National Information Services, which in name only, is just over five years old. Counting FNIS's first acquisition in 2003, the company is 40 years old.
In 1999, the number of independent companies offering Internet Banking solutions peaked at 24.
Today, there are 2 independent Internet Banking companies.
Whereas the consolidation of core vendors was based on good acquisitions, the consolidation of Internet companies was mostly due to quick startups that failed quickly.
The paradigm du jour is likely to occur with companies building Remote Deposit and Mobile Banking solutions—Find an investor, Build a product, Establish a company, Gain some customers, Sell it to a large company.
4 offshore companies (India and China) are included in the report this year.
There are 132 pieces of any FI's technology pie, where "piece" is a technology-based resource (software and/or service) that supports what FIs do. One company cannot provide all 132, but the right three or four can.

I'm sure you could get by without the above trivia, but when I have 'em, I like to share 'em.

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These May be the Best of Times for Some Bank Tech Vendors

Posted on April 07, 2008

A few years ago, the stats were telling me that the #1 business (new core sales) for bank tech vendors was leveling off. Not dying, mind you, just leveling off from about 8 percent of the population to about 3 percent. The sale of core apps solutions is the sweetest sale any vendor can make for these reasons: It's the biggest thing every financial institution (16,881 in the U.S.) does. All FIs do it every day. It's so critical that FIs would be subjected to huge risk if just one night's processing didn't occur. And from a vendor's standpoint, that's where the money is. For example, each of the top three banks in the U.S. spends $5.25 billion a year on core processing. If Fiserv and Fidelity National had only one of the top three banks as their only customer, each company would earn more revenue than the thousands of banks that Fiserv and Fidelity work for now.

This slowdown occurred because after 40 years of building, coupled with a fear of the "root canal procedure" of all conversions, bankers said, "We're done with core systems." And this milestone had absolutely nothing to do with today's sour economy. Now that the economy is sick, however, and after Ben gave it the kiss of death with the "R-word," several pundits are proclaiming a slowdown in IT spending among banks. With all due respect for the big consulting firms that are borrowing bankers' Rolexes to tell them what time it is, it's the FUD factor, stupid, not the economy.

I found that out because I'm getting out more these days. While working in NYC, recently I contacted a Park Avenue psychiatrist to find out what causes bankers to hunker down on IT budgets when other things appear to be going south. I first thought of going to Woody Allen's shrink, but after Woody married his "daughter," I figured he wasn't receiving the best therapeutic help money can buy. The guy I chose was quite good according to all the things I learned on TV. He kept asking me, "What do YOU think of that?" So I did all the talking which is my favorite thing in the world.

When the hour was up, and I knew it was up because he said, "Our time's up now," I managed to squeeze in my last shot. For some reason I had an overwhelming urge to ask, "What's up, Doc?" but instead I asked him to give me the answer regarding banker behavior. He said, "FUD." You mean like in Elmer? No—Fear, Uncertainty and Doubt. I handed him the twelve hundred dollar fee in cash, took one more kleenex, and left. As I was leaving the antiques-furnished vestibule, his administrative assistant asked me to sign a release so they could use our most unusual session for an episode of "In Treatment." I declined, but I felt good because she was offering my cash that came to her in a tube just like the ones at drive up tellers. I realized then that this guy knew banking, and I was in the right place.

Just because bankers are scared out of their wits over the credit crunch, subprime mortgages, consumer pullbacks and an "R-word" economy, doesn't mean that they should ignore opportunities to beef-up their technology. Here's what smart bankers are buying, and have been buying for the past couple of years:

• Protecting the Bank: fraud detection/prevention, regulatory compliance, data security
• Remote Deposit
• Electronic Bill Presentment & Payments
• ATM and Debit Card enhancements
• Online (Internet) banking
• Image Solutions
• A wide range of Business Intelligence applications

It seems that alert bankers have recognized the need to shift their focus from "building the factory" to enhancing the value of the "system" where system means contribution to higher earnings, and in a worse case, protection of earnings earned.

Are tech vendors off the hook now? Not yet. Now they need to shake up the other half of the banking community that is still doing a Rip Van Winkle.

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Banking Needs In-Your-Face Sales People

Posted on March 31, 2008

If you think that I'm not qualified to dish out advice about selling because I am only a technology consultant, think again. My very first business venture at age 10 went through a rude awakening that I was able to overcome for one simple reason: I learned how to sell.

The business almost fell into the popular category of "most new businesses fail within the first year." I know I didn't do the right research. I didn't have any capital. I wasn't a visionary. I had no skills, just a lotta chutzpah. But how was I to know W.W.II would end in 1945. And did I expect my war heroes to come home and compete with me, the sole provider of ice cream at Foss Park?

My first year in business, just before the war ended, was all gold. I parked my loaded pushcart under a tree, found a cushy spot to rest my thin body and waited for every kid to come to me. If I didn't have root beer popsicles, they bought pineapple. If they didn't have a dime, they resigned themselves to buy a nickel fudgesicle, while their rich buddies enjoyed an ice cream sandwich.

I was heartless. Some kids who were broke, promised to pay tomorrow. I would hand them a piece of discarded wrapper and tell them to fill out a credit application. They didn’t have a clue about what I was asking them to do, so I sent them off to Arts & Crafts a little further up the park where the high school kids were in charge of training.

At the end of the day -- which by the way was the same time every banker took off to play golf -- I went home with an empty cart and weighted down by $30 worth of nickels, dimes, quarters and those damn pennies. My net interest margin was 50% of my sales figure, if you exclude sweat equity. I was one happy puppy, especially since my board of directors (my widowed Mom) marveled at my performance. This went on day after day until Labor Day when even enterprising kids went back to school.

The next year, everything changed. War veterans came home, and they too had the entrepreneurial bug. On opening day of the new season, I was alerted to an unfamiliar sound way off in the periphery. Jingle, jingle, jingle went the bell on Nick’s Ice Cream truck all shiny and new, with slogans on the truck promising all kinds of goodies that only today would be regarded as the stuff that contributes to obesity. All my former customers flocked to Nick’s truck. He even let them pull the chain to sound the siren. I became an overnight case of toast.

Today, I would call McKinsey & Company to develop a new strategy for me, or I might have hired Bear Stearns to find a buyer for my company. But back then, not willing to risk my savings that would eventually pay for four years' tuition, I decided to noodle my way through the problem.

I was in the perfect mode. The "board" was doing her thing as a seamstress making ends meet for the family. I had a lot of peace and quiet because I had no customers. So I sat on the cart and looked out into the landscape of Foss Park. I was so cool about the whole thing I nearly dosed off.

But then I noticed something that in the past I had overlooked. My territory included more than just kids. There were other prospects that I easily determined might enjoy the benefits of an ice cream. It’s just that they were not as mobile as the kids. So it was clear that I had to get off my butt and go to them.

I wheeled my push cart to every nook and cranny of the community. When I was under their noses, they couldn’t resist. And because they were Romeos, Seniors, Nannys and Grannys, they demanded the best. Also, when the competition struck, I immediately knew I had to have a better product. So I went to my buddy Billy Ryan whose dad worked for Hood’s Milk and got him to convince his dad to load up my push cart with the best ice cream in Boston as long as I stood at the corner of McGrath Highway and Broadway to receive my commitment of ice cream, rain or shine, every day.

Billy’s dad never missed a deliver, nor did I -- even though on rainy days I experienced a day of "reserve for loan losses." But on sunny days, my new customers bought from me because I delivered quality and I offered the convenience of being right where they were. My business venture was restored. I worked harder; I was more responsive; I went where my customers were; I offered a better product; and most of all, I was more humble. That’s the kind of experience that qualifies me to tell bankers to wake up and learn how to sell.

Several years ago, I created a paper model of what I called a "Valued Prospect Scoring System." The late Jack Henry liked it so much that he told me to brand it as the "Gillis Index." I did. Think of a credit scoring system for loan applicants and you’ve got the concept of the Gillis Index (GI) -- with one difference. There are no losers in the GI. Low scores just mean greater opportunities to sell something.

In its simplest form, my system identified prospects based on common sense attributes and produced a record with just enough data (no transactions data, please) to quantify the prospect and set them up for a sales call. The records could then be parsed out to calling offices and downloaded to the appropriate "owners." The next night, a calling officer could surf 100 or more prospects, depending on the action of the game on TV, and produce a call list for the following day.

After that, success depended on the personal skills of the calling officer. Oh, and did I tell you the technology was doable? I didn’t know because I had flunked Programming 101, and Jack Henry wasn’t sure either, so he asked Mike Henry, head of development, and Jerry Hall, cofounder, what they thought. They didn’t blow trumpets and cheer, but they acknowledged that because of integration, all the data were available to fill the cells for the GI automatically during the posting run.

If anything was missing (for example, the GI includes notations, such as other generations of the prospect that have banked with the Bank), it would give the calling officer a good excuse to call the prospect. This sales approach used the power of technology and the charm of a calling officer to do what John Reed, former CEO of Citibank, said when he announced that Citibank was out to get 6 billion customers -- one customer at a time.

Banking needs in-your-face sales people. Prospects bypass ads that offer one "oatmeal" for all. Snail mail ends up in the trash, unopened. Web sites are so cluttered that pop-ups just irritate a customer who wants to get a job done. And a teller's voice sounds a bit insincere: "Is there anything else I can do for you?" "Yeah, give me a subprime mortgage at a fixed rate of 4% for 30 years, no questions asked."

By Art Gillis,
Former Ice Cream Vendor Extraordinaire

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Forget 'Insider Information.' I'll Take 'Outsider' Any Day

Posted on March 24, 2008

First, I should tell you I have a relationship with two ladies at the Securities and Exchange Commission in Washington, DC. It started on May 21, 1999. I initiated the relationship by sending a general letter to the SEC about who I am, what I do, and a whole lotta claims of my innocence regarding what I know and don't know about a handful of public companies. I have six letters in the file from two ladies acknowledging my disclosures. They were not form letters. Each letter had a serial number. They told me how my letters would be distributed to interested parties within the SEC. You'll be happy to know this is your government at work—very efficient, very accountable and very responsive.

May I also add that I have never testified before Congress, never been sued, and never sued anyone. When I told a prominent Dallas lawyer (now a judge) I had never been sued, he said, "You haven't lived yet." So why am I spilling my guts here?

Just to say that it's very nice being an outsider and a no-power player. I see things what even the closest insider doesn't see. I see vendors as they really are, not as they want us to see them. I'm the little guy who doesn't matter, and gets brushed off sometimes. And therein lies the value of what is included in each vendor profile of my annual report. Sometimes it's what you don't see that counts rather than what a vendor wants you to see.

This is report season for me, and thus I have numerous dealings with tech vendors. The popular big seven in the report do the best job of reporting. Could that be because they earned their way into the big seven by practicing the banking rule of full disclosure? There are also a lot of small companies that do an excellent job of reporting. Some of them are privately owned and yet they still disclose everything. And then there are some companies, not in the report, that desperately need a consultant, preferably with marketing skills. If that doesn't work, a psychologist would be my final recommendation.

Be careful what you ask a vendor, because you may not get it. But that may be a good thing too. I'm glad I know what I don't know.

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Congratulations to All Who Were In the Bank Tech World In 1985, and Are Still Here to Remember

Posted on March 17, 2008

My bookcase contains 22 past editions of Automation in Banking. The 23rd is still in the oven. The 22 are dog-eared because I have had to refer to them many times to answer questions from very intelligent readers who had a need to know. Last week I read the 1985 Edition, and here are some highlights that got my attention:

• The content increased enormously in the current edition, and today's tech companies deserve all the credit. I don't believe there is a technology that even the wisest visionary can dream up that isn't provided by some of the 88 companies in the current edition. I couldn't make that statement in 1985. The best "consultants" in this space are the customers who feed their providers with new and better ways to get the job done. And that feeding process continues today.
• The 1985 Edition had some interesting metrics for that era, beginning with the graph on the cover. Initially, most community banks relied on their correspondent banks to service their technology needs. So outsourcing was hugely popular in 1970. Sixty-seven percent of all banks relied on their correspondent bank or a fledgling private service bureau to process their data. In 1985, outsourcing dropped to 51 percent. Today outsourcing is only 44 percent, but before you chip that in granite, you may like to know it's rising again in popularity.
• The core vendor lineup was different in 1985. Systematics (now Fidelity National Information Services) was the giant at $180 million in revenue. FFMC was second, NCR was third, Mellon Datacenter was fourth and Citicorp Information Resources was sixth. Oh, and Fiserv was #5 but very impatient. So in subsequent years it acquired #2, #3, #4 and #6 giving it a mass of $620 million if it had all occurred in 1985. M&I Data Services (now Metavante) was at $90 million and Jack Henry was cranking out $13 million.
• There were 113 companies offering core systems in either service bureau mode or in-house in 1985. In 2008 there are 13.
• Of the top 22 bank tech vendors in 1985, four are identifiable today as going concerns, and all are public companies (FISV, MV, JKHY, CSVI).
• Very large computer services companies couldn't seem to grasp the banking business. EDS mismanaged both the in-house and service bureau segments into no-growth businesses. It spun off the in-house piece to the employees, which then was acquired by Jack Henry. It sold the service bureau to a private equity firm that called it Aurum Technology, which then was acquired by Fidelity National. ADP spun off its thrift processing business and named it BISYS which was then acquired by Open Solutions Inc. Large correspondent banks destroyed the business, and eventually got out. One exception was M&I Bank and their exit last year was more elegant. There are still eight banks that offer computer services to banks but those processors are small banks or cooperatives.
• In 1985, the average monthly market price to computer process a retail or business customer account was 63 cents (all types of accounts). Today, there is no equivalent average customer account because of new types of accounts such as online banking and EBPP. Even so, the average monthly price is now 83 cents, a 32 percent increase in 23 years. During the same period, the CPI grew 64 percent. All things considered, I believe vendors are doing a darn good job of delivering the benefits of IT, both in cost and performance.
• The security of electronic data has taken a huge leap forward. In 1985, there wasn't even a category to display data security vendors. Now there are 16 solutions in the report. If it hadn't been for dual authentication and the initiatives of technology, banks would still be asking for "mother's maiden name." Sorry folks, that's a joke.
• In 1985 there were 10 top software companies that supported in-house systems for community banks. Today only five of them exist, two of which would probably never get your attention. Jack Henry acquired (rescued) four of them. Fiserv paid handsomely for two, and Metavante waited a long time but picked the orange just in time.
• 1984 and 1985 were considered the years of robust core conversions. By that time, in-house systems had proven themselves as proficient, economical and "dummy" safe. My stats show that approximately 1,000 community banks were converting each year. We'll never see that again.

Bankers, Aren't you glad it's 2008?

Vendors, Have you found the next silver bullets?

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Consolidation—Predictable for Banks, Anything Goes for Tech Vendors

Posted on March 10, 2008

It's numbers crunching season again for me, and my outlook has been confirmed as if a combined team of Big Four auditors ripped through my databases looking for errors, omissions and even fraudulent opinions.

The financial institutions landscape:
The number of banks, thrifts and credit unions continues to contract at the consistent average annual rate of 3.48 percent (2.4 percent to 7.7 percent for the past 18 years). I didn't round it; it's the real math, and the real numbers as reported by Highline Data and Callahan & Associates. So if you want to use a pretty good figure to project the next 10 years, may I suggest 3 percent? Don't ask me why it's 3 percent. Ask Alan and Ben. That part of the consolidation scene is as predictable as reading ads about bank CD offerings in your local newspaper. No matter where the dart lands, the answer will be the same. In 2008, 3 percent of all FIs will accept the fact that they are going to throw in the towel. On December 31, 2008 we'll know the 504 by name.

The bank tech vendor landscape:
Let's have some fun and go to the other sports arena where nothing is predictable. What will the consolidation factor among tech companies show in 2008 and beyond? First, here's a macro look at the players as they appear in Automation in Banking - 2008:

Total number of companies in the report 83 (I'll explain 83 later)
Total number of core providers with their own peripheral apps 23 (these are the dogs)
Independent peripheral apps companies 44 (these are the tails)
Total number of systems integration companies in banking 6 (these are the generics)
Total number of research companies 10 (aka fortune tellers)

The Dogs
The main players in this category are:
Fiserv, Fidelity National Information Services, Metavante, Jack Henry & Associates, Open Solutions Inc., and Harland Financial Solutions. These companies are the primary tech solutions providers for 71 percent of all FIs.

The Tails
The reason tails need a good dog can be explained in one word—integration. Banks want to use integrated systems and buying systems from seven or eight different vendors can't possibly add up to integration. Sometimes, even acquiring a tail doesn't necessarily mean it will be properly integrated to the dog. But the intent is to make it work—seamlessly, to use vendor parlance. The 44 tails are too numerous to mention here, but the criteria for acquisition include being successful at their specialty, having a specialty that is in demand, demonstrating active marketplace success and possessing traditional business capabilities so that the dogs don't have to waste a lot of time teaching the tails new tricks. Over time, these tails and dogs will find each other. In my opinion, the last major acquisition (FISV/CKFR) represented a close to perfect example of a dog and tail marriage.

The Generics
There are 11 systems integration companies that perform all manner of tech services in most of the vertical industries. Banking is their sweet spot. However, these companies are like "all hat and no cattle." They do not own banking solutions. Five of them should be rounding up the cattle right now. They are IBM, Accenture, EDS, CSC and H-P. The fatted cattle that would appeal the most to the giant acquirers, as far as I'm concerned, are grazing comfortably in Brookfield and Jacksonville.

The near term M&A scene
I subscribe to the adage of, "Ask me no questions and I'll tell you no lies," so I never tread in anything that might look like "confidential" information. All my predictions come from the gut. I doubt if the generics will make any moves soon. IBM said it will acquire a data security company soon. It didn't. Mr. Palmisano said he is not planning any major acquisitions. He will. The ripe situations for M&A lie within the top six core companies, and I believe the 2009 Edition of my report will show there will be four.

Why 83 companies?
I published the first edition of Automation in Banking 23 years ago. At that time, I handpicked the companies to be included in the report using a single criterion—those companies were in the spotlight of what bankers needed in their pursuit of a better data processing system. Today, only 20 percent of the 83 are "originals." The remaining 66 came later as new technologies evolved, as global markets developed, as entrepreneurs saw a need to spread their wings and as wannabes developed into been-there-done-thats. My process has not been entirely successful, however. For example, I invite a few good companies each year to show what they've got, but I get the cold shoulder from some of them. Go figure.

Disclaimer: The only bank tech companies that Art Gillis owns stock in are two that gave him the cold shoulder.

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You Don't Tug On Superman's Cape, So Don't Mistreat the Sales Guy

Posted on March 03, 2008

Forgive me folks, but half of what I learned about human behavior came from the lyrics of pop and country music: Thus, the first part of the title of this blog.

I have always empathized with sales guys. They have the toughest job in our business because they are in the front lines, often alone, their audience is the enemy, and to make matters worse, they are constantly nagged by the win or lose outcome of their efforts--nothing in between. This story is about helping a rookie sales guy who left the confines of the brain trust territory to sell a technology in the land of "The Big Easy."

A few years ago, I got a call from the Chairman and CEO of a large bank who asked me to go to his city to help out in a computer crisis. He was a trustee at a very large and prestigious medical institution (in the class of Mayo Clinic, Cleveland Clinic, Scott & White and Palo Alto Clinic) and he was concerned that they were falling apart with regard to technology. I resisted by saying, "Antoine, just because I'm good at banking doesn't make me an expert in the blood and guts business." He answered with, "OK, just come and have lunch with me and their CFO. Do it as a favor." The next day I was on a Delta flight to New Orleans and the only thing on my mind was crawfish étouffée at Bon Ton. That led to a five-year consulting project that I absolutely adored.

In an effort to expand the use of technology from bean counting to physician support, we invited a company from Cambridge, Mass., to tell us about its new voice recognition system. Do I have to tell you that doctors' penmanship stinks? And that they love Montblanc fountain pens, but they despise keyboards? Just imagine that kind of record keeping as it relates to our health. Is that word "fatal" or "natal?" So when 30 plus white-coats showed up at the presentation, I wasn't surprised. The only thing that worried me a bit was the rookie. And I was right because he couldn't handle the intimidation of addressing some of the world's foremost physicians in his attempt to convince them that this system would make them better doctors.

It didn't take more than ten minutes for me to see the kid was going down. The beads of sweat on his face were obvious. The cottonmouth was another symptom. The hands shook. The complexion paled. His message was getting lost, but no one reacted. I couldn't stand the pain any longer even though I knew, when the kid collapsed, there was plenty of talent in the room to revive him. I didn't wait for that. I did what any arrogant consultant would do--take the spotlight off him and put it on me. I performed a typical Steve Martin wild-and-crazy-guy-act to break up the scene by directing the presentation to a very practical concern: "How does this system recognize weird accents like we have here in New Orleans? Let's try a demo right now since we have the real McCoys sitting here." The kid came to and the entire mood changed. Everyone got involved. The doctors focused on the system, not the presentation. Is that a good thing?

The end of this story does not parallel a fairy tell. The clinic didn't buy the system. Was it the rookie's fault? I don't think so. Does the clinic now have a voice recognition system? I don't think so. Should we have allowed the rookie to suffer emotional breakdown in his attempt to do a good job? NEVER. Should the company CEO have accompanied the kid to provide his support and make an impression on this blue ribbon audience? YOUBETCHA!

Be nice to your sales guy. He/she may just be the only link you have to a very strong solution.

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If I Were The CFO Of A Bank Tech Services Company, I Would...

Posted on February 25, 2008

You can fill in the rest of that title statement as you see fit. The reason I am writing this analysis is because clear-thinking investment analysts believe that when banks are in trouble, they will cut back on tech spending, among other expenses. That's a logical position to take, at least on the surface, but there's more to this issue than a surface look, and I'd like to explain the details.

This is how I would complete the title statement. ...do the following three things:

1. Identify the REAL problems first

• Is it the earnings and credit problems banks are facing that will curtail the revenue of any bank tech company?
• Is it tech maturity that will slow down new sales?
• Is it the absence of new first-time technologies that will slow down new sales?
• Has all technology run its course as a high-growth industry?

2. Develop answers that represent the real world

• No, to recurring processing revenue; maybe to new projects scheduled for 2008 and 2009.
• Yes. Most banks have been building their IT capabilities for the past 35 years, some would say 50 years, and now they have pretty much completed the building process.
• Yes. There are eight hot apps that banks are buying, but they are not entirely new and there's nothing brand new coming in the future. The 8 are hot only because the stragglers have finally entered the market to buy. The nothing-new problem is a first-time phenomenon since I've been tracking the industry during the past four decades.
• Maybe. The major generic software companies plus the top eleven systems integration companies might be putting on an optimistic face in public, but they are sweating bullets in the confines of their shrinks' offices as they wonder what happened to the good ol' days. None of these companies that cover all vertical industries are experiencing strong growth.

3. Arrive at a conclusion

Any responsible CFO had better adjust the operating costs of his company to coincide with the model of a Wonder Bread as opposed to that of an Apple Computer. The triple whammy of maturity, nothing new, and banker FUD is definitely going to have a reduced impact on bank tech company revenues.

In order to understand the impact of today's banking problems on IT, I'd like to address just a few examples of what one can expect. And none of this even comes close to insider information because I am the model of "outsider." These are my own thoughts as evidenced by the style of my writing.

• Countrywide may be a countrymile from recovery, even with Bank of America's rescue, but will Countrywide's technology suffer? NO. Even bad loans never disappear from the processing of a bank's work. So in-place technology will continue to run, maintenance will continue and reporting may even increase. Some day if BofA chooses to convert Countrywide's work to BofA's systems, that event will just result in more spending for BofA.

• Would the CFOs of troubled banks approach their Tech Provider to negotiate reduced charges? Only if those CFOs are under the age of twenty-one.

• If a bank using in-house systems fails, would the Tech Provider feel their loss? YES, to the extent that software maintenance fees would disappear. All other provider-related costs for the bank were sunk costs, paid for and unrecoverable, so providers got their due.

• If a bank using outsource services fails, would the Tech Provider feel their loss? Emotionally YES. But unlike the thirties, banks don't disappear completely anymore. The bank would still operate and the Tech Provider would continue to earn its revenue.

• When a bank loses money is it likely to delay new projects? YES. Regardless of how much intelligent analyses can be presented to the management of many banks, the FUD factor freezes intelligence and embraces emotions. "It's the psychology, stupid."

• Are any of the eight popular "new" technologies frivolous enough so as to be put in the back burner and not noticed? NO. In my opinion the eight are sound, practical and in some cases, solutions to present-day earnings deficiencies. For example, one is the application of IT to restore credit quality monitoring and enhance loan administration. On the side of customer service, Remote Capture is so practical, economical and efficient, that bank customers would revolt if their bank couldn't offer it. If you pinned me to the wall and forced me to drop one, it would be Wealth Management. I doubt if Northern Trust or Bank of New York would agree with me on that one.

• Is it likely that any bank IT operation will be "punished" as a result of losses from subprimes, credit crunch, or investment banking operations? NO. If some banks take a cleaver to IT, it will be because there was too much fat there to begin with.

• If a bank CEO forced his CFO to cut 10% from IT, without any discussion, where would the cuts be made? In a well-run bank, there are no good options. Cutting IT costs would be like doing 90% of the work. Whose accounts would the bank not process? In a poorly run bank, the cuts would have to come from HR.

So what will the revenue picture be for bank tech providers in 2008? Organic growth of from 3% to 7%. But the 7% is theoretical. If these companies changed their sales strategies to those of Accenturites, they could see the 7%.

Comments

Once Again, It's The Economy, Stupid

Posted on February 19, 2008

I don't know if Alan or Ben ever used some of my indicators to gauge the economy. Here are a few signals that I have observed which lead me to believe all is not well in the business world. If you're looking for deep-rooted intellectual thoughts here, then just know I can't deliver that caliber of economics. My stuff is in-your-face observations from the chores conducted by a small business owner. That means I'm not talking about my consulting practice.

• Every telemarketer is coming out of the woodwork to try in desperation to sell something, and they haven't done any homework or screening. Here's an example: "Do you guys have a store front?" I didn't hang on to that call to find out why, but I suspect he's selling signs.

• It's as if my business has gone global all of a sudden. The accents are so thick, I can't even decipher two words. Here's an example: "We have good price on muddah boahds."

• Some things never change. We had a guy at the bank whose first stop on Fridays was the florist. He'd buy a couple of flower arrangements and drive around town looking for "Grand Opening" signs. This morning I got a call from a guy at Wachovia who was in his car, his cell phone was breaking up, and I believe he wanted to know how I manage my banking. I told him to pull over before he had a wreck, but either "pull over" didn't translate in his native language, or he hit a dead zone. I wasn't familiar with this kind of mobile banking - auto-mobile banking, that is. I hope it doesn't catch on. Road rage is causing enough trouble as it is.

• I'm not picking on Wachovia. Every major bank in Dallas is calling me these days. Dallas has 11 from the list of top 35. Their techniques are different, but their messages are all the same. Comerica wants to impress me by using a woman to set up a visit for Mr. Bigshot. I pass just because of the method they use. Wells Fargo knows something about my business because they process my publishing business's credit card transactions. I like their sales approach the best. Their junk mail and the credit card report are easy to separate. My slam-dunks to the trash bucket are getting better. Capital One uses a padded oversized package for nothing more than paper. But they fooled me. I was expecting a free gift. The trick worked only once. Northern Trust doesn't know me, and that's because they have a binary screening system. It goes something like this: Is this guy a billionaire? Chase doesn't call. They send mail every week. Citi sends me e-mails, which by now should be regarded equivalent to an e-mail from al-quaeda. Even the word "bank" gets any e-mail chucked to the spamfolder.

• Bank of America has all my business - 14 accounts to be exact. They never approach me, not once in eleven years. That's smart. What else can they sell? De novos have been popping up on every corner of close-in Dallas. It seems to me they would have the perfect pitch - "We're local." I've never heard from them, not even the one where some former EDSers work (own).

• Is there an opportunity here for marketing consultants who specialize in banking? Were risk management consultants advising banks about the danger of subprime mortgages a couple of years ago? It's been said a million times, and I'll paraphrase - lemons can be converted to sweet lemonade. But most bank marketers don't have the sugar.

• It's not just Macy's that's dumping employees. A lot of service companies are cutting back. A large Kinkos center that serves mostly commercial customers has only three employees at the counter. One of them is wearing a tie. He's the manager and he knows the shop is understaffed. As soon as a customer gets through the door he says, "We'll be with you in a second." That's a euphemism for, "I hope you have nothing better to do today because you're gonna be here a while."

• My fax machine now operates exclusively for the benefit of unsolicited offers. Because the offers are narrowly defined, I suspect a dumb marketing system has profiled me as a guy who needs health and life insurance, has tons of money to buy penny stocks, and goes to Orlando a lot. All wrong, but, hey, that's what they're selling. The price of everything is either $99 or 99 cents. I'm sorry I didn't price my report on bank technology at $999.99.

• Even telemarketers are feeling the pinch and have gone from offshore to recorded messages at 9:00 PM. Some of them hit at prime time, but they start out with the perfect reason to hang up. "This is not a joke" or "Don't hang up." One guy calls me once a month because he has a client who wants to buy my business. He calls at night and his client must be the most patient guy looking to buy a business because this has been going on for several months. I recognize the voice as if I had the benefit of the FBI's voice detection systems.

• The offers are now up to a half million dollar line of credit for a tiny company like mine. It's not real, but I wonder how many subprime mortgage holders fell for that trap as they now walk away from their homes.

On a 60 Minutes segment recently I heard Andrea Mitchell say she couldn't get a straight answer from Alan Greenspan when she asked him what he wanted for breakfast. Instead she got his usual convoluted reply so often presented to Congress. So that's how I see it, folks. It's definitely a weak economy, and one should think carefully about offers that can be refused. At the same time, there's room for doing the right things during bad times. Get a grip, use your head, and wait it out.

Comments

Spammers, Phishers, Fraudsters and Dumb Internetpeddlers Oughta Attend a Seminar

Posted on February 11, 2008

It's been at least 15 years since I "enrolled" on the Internet, and I knew it would take a while for it to mature, where mature means getting rid of the scam artists. I was wrong. The Internet will never mature to my idea of a clean, wholesome resource. Today's interlopers must think we're all stupid, and we'll fall for their con games. So I took matters into my own hands, or fingers, and learned how to bypass the abuse. I offer some tips, although I'm sure you have your own.

• avoid any e-mail that uses all caps in the subject. All caps is like a car salesman screaming at you for emphasis. Would you buy his pitch or change the channel?
• avoid any e-mail that uses punctuation marks in the subject. Legitimate senders don't have time for grammar.
• The word "update" is worse than the word "steal" in the minds of screening systems. I now use "send me your fresh data" when I update my annual research report, instead of "please update your company profile." "Please" is also a bad word because crooks think politeness will get them past a spam hurdle.
• avoid any e-mail that uses the word "friend." Real friends don't have to call you one.
• avoid any e-mail that uses the word "investment," especially if it's from your brother in law.
• "congratulations" and "you have won" are also lies. If you ever win anything, you won't find out about it on the Internet.
• anything foreign is automatically a scam. Italian, French, German and Arabic are popular languages used.
• avoid ANY e-mail from Nigeria.
• "unclaimed accounts" are like oceanfront property in Arizona.
• Have you read about the snake oil salesman who rolled into town offering the elixir that cured every pain? If you believe that sort of thing today, click on.
• Are you obese? Then pills, mail order food, a book, or a chanting guru won't solve your problem. The delete key is a good exercise for you, in addition to the best cure of all - push-away from the table.
• In looking for healthcare reform your best bets are Hillary or McCain, and if you can't find solace in them, just know that a rainbow sherbet cone at Baskin-Robbins will make you feel better than anything you'll find on the Internet, and at a price anyone can afford.
• I have nothing to do with ebay or paypal, so I know all these guys who want to buy something from me can't be real. Another clue is that my pseudo account was supposed to have been suspended years ago, but I still get e-mails threatening to suspend.
• My banks never send me e-mails, so when I get one from any bank, I know it's a bad guy.
• Lookin' for luv? I'm not sixteen anymore when I was in love with Marilyn Monroe. So any invitation for romance has got to be a virtual figment of some weirdo's imagination.

Now here's the worse part, folks. About one percent of the time I see an e-mail that my internet service provider suspected was evil, but turned out to be a legitimate sender. That sender used all the "wrong" words and was diverted to my spamfolder. Given the chance, I drag them back to the field of legitimacy. So finally, my best advice to you is don't dig your heels in. Who knows, a modern day Marilyn Monroe may be out there looking for a guy just like you, who saw you racing through the mall last night. How legitimate is that?

If you need a silver lining to hold on to with respect to all the good things that the Internet has to offer, here's one. Originally there were 14 candidates for president. Never did I receive even a hint of an offer from any of them for my vote - not a stay in the LIncoln Bedroom, a State Dinner at the White House, a tax-free year, a weekend at Camp David, quail hunting on an every-man-for-himself protective shoot, an 18-hole contest with the Pres while mentioning certain parts of the female anatomy, a free tour of Baghdad in a pre fully-armored humvee, or a DVD of W's last state of the union address. Now this is an Internet you can respect, folks.

Comments

So You'd Like To See Some Changes In Banking, Eh?

Posted on February 04, 2008

Two years ago, I saw a list of opinions regarding his/her/their "own grandiose challenge to the industry." In my opinion, it was more like an in-your-dreams list, so I saved it to see if a couple of years would produce any kind of change close to the dream. The short answer is, it would take decades or fuggetaboutit. Here's the score card:

• Consolidation of U.S. bank and financial services regulatory agencies.

I believe there will be more specialist regulatory agencies thanks to SocGen and subprime, so give up any idea of fewer than the eight bank/federal agencies we now have.

• Creation of an independent financial-services consumer advocate.

Is Ralph Nader doing anything these days?

• Centralized U.S. government financial crime statistics, including those for identity theft.

A good goal, but only after the War in Iraq ends, we get universal health coverage, we solve the immigration problem, we educate every child to the level of excellence, we regain the respect we had back in 1777, and our economy competes on the basis of quality and performance rather than lowest price.

• Public online disclosure of both financial crimes and consumer complaints.

This isn't even a dream. It's a nightmare. In a world where any screwball can gain worldwide exposure, who is going to screen the legitimate complaints from the weirdo complaints?

• Consolidation of consumer protection laws.

So that it would take 18 lawyers to figure out which type of account is involved? I'd rather see an effort to dumb it down - the consumer protection laws, that is.

• Greater consumer protections on deposit accounts and credit cards for businesses, which lack nearly all protections available to consumers.

That'll have to wait until 2009 when the new lobbying firm of Cheney & Bush is established. You noticed Cheney got first billing just to preserve what's been going on for eight years.

• An industry move away from risk-based pricing on loans and the rewarding of high-balance customers on deposits.

Only after the Democrats win. If this has anything to do with equality like the one in our Constitution, then I'd expect Ross Perot and Jose Himenez would get the exact same terms and treatment in their application for a home equity loan. How real is that?

• Regulation for all. All financial institutions -- including finance companies, mortgage companies and industrial loan companies -- should be accountable to the same strong federal consumer protection and disclosure rules.

How does this reconcile with #1 - Consolidate regulatory agencies? It sounds like more government, more overlap and more confusion.

• Financial institutions should strive to offer special, fairly-priced accounts for those who never have had a checking account or credit card.

After the immigration problem is solved.

• Speed. Faster crediting of interest on deposits, which is only fair now that banks are debiting checking accounts faster.

Good idea, and after that, would you like to come to my house and see my baseball card collection?

• Choice of venue for complaints. Consumers opening bank accounts should not be required to submit to arbitration if they have a dispute with their bank.

Is there even one consumer in the U.S. who would do that now? This sounds like a change looking for a problem.

• More uniform disclosure of credit-card fees, interest rates and other pricing nuances. If a solicitation or ad offers an attractive rate, the institution should be required to display any catch to it in equal-size type.

I have a better idea. Caveat emptor, or read the fine print. Saying it differently, I have never been screwed by a bank since I opened my first bank account in 1945.

• Give notice. If terms of a bank account or credit card have changed, institutions should be required to provide in notices both what they are, and what they will be. Easy-to-read disclosure of specific account terms should be required with account approval notices.

I get those now and throw them away because I can't afford to take off time from life to read everything that comes in the mail. Is this another attempt to ask government to govern our lives?

• Universal default clauses should be prohibited on credit cards and loans. Rates and fees on a bank loans should not increase based upon a misstep with another unrelated customer account.

Another regulatory nightmare.

• More speed. Improved bank customer service response times.

I have a better idea. Bring the call centers back to Iowa, Montana, the Dakotas, etc. where speed will be improved by simply speaking English without the accent.

• Soldier solidarity. More financial education and assistance to our military, whose families are getting particularly clobbered by steep bank fees and unfair practices.

Haven't you heard? Hillary's going to end it on January 21, 2009 (day one). Besides, banking is not the main issue for our warriors. Start with rewards, bonuses, benefits and care. That's what they want, not seminars.

• More attention to bank online security. And along with that stronger guarantees of reimbursement to consumers who bank online. Elimination of phishing, viruses and hacking incidents that lead to both consumer and bank losses.

Now I'm not sure I did the right thing to save this list. I coulda gone to Disney World if I wanted to experience a series of fairy tales.

Comments

The Sky Might Be Falling, But IT Companies Are Protected

Posted on January 29, 2008

Three conditions affecting the banking business seem quite real and have already become visible in the form of poor earnings reports from the giants - losses in investment banking, the credit crunch and subprime mortgages. So it's natural to look to the left and right for other industries that might be affected. Of course, IT is a likely candidate for losses because as bank profitability goes, so goes IT investment. Maybe.

Here's my take on what the subprime problem means to IT companies - very little. Take a ride with me and see if you buy my typical consultant-type extrapolations.

1. There are approximately 67 million mortgages in the U.S. at the present time. 54 million are good. They are yours, mine and others that were acquired through traditional methods and paid for like coins on the tollway. Large mortgage companies like Countrywide would have loved to unwrap and display these mortgages to the bank examiners. Most of us would pay the mortgage before any other budget item. For example, I coulda gotten tickets to the Red Sox sweep, but instead I paid the monthly on my three mortgages.
2. Taking my usual conservative approach, and after watching last Sunday's 60 Minutes, I have assumed that 14 million mortgages are subprime. That may sound high to some of you, but I have learned that bad things usually get worse once we've uncovered the first signs.
3. Since mortgages have traditionally been a business for thrifts and large financial institutions, I'm arbitrarily putting half of them in the 145 large institutions, leaving 7 million subprimes in the 17,000 remaining banks, thrifts and credit unions that typically rely on outside help for IT.
4. The protection gets even better because only 44% of the 7 million subprimes are under the care of a third party processor. Those FIs that went in-house sorta remind me of the sign in antique shops - "You break it, you pay for it." We're now down to 3.1 million bummers.
5. Outsourced banks will pay a processor $6.00 per mortgage account per year just to do the computer processing. That means theoretically $18.6 million is subject to vanish from the revenue hoppers of outsource companies. I say theoretically because we all know even workout loans never really disappear. And we all know that IT vendor invoices are anything but crystal, so trying to get a credit for a hundred fewer mortgages is like asking American Airlines for a credit because I lost 10 pounds and they'll save on fuel.
6. If you look at the combined projected 2008 revenue for the top eight outsource companies, the $18.6 million doesn't even represent a half of 1% of the aggregate. Most of the top eight won't even be touched by subprime, but if a company is big in the mortgage processing business, it just stands to reason that exposure might touch that company for maybe half of the $18.6 million.

All in all, subprime is a problem, but not for the companies that process transactions.

Comments

There's A Big Void In the Bank Tech Community, And It's In The Sales Department

Posted on January 21, 2008

I have completed 154 consultations for 67 investment firms in the past two years. The analysts asked a lot of good questions (none that I didn't expect) about the performance of bank tech companies. However, no one ever asked me about the competence of the sales forces. Not one - nada, nyet, rien, niente, keine, tipote. So I feel the need to speak out about the overall condition of the bank tech vendor community, as I see it, including the good, bad, and ugly. Most of it is good, I'm happy to say.

• All the required products have been developed and most of them are good, some not so good, but hey, is this a perfect world? Do banks have bad loans?
• The right support teams are in place waiting for nagging calls from customers.


• The operating departments are doing a good job making sure trillions of transactions are processed correctly every day. We take that for granted, but it's an amazing accomplishment.
• Data security is pretty good. From day one, transaction processors were conscious of their obligation to properly manage other peoples' data. Governance by regulatory agencies also helped. Now if only they could figure out how to protect (and not lose) reels of magnetic tape containing customer data.
• R&D appears to be current because fewer customers are asking for new stuff anymore.
• Acquisitions are occurring at a consistent clip of about 30 per year, even though there's a shift to acquire companies unlike the acquirer.
• Integration is like dieting. We all want the benefits of it, but it's one hell of a challenge to achieve, except in sales brochures and ads.
• CFOs are counting their beans accurately and reporting honestly. I'm a bean counter (albeit an electronic one) and damn proud of it too.
• Tech company CEOs are still checking management reports after the fact as opposed to looking for what's going to go wrong three quarters down the road. So what's new? Bank CEOs are no better, and that makes it OK in a club-based business environment.
• A few CEOs are doing the Lee Iacocca exercise - walking the assembly line, talking to the workers, getting their hands dirty, and then returning to the power suite to kick ass and implement change. Unfortunately, some CEOs have only one thing on their mind - a street called Wall.
• The strategists are absent, unless you call the Monday morning management meetings a place where new strategies are discussed. Is there a Chief Strategy Officer in the house?

This sounds like a pretty tight ship, right? In my opinion, one piece is missing. The biggest void is in the sales department, and it is hugely apparent these days because "consultative selling" is what works. The problem is that most vendor sales organizations are still selling "left over" products, and that game ended about three years ago. The game now is to sell capabilities that will improve the performance of their customers - commercial banks, credit unions, thrifts and mortgage companies. If you don't know what I mean, let me use two examples to explain - Accenture and IBM Global Services. Accenture and IBM GS don't own banking products. They "own" 140k and 175k employees. What a lost opportunity for major bank tech vendors if large banks bring in Accenture or IBM with this work order: "We bought all the best products from Vendor X. Now help us to achieve the performance we need for a desired ROI."

I'd like to see the new breed of bank tech salesman with an MBA from Harvard, Stanford, Wharton, Sloan, Kellogg, Chicago, Tuck, Haas, Columbia or Stern, and a few years under his/her belt, join Fiserv, Fidelity National Information Services, Metavante, Jack Henry, Open Solutions, Harland Financial Solutions, Computer Services, Inc. or COCC as a plebe salesman. If my sweet dream were to continue I would have seen, for example, the rookie getting an appointment with Chuck Prince in January 2007 to discuss Risk Management. The opening remark would have been, "How would you like to keep your job for ten more years? Our Business Intelligence systems can tell you where Citi's biggest risks lie, and how you can soften the impact they are about to invoke. The stakes are high, $10 billion, but our fee will be only 1% of the risk, and your stockholders might just enjoy a flat year in the value of C's stock, along with their regular dividend. How good will that be in a treacherous economy that's heading our way?"

Will I ever see that kind of selling in the bank tech business? Will Ken and Jamie have to get the axe before it happens? It's time for banktech sales people to put away geekie stuff and rise to the power suite where the major league selling occurs.

Comments

2008 Persons of the Year - Bank Tech Sales Reps

Posted on January 14, 2008

With all due respect to the Cs in every bank tech company, show me a salesman who brings in the business, and I'll show you the person who is going to propel our industry into one very sweet higher level. I have met only 9 tech sales reps in 35 years who left a lasting impression on me, so don't expect a smashing 2008 unless the new breed of salesman is going to hit the streets soon.

The industry pundits have been calling bank tech a "commodity business," implying that every vendor's systems look alike. That isn't entirely true, but if I wanted to pick an argument about vendor comparisons, I'd choose this one. The salesman representing a good vendor can make the difference between winning and losing. Here are some unforgettable true stories about a few salesmen (you can add women today) who made the difference, and the stories still apply today. Just change the names. I chose the name of Larry in each case to preserve the modesty of the winners and to portray Bob Newhart's sitcom where the name Larry prevailed.

#1 Larry sold big iron, but not for IBM. In 1961, Larry worked for Honeywell, the company that wanted to be different by building a computer that delivered more. For example, while the rest of the pack was using half inch magnetic tape, Honeywell used three quarter inch tape. Oops you say. Well, the wider tape transferred more data in less time than the other drives, but also added a large measure of reliability. While Met Life was at Honeywell's showplace data center in Wellesley Hills, MA for a demonstration, the MIS Director (a dated title in between DP Manager and CIO) was smart enough to ask, "Why create something that's incompatible with the rest of the world?" Honeywell had two other major innovations that the other computer companies didn't have, an English language programming tool before anyone had ever dreamed of COBOL, and the ability to do multiprocessing long before that capability hit the scene. The challenge that innovation faces is how to present engineering marvels as a business benefit, not just as a raw technology. That's where Larry comes in. He gave a dissertation on Orthotronic Control (a term the Honeywell marketing guys coined) that described a process whereby bad data on a tape was automatically corrected by the system thus sending data forward without stopping the process to manually correct the bits. Is this hitting at the core of what insurance companies need? Larry did such a magnificent job that no other person dared challenge the demonstration, which made my job easier. Met Life turned out to be a huge customer. After the demo, I told Larry his performance was greater than Lincoln's Gettysburg Address. He didn't expect the compliment because in the land of brain trusts (Harvard/MIT) salesmen were considered one notch above clowns. The Met Life guys took the Eastern Shuttle back to NYC. Larry wanted to celebrate so he asked me to join him for dinner at Locke Ober's. I said, "Get real, Larry. You just achieved a techno conquest today but when a Jew and a Greek show up at Locke Ober's on a busy Friday night there won't be a table available at this Boston Brahman establishment unless your name is Lodge, Winthrop or Peabody." An hour later, I was sipping lobster bisque at Locke Ober's while Larry was "holding court" about his next big challenge, and the maitre d' couldn't do enough for him.

Here are the attributes that put Larry at the top of his profession:

• Chutzpah. Larry acted like the CEO of Honeywell. He convinced Met Life that they were number one and he could marshall all the corporate resources to deliver what they needed. I almost believed that he convinced the maitre d' he was JFK's cousin.


• Intelligence. Larry wasn't a glad hander. He succeeded by knowing all the answers. Larry must have spent hours doing his homework.
  
• Larry dressed well. Even in 2008, it's important to look the part. In New Hampshire voters were saying Mitt Romney looked presidential even though they didn't choose him. If Larry had dressed like a slob, he would never have earned the opportunity to describe Orthotronic Control. How valuable was that?


• Larry was always ahead of the curve, looking for the next big deal.


• Leadership. Larry had to make two sales, one to Met Life and the other to Honeywell. Both mattered even though a complainer would say it was unfair. Larry never complained.


• Larry had the right mother. Everyone liked Larry, but not because he was a pushover. People love a winner.

How many guys like Larry have you met? Leave me a comment and let me know. I'll tell you about the other eight I met later.

Comments

Year-End: Joys, Ho-Hums, A Pause that Refreshes Some and Disappoints Others, An Overnight Credit Crunch and Mortgage Disaster, One Big Acquisition, A Few Surprises, and A Whole Lotta FUD

Posted on January 03, 2008

In my view, 2007 was not a Boston-Sports-Teams year for the banktech business. There were some losers in our arena, as well as lots of worries; a large number of lower stock prices for banks and techs; a ninth inning attitude among bankers who achieved a good-enough system to get the job done, and then took a rest; certainly nothing new and exciting showed up to compete with the likes of Apple Computer. But one has to recognize the good things. For example, U.S. banking transactions got posted accurately and on time during 4,308,198 posting runs in 2007. Presumably 112 million households were pleased with the processing of their accounts. And I believe business customers got the same accuracy and timeliness. The press had far more compelling events to write about than to look for banking glitches. I was interviewed for only two failures in 2007 and both were ATM related, and both were corrected within 24 hours.

I don't know how your world looked, but here's how banktech looked from my perch.

1. What the banktech business needs now is a "clear thinker with no baggage." After 50 years of addressing fragmented requirements from dutiful bankers dedicated to serving their customers, CIOs and their suppliers have now reached a level that can be described as the bicycle tire tubes on my fifties-styled newspaper delivery vehicle. "Get a new bike" is what Ray, the distributor, commanded. And the metaphor continues. I had the largest paper route in Somerville, MA - 202 families, many of them W.W.II vets who wanted their paper on time when they returned from the factory every night. Excuses and apologies didn't work for my customers. I invested in a new bike using borrowed funds from Ray. I tried my bank first, but I was considered nonprime. Ray got his three bucks a week (sans interest) every Saturday after collections. Today, bankers (especially the giants) are still using patched systems while giving away their hard-earned profits to some mortgage holders. Where's the justice in that?
2. When I say a "clear thinker" I'm open to all manner of previously unacceptable members of the banking "Green Book" - tweenies, boomers, geeks, geezers, artists, scientists, einsteins, the ordinary, the nouveau wealthy, the multifaceted nationalities, the unbanked, the overbanked, the urbanites, suburbanites and ruralites, the gripers, and even the activists. I present that all-inclusive picture because banking is not just a business, it's a community service. The only ones excluded are the scammers, phishers, hackers, launderers, data snatchers, fraudsters and robbers.
3. A year ago, I had identified 23 core companies as potential candidates for acquisition, only because they were independent and they were core. I zeroed in on five of them as "could happen" candidates; the others as "after all the glaciers melt." None of the 23 was acquired. "Wait till next year" as we in Red Sox Nation used to say.
4. One giant acquisition took the spotlight from the other 22 rather uneventful ones. The Fiserv/CheckFree deal just had to happen for the good of all parties concerned. CheckFree was a very good "tail" that needed a very good "dog" to wag it. I expected it to happen two years before it did, and it should have happened then because there will be a natural gear-up phase of a couple of years before the benefits of fresh revenue start to roll. This is not an overnight sensation even when trying to sell CheckFree's EBPP to a strong Fiserv customer. Since Fiserv was not ignoring the electronic payments business, it had its own solutions to sell. I therefore believe existing EBPP Fiserv customers won't be too excited about doing another conversion just to get a "better" EBPP offering. In my opinion, if Fiserv is serious about generating $125 million in synergy revenue, it will have to get it from new sources such as the fewer than 500 small banks and credit unions that will be shopping for a new core system in 2008.
5. Bankers have always been slow to react to new things. It took 12 years for ATMs to hit a confident stride. Internet banking is still viewed as a risky way to do business so it's taking longer than 12 years to come up to speed. Consider the following time factors:
   • The Internet reached the early adopters as a usable comfort tool in 1992.
   • Tech companies introduced their first Internet Banking solutions in 1995 and 1997. You won't know them by their original names today because they were smart enough to sell out at their peak.
   • Today, only about 41% of U.S. households use Internet Banking, and I suspect a lot of them just to check their balances.
   • If the greenhouse problem moves at the same rate as banktech innovation, we won't be swimming in glacier waters in January for some time to come. That's a good thing, Al.
6. Bankers love "toaster technology." Where do I plug it in? Remote capture was such a technology and it took off without the usual vendor arm-twisting. As Bob Hope used to say, "If the audience had to stop and think about the punch line, it was a bad joke." My father liked Bob Hope, but I never forgot his advice on reactions. Bankers are not thinkers. They are mechanics. Here's the sales pitch: At $3.00 plus for a gallon of gas plus labor, you don't need a courier or your employee to drive to the branch. Do it yourself from the source, truncate the paper, reconcile, and get instant credit. Remote capture was the hottest new technology in 2007. There were seven others:
   • Anything having to do with protection - compliance, security, fraud prevention, privacy
   • Any transaction handled electronically - EBPP, EFT
   • Business Intelligence, Data Warehouse, Intuitive Retrieval (the third one is my term)
   • Electronic Check Clearing (aka Check 21)
   • Credit Quality Surveillance (who will be the bad guys)
   • Wealth Management (Joe 6 Pax and Couch Potatoes need not apply)
   • Treasury Services & Cash Management reborn
7. While the prestigious business press love to promote the tech wisdom of large banks, we in the trenches know that the unsung little banks have the best technology in the world. 145 large banks are still using 40-year-old technology with no relief in sight other than the promises of pundits that there will be mass conversions occurring soon. But there hasn't been a core conversion in the Big 145 for years. Is this something to worry about? Only if you are a CIO at a big bank and you're 50 years old or younger. Anyone older will leave legacy systems conversions to their successors as they drift off towards the sunset.
8. Almost overnight the U.S. banktech market has been invaded by threats of companies like i-flex solutions, Infosys, TEMENOS, Misys and Tata Consultancy. And their sights are on the giant banks. i-flex has help from its majority owner, Oracle, while TEMENOS partnered with Metavante. None of the five has made even the slightest inroads as yet. These companies have the right system architecture, but they failed to realize that bankers are still buying functionality, and the U.S. legacy systems have tons of functionality. "Legacy" may be a dirty word in the tech world, but bankers see it as a synonym for experience.
9. What was once a vibrant revenue generator has now become an "also ran." Core systems sales are at a churn rate of only 3% a year and dropping. If one looks behind that rate, the stat gets worse. 34% are de novo banks, 22% are credit unions, and 44% are banks. Some day those three groups will have crossed the finish line, and then what.
10. Even the dreamers can't come up with a wish list that would require drawing board activity. There are solutions, there are choices, and there are responsible vendors who can implement and support them. What more can any industry ask for?

What can you expect in 2008? Here's a clue. I'm saving this blog so next January I can just make a few updates and save me hours of work in preparing my annual blog. And that ain't all bad. We are not in the entertainment business, and I'm not a PR guy. If you see any dreamers in your travels, let me know. I'm tired of dealing with bean counters.

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Timing Isn't Everything. It Just Separates The Winners From The Losers

Posted on December 28, 2007

Domestic core system vendors vs. International core system vendors. Every week I read about a new sale made by either i-flex solutions, TEMENOS, Infosys, Misys, or Tata Consultancy, and they are mostly significant sales. But their marketplace is not the U.S. There's a more active market out there called "the rest of the world." While this robust new business activity is taking place, U.S. vendors are still looking for the passport office.

I believe the top core vendors in the U.S. (FISV, FIS, MV and JKHY) missed the boat by not seeing early signs of new opportunities about ten years ago. But who can blame them? Ten years ago, core business in the U.S. was still churning at about 8% of the population. Now that the rate is only 3%, it seems the opportunity to jump into the international arena has diminished as a result of stronger foreign competition.

Maybe there's a solution. Oracle found it as an 86% owner of i-flex. Metavante partially found it by "dating" TEMENOS. Do I hear a bid for Misys, Infosys or Tata? There's one great synergy that I believe is possible if domestic and international tech vendors got together. The domestic guys know the banking business better than anyone, even though their system architecture is far too old. The international guys have modern day system architecture, but still have a lot to learn about how to make a bank really work efficiently.

I understand it's Christmas Eve, folks. I better get going otherwise it'll be my goose that gets cooked. Season's Greetings to all.

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Risk Management - A Science, Art Form, Gut Feel, Experience, Or Biometrics

Posted on December 17, 2007

To all the guys in our business who have made the tough loans during good times and bad times, let me confess. I've never been there. I only watched, and here are some things I discovered about lending.

While working as an IT guy for a large regional bank in Providence, I got a call from an ethnic-based loan company in Fall River, Massachusetts. The owner wanted to know if we could automate their loan portfolio and transaction processing. Business was robust and they couldn't keep up with their manual system. Six months later, and 10 pounds heavier (the owner would only meet with us after hours during dinner which he gladly paid for), I was pleased to announce that our Installment Loan system had been customized to do the job. During the celebration dinner (after the conversion), I made the naive mistake of asking the owner how the loan company evaluated loan applicants. He said, "We ask them two questions. Do you have a job? Where are the Azores located? If the answers were "yes" and "about 1000 miles west of Lisbon, the loan was approved." When I asked what the default rate was, the owner laughed. "What do you think we are a bank?" These people don't default. How nice to know your customers.

When I launched my consulting practice, I thought it would be wise to have a line of credit as backup in case I encountered some "on the beach" time. I walked into a Madison Avenue branch of First National City Bank of New York (now Citi), and spoke to a loan officer. All I had was a copy of my resume. When he asked me why I had left a prestigious consulting firm like Booz, Allen & Hamilton, I said, "There are 15,000 other banks besides First National City that need my services and can afford me." He said, "Sign here", and I had my $25K line of credit. Sometimes name dropping buys a lot of credibility.

As a fledgling independent consultant, I took any legitimate work I could get. One project was "handed" to me by a top official at the Department of Health Education and Welfare, to work as a sub on a contract to prevent Medicare fraud. The prime contractor was a fellow who had developed systems to spot the most-likely candidates who would cheat the system. During a lull in the project, and while enjoying a fine dinner at Le Cheval Blanc, I asked Dave if his system could spot poor credit risks also. You know you're dealing with a brilliant Ph.D. when he looks at you after he takes a sip of wine and quietly says, "I could do it." I set up a meeting with "the right guys" at Citibank and Dave made his pitch. A few weeks later Citibank sent us a deck of punched cards representing known cases and challenged Dave to identify the bad guys. Dave ran the data and sent the results to Citibank. In the NYC style of Mayor Ed Koch, I asked Citibank, "How'd we do?" Dave's results were over 95% accurate. The reason they couldn't be precise was because Citibank had misidentified some of their known cases. Sometimes science works.

One thing I never liked about the banking business is the line item called, "reserve for loan losses." In my business, I wouldn't dream of taking on a new client if I thought it would go sour. In banking, one could do a lot of things right during the year, and yet be wiped out if one segment of the business didn't work out as planned. I believe Chuck Prince might agree with me. Believing that technology might provide a few checks and balances in the process of evaluating lending situations, I had developed a concept to be used in loan committee meetings that would provide the "final answer" when the committee couldn't agree. But first, I wanted to test the concept with some trusted bankers who would not just patronize me. Their comments surprised me because most of them trusted biology more than technology. Here's what I heard. "I look the guy right in the eyes and I can tell if he's going to perform on the loan." "I trust my seat-of-the-pants judgment more than I do technology." "By the time I review the situation, I get a feeling in my gut that tells me what I should do." Having just read Gerd Gigerenzer's "Gut Feelings," I now might agree with that banker. A software company in Eden Prairie, MN didn't pay attention to my focus group testing and produced the concept as software to run on an IBM PC. They called it, "Decision Maker." I still have the first shrink-wrapped package complete with disk and user manual. It sits on my book shelf and it looks very professional in its box. It never made it outside the box, however. Biometrics prevailed.

To all the entrepreneurs out there, if you have a thirst to produce a technology that the more established tech vendors have overlooked, and even the wannabes, rush out to your garage and get to work. There couldn't be a better time.

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Innovator CIOs Are Everywhere But In Banking

Posted on December 10, 2007

Computerworld just published its list of the top 100 innovators. I am not one to be impressed by "beauty contests" but I like to see how others rank the best performers.

The list included all manner of institutions. For example, many organizations were the type that one usually doesn't consider innovative:

Oregon Department of Transportation
City of Tallahassee
State of Nebraska
Catholic Archdiocese of Philadelphia
New York State Court System
National Guard
University of the Pacific
Golden Gate University
New Mexico State University
George Mason University
Six Flags Inc.
U. S. Army
City of San Antonio
Peace Corps.
Marriott Vacation Club
U. S. Air Forces
Chicago Tribune
Salvation Army
U.S. Postal Service

I looked for banks and found only two. Citigroup Risk, Compliance and Legal and Wachovia Investment Banking. Not your core banking CIOs mind you. Go figure.

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Intuitive Business Decisions Could Get You Fired. Welcome To The Mortgage Business

Posted on December 03, 2007

It was on August 29, 2005 that I took my first cheap shot at the now fired CEO of Citi, after I had read a PR-type article in the American Banker. This was the shot: Mr. Prince says, with surprise, "Citibank can't put together four accounts of a retail customer." Even a rookie in today's bank tech world has to ask, is the year 1965? I believe the next operating committee meeting at Citibank might well begin with, "This is not about insurance, brokerage or other financial services. This is about banking. Is there a banker in this room who can lead the discussion?"

Some time after that I thought it was strange that Citibank was about to spend billions to change its name to Citi. Was that the solution to some kind of hidden hint that sub prime mortgages were about to hit the fan? Just think if the U.S. leadership, for example, used intuition rather than rock-solid intel and analysis from the CIA before going to war in Iraq. Oops, I voted for the man. The last time I had something to say about Citi was in a blog - "Don't get rid of the lawyer. Citi may need a good one or dozens to ward off litigious stockholders."

How is it that one bad business decision in a huge organization can almost destroy it? The answer to my own question is, the lack of internal "regulators" aka "no-men." In the case of Citi, I wonder how many yes-men applauded the idea of sub prime mortgages. I wonder how many of them were fired. In other words, CEOs don't know everything, and they're only as good as their team.

Look at the other two banks in the Big Three. BofA doesn't have any sub prime mortgages, but that bank took a hit because as Ken Lewis put it, he's had all the fun he can stand in investment banking. In the case of Chase, poetic justice plays. Jamie Dimon didn't get the top job at Citi so he went to Bank One and now leads Chase. Maybe Chase will acquire Citi just to set the record straight that Jamie was the right man. After all, Chase hasn't screwed up anything so far. Maybe they use the right computer models based on good old fashioned banking business.

Don't get me wrong. Intuition is a good thing to have when you're running a bank, as long as nothing bad happens on your watch. And this from a guy who knows nothing about running a bank.

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Banks Do It, Home Builders Do It, Automakers Do It, Consultants Do It, And Now, Even Bank Tech Vendors Might Lay Off Employees For The First Time In History

Posted on November 26, 2007

As if there isn't enough bad news about the economy, here I am adding to the heap before it even happens. As much as I don't like bad news, what's worse is bad news that comes as a surprise. So be prepared. Just follow the facts, and then draw your own conclusions.

1. Fiserv has never had a layoff. Nor has Metavante, Jack Henry, Open Solutions, Harland Financial Solutions, Computer Services, Inc. or COCC. It's hard to tell if Fidelity National Information Services has had any layoffs because they selectively discharged redundant employees as they acquired like companies, and I'm not sure that counts as a layoff. Suffice it to say, bank tech companies have been constantly adding employees to satisfy a growth record that never dipped in over 40 years.
2. Other companies in the tech business layoff employees routinely. Accenture, EDS, CSC, BearingPoint, Perot Systems, IBM, CGI and others are accustomed to layoffs because of the nature of their business - projects that have a beginning and an end. When a project ends, and another one isn't in the pipeline, employees are laid off.
3. Transaction processing companies are in it for the long haul, but when parts of their business meets with a decline, then ready-willing-and-able employees are no longer needed.
4. Right now, for the first time in fifty years, I see a leveling off in the bank tech arena which can simply be called "all the pieces of the bank tech pie are in place and working reasonably well." In fact, my stats showed signs that it was about to happen two or three years ago. The core apps churn rate dropped from a consistent 8% per year to about 3%.
5. When bank tech vendors aren't selling core apps systems, it's like Thanksgiving without a turkey. The trimmings are fine, but they all depend on what's at the center of the table.
6. Core apps work is the largest user of a vendor's human resource pool, thanks to that nightmare of a word, "conversions." If vendors are not installing as many core systems, what will they do with the people who did those jobs?
7. Organic growth among bank tech vendors is dropping to single digits. If the top line levels off, and the CFO wants to preserve the bottom line, it's the middle lines that need to be adjusted. 40% of the middle lines is one line - salaries and related fringe benefits. Since that line is the major and almost only variable expense, which one do you think is the best line item to cut?

I wish there was something new and exciting to replace dwindling core sales. In my opinion, current "trimmings" (security apps, EBPP, electronic check clearing, remote capture, credit management, and business intelligence) aren't enough to pick up the slack. Even the guys who need a new core system more than any other bank (the 128 large U.S. banks) are digging in their heels hoping their legacy systems will keep on posting. And for the first time in at least 40 years, I don't see a new silver bullet solution even in the distant future.

Which way is it to "Chindia?"

--Art Gillis
www.artgillis.com

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Enhancing The Blog

Posted on November 19, 2007

Last week's blog about large bank vs. small bank technology produced exceptionally good and meaningful feedback.  I believe the three respondents added new dimensions to my message, and thus I want to make sure everyone sees the wisdom of the three gentlemen who commented.

1. One reader agreed with the blog, but only as it related to core apps.  That's how I intended the message.  Correctly so, the reader pointed out that big banks are way ahead of smaller banks when it comes to customer-facing technologies.  He also concludes that smaller banks have not yet utilized the Internet to its full capacity.  Points well made.  I might even go a little further to say that small banks view their technology more like a factory.  It produces products (updated files and reports) every day, but seldom do small banks analyze.  The key term in the industry is "business intelligence."  The factory creates all manner of information resulting from the daily posting and updating of accounts, but information sits in the databases like gold in an untapped vein.  Big banks, on the other hand, have entire groups of analysts looking at data to figure out how the bank should develop marketing campaigns, price products, design new offerings, calculate product profitability, and sometimes, how to get rid of undesirable customers.  You don't believe the last one?
2.   My remarks about the two most popular core systems (JHA and ITI) triggered some reaction that clearly painted a different picture than the simple one I presented.  I have no doubt that the remarks of this reader were sincere. His experience with the ITI system reflected real-world difficulties with the cost of proprietary interfaces, the now-you-see-it, now-you-don't SOA, standard third party interfaces that need to be tweaked or the vendor will write any interface for a tidy sum, and the perception of a database file structure that is nothing more than a flat file buried in ITI's proprietary COBOL.  These comments come from a man who uses the ITI system as an outsource company.  That makes company look more like a large bank.  ITI's software serves at least a dozen such companies.  I respect his remarks and would only offer this follow up.  As a third party vendor, his company has legitimate challenges that make his job more costly and difficult.  At least his outsource company didn't have to procure a bunch of independent core apps and "glue" them together.  This story could go on and on, but I wonder what ITI has to say about it.
3.   The third responder gave credence to the value of integration and the high risk of conversion for large banks.  His contribution to the dilemma large banks face is to integrate customer and predictive analytics solutions using data sourced from the core to allow banks to develop targeted growth strategies and implement profit-based incentive programs.  Hidden in his solution is, leave the existing core apps alone.  I believe the large banks are taking his advise.  Even though large banks are using very old systems, there hasn't been a wave of core conversions in the U.S.

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Big Bank vs. Small Bank - Which One Has The Best Technology?

Posted on November 12, 2007


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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How Important Is Wall Street When a Bank Selects a Tech Vendor?

Posted on November 06, 2007


Short answer--not very. In the past week, the top four bank tech vendors made headlines--the kind that Wall Street notices. Metavante went public after thinking about it for several years. Fidelity National Information Services intends to split the company into two public companies. Fiserv sold off a major piece of its healthcare business. And Jack Henry announced a nice first quarter report. Forgive me, folks, if this stuff doesn't get to me like the Red Sox Sweep, and it's not that I don't care about 96 companies in my report.

It's just that when I am called upon to assist a bank in the selection of its primary tech vendor, I pay attention to 814 tests. The price of the stock is not one of them. What's interesting is that not a single client has ever asked me anything having to do with the price of a vendor's stock, the ownership of a vendor, the buyout of a vendor, or the financial strength/weakness of a particular vendor. In the old days, these questions would come up in seminar settings. What gets thrown around in a room full of bankers (the number was usually 35) is quite uninhibited. "What do you think of XYZ?" XYZ is a pseudonym for eight charlatans that once entered the marketplace like snake oil salesmen, and managed to rip off every customer they signed.

Bank examiners also love to ask questions at seminars. "Do you investigate the financial strength of vendors you recommend?" My answer to that one is very simple, and perhaps the only time I display humility. "When I chop the list of 76 theoretical solutions (the long list) down to 4 (the right-fit list), I take it for granted that other professionals, far better at auditing financial integrity than me, have already put the companies on the short list through the financial ringer. I don't have to burden my billing meter just to build up my fee." This I said before "Artie Andy" did their thing at Enron. I hope we can count on Deloitte & Touche, KPMG, Crowe Chizek and Blum, Shapiro & Co. to do their job well because I'm still committed to doing my job well and not interested in doing everybody else's job. And there you have it from the happy camper.



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It's Not the Economy That Will Hurt Bank Technology; It's Fear, Uncertainty and Doubt

Posted on October 29, 2007


There's a lot of bad news in the financial services sector these days, and I'm sure it's real — problems with subprime mortgages, problems with the investment banking units of large banks, poor quarterly earnings by some of the giant banks, downturn in the national economy, slump in the housing market, deterioration in credit quality, and not-so-encouraging comments by the Ben & Alan Duo saying things could get worse.

So what does this gloom and doom have to do with the business of bank technology, and why am I writing about it? Well, 20 percent of my client work is for investment companies, and having completed the 107th project this week for that group, I can report that their main concern right now is how the big bank tech companies will be affected by this negative set of circumstances.

Here are my answers:

• First take a deep breath and focus on the real villain. Technology didn't cause the current problems. If you were taking a cross country road trip in an RV and got lost in Iowa, you wouldn't blame the tires or the engine or the price of gas. It was you and the road map that got you in trouble.

• Technology is not a good scapegoat. The word, tweak, was popularized by technocrats, for the purpose of fine tuning the system on a daily basis. That's a good thing. But tweaking of IT budgets is not something bank managements should do in searching for relief when costs need to be cut. That's a bad thing.

• Technology investments are very long term and cannot be tampered with from quarter to quarter. Whether a bank outsources or uses an in-house system, IT costs are sunk costs. There's no turning back.

• What this means is that whatever is in the tech pipeline will stay in the pipeline and vendors will get their due.

• Of course, there are two conditions that will give bank tech vendors reasons for concern - 1) new projects could be delayed because of the FUD factor, and 2) some mortgage companies could be filing for Chapter 11. At that point, I would admit that this economy will hurt bank tech companies.

Two years ago, I was looking for reasons that would give bank tech companies a boost in revenue and couldn't find any. This recent downturn certainly hasn't added any optimism to my gloomy outlook.


Art Gillis
www.artgillis.com


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Banks Are Spending More On IT, But Vendors Are Not Getting It All

Posted on October 22, 2007


There's some VERY good news for bank tech vendors, and there's some PRETTY good news. But the BAD news is, most bank tech vendors don't see the hidden opportunities. First I'd like to explain what might appear as contradictions to anyone who has tracked my previous blogs.

This is what I have been saying:




1. Tech vendors have nothing new to sell to banks and there's nothing new on the horizon.


2. Most banks have hit a comfort zone with their technology that's just "good enough."


3. Switching from one vendor to another has no appeal to bankers because there's little to gain compared to the risk and disruption of a conversion.


4. Even though one could argue there are still too many tech vendors selling the same stuff to a saturated audience, only about four to six companies "need" to get their share of the sales. The rest are content with just being a player.



While the above conditions paint a dark situation for growth oriented vendors, there are some positive views as well. Banks are still big spenders of anything that looks like technology. From 1994 to 2006, the cost of IT increased by an annual average of 15.6%. Two groups experienced the strongest growth rate, and they are at both extremes of the spectrum - very large banks and credit unions. Their increase during the 13-year period was about the same, 260%.

Now the apparent contradiction appears. If banks are satisfied with their technology and there's nothing new to buy, why are they spending more? I believe the answer lies in a shift from buying products to paying internal costs to move technology onward and upward. And that's something vendors haven't figured out yet. Vendors are still doing product dog and pony shows instead of consulting type projects to figure out how their products can be utilized more efficiently. There are three metrics that support this argument:




1. At a bare minimum, any bank has to increase its annual IT cost 7% just to maintain the status quo. Nothing new added.


2. Average annual increases historically have been 15.6%.


3. In 2006, the average revenue increase for eight of the top bank tech vendors was 10.6%.

Thus I return to the theme of this blog. The money is being spent ($63.67 billion in 2006), but vendors are leaving a nice chunk of it on the table. This idea of doing more for a bank reminds me of the old term, "Facilities Management." Invented in the mid sixties, three companies (NationalSharedata, Systematics and EDS) had a very simple sales pitch, "Get back to banking and leave the technology to us."

-Art Gillis
www.artgillis.com


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Sometimes It Takes A Dr. Phil To Come Up With The Right Tech Decision

Posted on October 15, 2007


I have never viewed more than ten seconds of a Dr. Phil episode, so I apologize in advance if I used the wrong metaphor. And since I'm in an apologetic mood, I should admit up front that I will step on lots of toes in the process of getting across a very important message: "Don't play politics with technology."

Make a bad loan. Fire the wrong person. Hire your wife to head up marketing. Open a branch near your home. Make your own commercials. Invest in MSFT. Bank at your own bank. All those mistakes can be undone at some measurable cost.

Technology mistakes last forever even after the checks have been written. That's why at the kickoff meeting of a client assignment (with usually 35 people in the audience), I open with this statement: "Good morning, this will be the last conversion you will make at this bank even if you live to be a hundred."

I'm not saying you should leave your heart and soul out of the decision process. But make sure you do the science first. I do the science based on 814 criteria. Then I ask my clients to spend the next 30 days doing whatever makes them comfortable.

Some visit peer banks. Some visit the vendor of choice. Some organize the 35 team members into groups and vote on their choice. Some take pot shots at the science to make sure it will pass the tests of the examiners who will surely show up one year after go-live. Some find a devil's advocate and put the burden on that person to look for flaws or omissions in the process used.

In my experience, the best devil's advocates have been, Auditors, CFOs, and a small number of CEOs. And if any of those advocates are women, you just got a huge bonus. Don't ask me why. Maybe it's because decades ago, banks hired young female high school graduates to work the teller lines and the back rooms. In time they advanced to positions of strength, even though not necessarily recognized by some managements. Today, they "run" the bank from the bottom-up and they possess the virtue of telling the truth, with no political motives.

It's a matter of record, folks. Some of the largest banks have been offenders of world series class tech disasters. Their common misstep was using technology to boost an in-house ego that you'll still see in all vendor brochures - leading edge technology.

Ah, that felt good, and I didn't even have to find a shrink to get it off my chest.

- Art Gillis
www.artgillis.com


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Signs Of Entrepreneurship Are Appearing In The Bank Tech World

Posted on October 08, 2007


Fifteen to twenty years ago, it would have been quite ordinary to observe the large number of start-up companies based on a single-product offering under the broad heading of bank tech systems. Major events fed that creativity, including the availability of PCs, document imaging, Internet banking, check clearing legislation, telecom speeds and powerful database management systems. In recent years, however, the scene switched to a different kind of world - that of consolidation. Big companies got bigger, while small privately owned companies disappeared, at least in name.

Now, in my view, there appears to be a resurgence of new companies entering the marketplace, so new that some of them are hitting "my shores prior to taking the beach." Sorry for that weak analogy, but I've been glued to the TV watching "The War" these days. There's an interesting characteristic describing the new start-ups these days that sort of satisfies a general observation that describes technology as, "We're done." Today's entrepreneurs are responding to better ways of doing the old stuff rather than creating products to address first-time situations. Stay tuned. Automation in Banking - 2008 (now in the planning stage) will have more than 92 companies in it. The giant will still have 26,000 or more employees, but there will be a few companies with 6 employees.

- Art Gillis
www.artgillis.com


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With Three Months Left to Score Some Big Sales, Will Bank Tech Vendors Have a Banner 2007?

Posted on October 01, 2007


I don't think so. And here are the reasons.

• Before 2007 even had a chance to show its strength I wrote a blog titled, This is a Pretty Dull Time for Bank Technology." I was hoping to generate some objections, disagreements, differences of opinion or even insults. I didn't get a whimper. Instead, I received a note from the Editor of Computerworld saying a reporter's story and my blog must have crossed in Cyberspace because the idea was the same. She called the industry "dull and boring."

• I'm not a visionary, but I've been looking on the horizon for new technologies and can't find any. Bank tech vendors, like retailers, automakers, and McDonald's just to name a few, thrive on new stuff to sell. The only things vendors are selling today are technologies that the stragglers are now waking up to. For example, is there still a bank that doesn't offer its commercial customers remote capture? Or check imaging? Or Internet banking?

• Recent new technologies have indeed improved processing methods for banks. In turn the new technologies provided economies for the banks. What nobody seemed to notice is that these new efficiencies forced vendors to reduce their charges to a bank because the work that vendors performed the old way has declined. It's not something likely to appear in any vendor's press release, but corporate revenue gains occur when every invoice generated by a vendor is larger than last month's. Invoices to existing customers are shrinking, or at least, they should be.

• There's some heavy duty spending going on in large banks, as expected. But I haven't seen a single press release announcing a new core system sale to a large bank. The press releases are about de novos and the mom and pop shop banks in the boonies. For vendors who are now playing at the five to six billion dollar "tables", selling anything to a tiny bank is like playing the 25¢ slots. Why am I thinking of this famous movie quote, "Show me the money, Jerry?"

I hope I'm wrong about this. I like good news as much as the next guy. I just haven't seen much from the vendors who normally love to tell about their successes. We'll find out a couple of months after the books are closed on December 31st.

-Art Gillis
www.artgillis.com


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IT Costs - If Nothing Else (And There Is A Strong "Else"), It's About "Truth In Reporting"

Posted on September 28, 2007


My last blog "When David And Goliath Come To Terms, One Wonders What The Sub-Goliaths Were Doing" was about the absence of accuracy in reporting the true cost of IT. Here, I'll give my views, based on my work experience at 331 banks, as to why accuracy is more than just a good thing to do in compiling a P&L. An accurate IT cost is a major factor in taking initiatives to arrive at sound IT decisions.

• Peer comparisons - Any rookie who has been in banking for at least a fortnight will have understood how bankers live by the rule of comparisons. That can be dangerous. For example, a $200 million bank in the Chesapeake Bay area that only makes boat loans (a former client) is going to spend far less on technology than a $200 million bank doing business in a broad based community like Baltimore (a former client).

• Most banks do not include IT-related human resource costs in the cost of IT. Just look at any annual report and you'll see that all HR costs are lumped together on one line item. Every survey I have seen shows that, generally, HR represents 40% of any bank's IT budget.

• Any decision to change a process, for example in-house vs. outsource, will inevitably raise the question, "What are we spending now?" If the total costs aren't documented, there will be one giant "oops" in the executive suite after the fact. And the lieutenants will have a lot of explaining to do. Take a lesson from the CIA. Get it right and stick to the truth.

• It's nice to be well informed and pay attention to what gurus offer. For example, last week, Gartner announced that global IT is expected to grow 8.7%. Several months ago, my calculation for banking specifically was a minimum of 7%. I know I tend to be conservative so I would defer to Gartner's projection. But a greater difference would be what number one applies that percent to.

In banking, it's generally accepted that peer comparisons are good measures. For example, any bank earning a 1% Return On Assets is not too shabby. "Return" is easy to measure and "Assets" is easy to measure. But a bank that spends 6% of its total operating cost on IT vs. a bank that spends 20%, doesn't mean a thing, because IT is measured by the rules of the measurer.

-Art Gillis
artgillis.com


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When It Comes To Figuring Out The Cost Of It, Bankers Stop Short, Vendors Low Ball It In Their Proposals, And Consultants Pour It On

Posted on September 17, 2007


As a consultant, I have worked for 4% of all small banks, 5% of all medium size banks and 14% of the 111 large banks in the U.S. My consulting practice includes 16 services. The second most popular one is an analysis of a bank's IT expense.

A significant part of every project for all banks has been performed in the departments that the CFO covers - all functions having to do with accounting. I understand the reason for that client-directed emphasis because after all the rhetoric about how wonderful the new system will be as presented by the bank's IT study team, the vendor of choice, and me, it comes down to an accurate calculation of what the new system will cost. But I never met a cost accountant in any of those banks, and thus I have concluded, bankers don't care much about the cost of anything (except funds) the way manufacturing companies do. I'll bet Mr. Campbell knows exactly how many peas, kernels of corn, pieces of carrots, pieces of potatoes, green beans, macaroni, and all those weird preservatives that go into each can of vegetable soup. When the can is scanned at the checkout, Mr. Campbell knows, to the fraction of a penny, how much of the $1.15 dropped into his company's net profit bucket. He even knows that the difference between his retail price and that of the generic brand (25¢) is the amount he has to recover from his enormous advertising budget. "Mm good, mm good, that's what Campbell's soups are, mm good." I know the jingle is dated, folks, but the tune still plays in my head whenever I think about Campbell's soup.

Here are some things I have discovered about IT costs in the banking arena:

• Whenever I ask a banker what his IT costs are, he answers with an amount that is at least 20% lower than the true costs which I accumulate using the Sherlock Holmes approach. A lot of IT costs never get coded the way the Chart of Accounts intended. Also there are bootlegged IT resources in every bank that department heads have coded as some innocent category like "Office Support." Who can blame them after being told by the CIO it will be three years before the user department's project gets to the top of his "to do list."

• When I asked the Investor Relations department at Citigroup what the IT cost was for the company, I got the typical cleansed response of "That information is not disclosed." I looked at Citi's 2006 annual report, which I believe everyone would agree is designed to disclose, and right there on page 124, it said $3.762 billion for "Technology/communication expense." That number was an increase of 6.8% over 2005's number. I reported the disclosure back to the lady with the protective canned answer as if I were performing a good deed, and her idea of recovery from embarrassment was to send me a copy of the annual report. I now have two Citi annual reports that muddy the waters of IT costs. Citi's IT expense is more like $7 to $8 billion not $3.762 billion. Why they are reporting a partial number is something you'll have to ask the CFO or Citi's auditor, KPMG.

• When I solicit proposals from vendors in the conduct of a client assignment, I usually get price list data. That's as useless as the sticker price in an auto showroom. I bought a new Jeep recently. By the time I left the showroom, I got a $1,500 rebate from Chrysler, a $1,500 credit for paying cash, and $500 if I could prove I was a veteran. When I receive vendor price data, I pour it through my "neutralizer spreadsheets" to arrive at true bank P&L costs. I also ask vendors to submit a pro forma invoice showing what the total charges to the bank will be six months after the go-live date. They never send it to me. What does that tell you? They've got the best lawyers in town.

• The true IT cost is not in itself a measure of good or bad. As a percent of total operating costs, the number can range from 6% to 20%. I would be happy to support the 20% if I knew it was reducing labor intensive bank operations costs by a significant measure. The 6% guys may think they're getting a bargain, but they could be throwing employee-related costs out the window by not spending more on technology. It's not about just doing the math. It's also about measuring the payback.

• The real culprit in reporting IT costs is the fact that we don't have any standards as to what should be included in IT Costs. Bank regulators don't define it. The SEC doesn't define it. The National Institute of Standards & Technology doesn't define it. The American Institute of Certified Public Accountants doesn't define it. And even though I haven't asked the wonder boy of creative accounting, Andy Fastow, I don't believe he ever defined it either. There are 84 line items in my spreadsheets that identify true IT costs for any bank, and it's OK if some cells are blank. For example, some banks do not offer trust services so there is no IT cost.

Now what is the point of all this ranting and raving about reporting a true number? I will tell you in next week's blog.

Art Gillis
www.artgillis.com


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When David And Goliath Come To Terms, One Wonders What The Sub-Goliaths Were Doing

Posted on September 10, 2007


First, how about if I define the players:

David is ACI Worldwide at $348 million per year in revenue.

Goliath is IBM at $91 billion per year.

The sub-Goliaths are CheckFree at $973 million and Metavante at $1.5 billion.

When I read today's press release that ACI and IBM are collaborating to bring electronic payments to a current-day platform from what everyone knows is a legacy system world, I couldn't help but ask where were the giants of Electronic Payments Systems? Was Fiserv too focused on acquiring CKFR? Was Metavante too focused on going public?

With all due respect to all the players who managed to make their mark on their own, one unwritten law in the books of technology is that IBM governs. For what it's worth, if IBM got in bed with Fiserv, CheckFree or Metavante, I would have yawned. Doing it with ACI tells me there's something else going on that I missed. But I'm in good company because Fiserv, CheckFree and Metavante were taking a nap also. Whatever happens next, one thing is for sure. Fiserv, CheckFree and Metavante lost something. ACI won big time. It just proves that big is not always a guarantee for success.

Stay tuned.

- By Art Gillis
www.artgillis.com


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Without M&A Activity The Top Six Core Vendors Would Account For Only 13% Of Their Current $14 Billion Annual Revenue

Posted on August 31, 2007


It sometimes haunts me to think that I have been in the bank tech business longer (as long in the case of Metavante) than the top six core companies. Other times, it provides me with the hutzpah I need to offer this "what if" blog.

You don't have to believe the stats I offer because you probably don't have 22 historical copies of Automation in Banking from which I derived the following numbers. Trust me, I have the 22 historical copies, my spreadsheets work, and vendors have been reporting the truth for 22 years. Now I'm just changing history, at least on paper.

1. If Fiserv had not made 149 acquisitions in 22 years, its annual revenue today would not be $4.54 billion (approaching $6 billion). It would be about $1 billion.

2. If Fidelity National Information Services had not made 12 acquisitions in the past five years, its revenue would not be $4.2 billion (approaching $5 billion). It would be zero.

3. If Metavante had not made 28 acquisitions in the past 15 years, its annual revenue would not be $1.5 billion. It would be about $740 million.

4. If Jack Henry & Associates had not made 29 acquisitions in the past 15 years, its annual revenue would not be $668 million today. More likely it would be about $120 million.

5. If Open Solutions Inc. had not made 16 acquisitions in the past 7 years (and hired Louis Hernandez, Jr. to turn this company around), its revenue would not be $480 million today. It would be defunct. The defunct part is only my opinion, of course.

6. If Harland Financial Solutions had not made seven acquisitions in the past 7 years, its revenue would not be $325 million today. It would be about $100 million representing Marketing Profiles, Inc. and FormAtion Technologies, Inc. which John H. Harland Company, the check printing company, acquired as sort of a stick-your-toe-in test before getting serious about the bank tech business and establishing Harland Financial Solutions.

If you need a reality test to see the impact that acquisitions have had on bank tech vendors, use Computer Services, Inc. as the model of the "unaquirer." This company has been in the space for over 40 years. It has made a handful of small acquisitions. Its annual revenue today is $125 million. It's a good company with very happy stockholders. It's just not in the "ratings game."

There's a rule for survival in the consulting business - Publish or Perish.
Here's my rule for bank tech companies - Acquire or Be Acquired.


Disclaimer: The CFOs of the seven companies mentioned in this blog have not seen an advance copy of this blog, nor has anyone else. As a result, it's possible that insiders could dispute my extrapolations, and prove that my figures are wrong.

Art Gillis
www.artgillis.com


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Sometimes Even The Best Research Doesn't Produce The "Right" Answers

Posted on August 20, 2007


I'd like to begin this blog with story about a nice experience dating back to the sixties when I worked for a large consulting firm. Our client was an airline called TWA. The board of directors hired our firm to answer a question that management and the board couldn't resolve - Should TWA move its reservations center to Rockleigh, New Jersey or leave it in Kansas City?

We had 30 days to answer the question, and indeed we did. The firm pulled together eight experts with the appropriate sets of skills. The team built tons of evidence to support our recommendation, which was, move to Rockleigh. TWA stayed in Kansas City.

Recently I posted two blogs that provided conflicting trends--even though I hadn't noticed it at the time. You wouldn't have noticed either because they were posted five weeks apart, as my work evolved. One was a survey of what my trusted clients were going to be implementing in 2006 and 2007. The other was what trusted vendors said were their hot technologies for 2006. The two lists didn't match well enough, at least, in my opinion.

1. Popular Applications Implemented in 2006 and 2007 According to Banks (the list contained a total of 24 apps)

Anything having to do with imaging
(checks, docs, exchange)------------------------a match
CRM---------------------------------------------not mentioned by vendors
Platform Automation-----------------------------not mentioned by vendors
Internet Banking--------------------------------not mentioned by vendors
New Core System---------------------------------a match

2. Popular Applications Sold in 2006 According to Vendors

Remote Merchant Capture-------------------------not mentioned by bankers
Compliance & Security Related-------------------very little attention by bankers
Bill Payment------------------------------------not mentioned by bankers
Loan & Deposit Pricing--------------------------not mentioned by bankers
Image Exchange (Check 21)-----------------------limited activity
eStatements-------------------------------------limited activity
Distributed Capture Applications----------------not mentioned by bankers
Core Applications (in-house & outsource)--------a match
Commercial Credit Management System-------------not mentioned by bankers
Check Image Processing--------------------------a match
Cash Management---------------------------------very little activity
Card Solutions----------------------------------not mentioned by bankers
Business Intelligence---------------------------not mentioned by bankers

I tried to come up with a nice logical explanation for the variances, but I failed. It wasn't a timing problem. In 2005, bankers said what they would be doing in 2006 and 2007. In 2007, vendors said what they sold the most of in 2006. It wasn't a compatibility problem. My survey included an even mix of small, medium and large banks, as long as you exclude the top 100 banks. Vendors cover the same size banks that were in the survey. It wasn't a lack of understanding. Not a single person asked me to clarify anything. They even wrote in the margins to make sure they were understood. If you're thinking the bankers and vendors lied, think again. Wouldn't you expect it would be politically correct for every banker to give the impression they support more security technology even if they weren't doing anything about it? Only two mentioned security. Congress can relax. There's no need for "Truth in Telling" legislation in the banking industry.

So why is it these two independent pieces of work did not support the idea that what vendors sell is what bankers implement? I do not know. If you know, please tell us. At a quick glance, you can see the lists showed only two activities where there was agreement - core and imaging. Is that what the current state of technology is all about?

By the way, TWA stayed in KC because of political issues. The Hallmark people (a powerful KC-based influence) wouldn't let TWA leave "their town." So where's the politics here? Talk to me folks, even if you're with one of the Boston-based brain factories. I learn new things every week, and I'm not done yet.

Art Gillis
www.artgillis.com



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Large Bank Core Conversions In The U.S. -- Lottsa Talk, Little Action

Posted on July 30, 2007


First, let me describe the arena this blog is about:

• "Large banks" include 145 financial institutions (FIs) operating in the U.S. The good people at Highline Data came up with 145, but I reduced it to 122 because I look at corporate entities, not charters.
• The list includes asset sizes of $8 billion to $1.3 trillion.

• Most of the FIs are commercial banks, 13 are savings and loans, 7 are primarily credit card companies, 6 are brokerages that operate banks, and 3 are credit unions.
• Most of these FIs have been using mainframe computers for at least 50 years, which means they are using core software that they themselves built.
• Nineteen have hired an outsource company (FNIS, Fiserv, Metavante or BISYS/Open Solutions Inc.) to do their core processing.
• Some are using vendor-supplied software but mostly for a particular application rather than full core. The most popular example of this is Automated Financial Systems for loan processing. A less popular example is CSC's Hogan System.
• There are some banks (less than 20) in this group that have implemented integrated core systems such as Jack Henry SilverLake, Information Technology, Inc. Premier, Fiserv CBS, Fidelity MISER, Fidelity Horizon, Metavante Bankway, and Trisyn Infopoint.

Now that we understand the players involved, I'd like to express my opinions regarding the "noise" one hears from researchers and pundits who claim large banks are planning for conversions to new core systems. This situation has been a subject of press and research firm activity for at least the past ten years.

• My first offering in this imaginary debate is, it ain't gonna happen.
• Even though large banks realize their legacy systems are old and tired, they don't have options that are risk-free.
• The common characteristic, in one word, that all large banks share is - customization. If one bank found a new system that it liked, it would take 1,000 "Accenturites" or 5,000 "Offshorites" to implement it while preserving the functionality that the legacy system has. What is the cost of that?

• Why are they stuck with legacy systems? Because their present core systems are like roots of a 300-year-old-oak tree. No one knows where they end. The Monday after a core conversion, there could be a meltdown at the bank because testing and reality are never the same. Name a CIO who would like to give up his/her million dollar W-2 for that kind of craps-shoot.

• Interfaces in legacy systems are like fleas on a hound - too many, irritating, and they'll migrate to the new pup. If interfaces continue to reside in new systems, then their overhead will carry the negative baggage of legacy systems to the new platform. Where's the improvement in that?

• The bank tech vendors with advanced architecture are big internationally (i-flex solutions, Infosys and TEMENOS), but they don't have a single large U.S. bank using their complete core system. Is that going to give a CIO the warm fuzzy feeling he/she needs to take the bank to what we all agree is a better platform?

The last time a core conversion was attempted at a large bank(s) was more than ten years ago when Norwest (now Wells Fargo) and Bank One (now Chase) hired EDS to build and implement a new-age core system. The project failed after a few hundred million dollars were invested. Ask Wells Fargo and Chase what their plans are today to replace their legacy systems. I can hear their high-tech clichés now.

-Art Gillis
www.artgillis.com


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What's In Your Shopping Cart?

Posted on July 24, 2007


I have said several times that the bank tech industry is experiencing a lull. There's nothing brand new to buy. And most vendors are noticing the lull in their revenue figures.

So to give my blog readers a touch of reality, I am listing the activities that my clients are working on these days. I believe you cant trust these answers because I know the people (109 bankers) who answered my survey. They tell things because they are true, unlike most survey participants who answer in order to be classified as an innovator. Please note, the survey consisted of 30 questions in response to the question - "What do you think of your technology?" I eliminated duplicate answers in order to reflect just the identity of what is going on in terms of implementation activity.

16. What are the next things you plan to add to your technology environment?

• Profitability analysis
• More security
• Check imaging
• Migration to total Microsoft environment
• Document imaging
• Single sign on
• Long term archiving
• Patch management
• SYS LOG management
• New VRU
• Image Exchange
• e-mail statements
• Voice Over IP
• New web site
"Online" applications
• Core applications
• More interfaces with vendors to our core
• Client contact/relationship management system
• Event notification
• Anti money laundering software
• Wire transfer processing automation
• Adding deposit platform
• Bounce protection
• Teller platform
• In-house Internet banking
• Intranet
• Documentation of loan files
• Deposit platform
• Contact management with incentive tracking, referral, and CRM integrated to core, trust, and insurance customer data along with Microsoft Exchange/Outlook
• CRM
• Full cash management service
• SAN storage device
• Online loan apps - 10 minute mortgage approvals
• More branches - 6 in the next 18 months
• SQL server for new account platform
• We are looking at Internet banking but cannot figure out how to cut the cost and be sure of the security.
• Branch Item Processing
• Loan file image
• Core processing that includes insurance and brokerage
• Wealth management
• Private banking
• Document archival
• Document scanning (signature cards, driver's license, etc.) for platform areas

- Art Gillis
www.artgillis.com


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Why Aren’t The Tails Wagging The Dogs?

Posted on July 16, 2007


I'm putting this question to the readers of Bank Systems and Technology because based on feedback that I have seen, some of you have the answer, whereas I don't.

Here's what I mean about tails and dogs. For the past 25 years, core applications vendors (dogs) have been acquiring peripheral apps vendors (tails) in record numbers. In 2006, the activity came to a near halt, just because the well seems to have gone dry. The only core vendor that acquired peripheral apps companies was Goldleaf Financial Solutions, and that's understandable because GFS is the newbie playing catch-up.

But some peripheral vendors were acquired by other than core vendors. For example, Intuit acquired Digital Insight; CheckFree acquired Carreker and is in the process of acquiring Corillian.

Now what seems a little strange to me is this. If the Internet is becoming the channel of choice for the banking industry, why haven't the companies that reside on the Internet taken charge of their domain and gone hunting for the core vendors?

To throw out a wildly speculative example, should S1 or Online Resources acquire Harland Financial Solutions or Computer Services, Inc., or Jack Henry & Associates?

What do you think?

-Art Gillis
www.artgillis.com


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Take A Vacation, But Don't Turn Off Those Little Gray Cells

Posted on July 09, 2007


It worked for Hercule Poirot; it should work for "investigators" in the bank tech world. What we need now more than ever before are thinkers, disrupters, analysts, inventors, and new ways of doing things. The mechanical processes are pretty much operating at peak performance after more than 45 years of using improved technologies.

It's time now to push back and critique our own stuff. I'd like to see little think tanks sprouting at out-of-the-way places. Non-banker attire should be at the discretion of the wearer. After what Steve Jobs has created for Apple, I'm goin' with tattered jeans and black turtle neck. Each day should begin with this challenge, "Why are we doing it this way?"

Major tech innovations in the past launched new ways of doing things. My favorites include, data communications, mid-range computers for in-house processing, ATMs, relational database management systems, software development tools, personal computers, the Internet, and digital imaging. Congress contributed also by changing the laws to allow for new ways of clearing checks. For the first time in 45 years, there is no major new innovation in sight that will improve the way banks work. That's why we need a think tank initiative.

Imagine the new titles: CCO - Chief Creativity Officer, CSA - Chief Systems Architect, DONA - Designer Of New Approaches. A banker in my annual report about what bankers think of their technology may have started already with his e-mail address - "joe_smith@think.com"

As I push back and critique my own annual report, Automation in Banking 2007 I'm spotting subtle evidence from vendors that there's more to their business than just selling great products and services. Fidelity, Metavante and Harland Financial Solutions identified, and even talked about their commitment to their consulting practices that show banks how to improve their operations.

If all the new ideas were focused on just the Internet, it would keep people busy for years. I still have reservations about Internet security, especially when I see e-mail warnings from eBay, PayPal and banks that I don't even have a relationship with. If we can secure Fort Knox, there must be a way to secure the Internet. That goal reminds me of my apparent naiveté when in the fifties I said I'd like to see what's on the moon. Eyes rolled and my buddies said, "Yeah, Art, you and Alice Cramden." Less than twenty years later, two guys told us.

I'm on vacation and I've got lots of work (thinking) to do. When are you takin' yours?


-Art Gillis
www.artgillis.com



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Automation in Banking 2007 Executive Summary

Posted on June 25, 2007


In 2006, the bank technology business was good for bankers and it was just OK for vendors.Bankers were getting the work done every day; they were reasonably safe from hackers, phishers, and T-shirt collar criminals; they were generally comfortable that their catch-up game was running neck and neck with market-available technologies; and they were free from big spending projects that in the past, seemed to be integral to anything with the word technology in it. I would imagine their Wednesday afternoon golf was never disrupted in 2006 because of an IT disaster. There were two reasons for this state of justified euphoria.

First, the grunt work of daily processing for core applications has settled down to mundane operations where the main responsibilities are to capture and post (often in real-time) every transaction correctly, end up with a good reconciliation, tie all the peripheral applications to an integrated general ledger and customer database, be ready for early-rising customers, and provide hundreds of online
reports to satisfy gluttonous users who need to know things. From an ivory tower I could wish for more, such as using technology to understand the customer better, and analytical capabilities to determine why transactions occur the way they do. But I won’t hold out for much to change until a new generation of bank CEOs comes on board. If I had one small message to offer it would be: “Analyze don’t mechanize.” As backup for my complaint, I offer Exhibit 75 in this report - Most Popular Applications Sold in 2006. The hottest applications in 2006 were mechanical ones. There was nothing mentioned about CRM, or anything customer-related for that matter. Only one vendor mentioned Business Intelligence, and Fidelity
National Information Services deserves credit for that. This is what I like about new players. They bring fresh ideas to a situation even though a lot of bankers are still in the proverbial box. If discretionary applications get their fare share of the spotlight it’s going to be because tech vendors are smart enough to know how to sell their benefits.

Read more of the Automation in Banking 2007 Executive Summary.

--Art Gillis
www.artgillis.com


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Sale Of Core Applications As A Thing Of The Past

Posted on June 11, 2007


By Art Gillis
http://www.artgillis.com

After I wrote last week’s blog, I was haunted by that old cliché, "A picture is worth 1,000 words." In this case it's 382.

So folks, look at the picture.



download


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Single-Report Bank Core System Is No Pipe Dream

Posted on June 04, 2007


By Art Gillis
http://www.artgillis.com

If someone paid me $7 million, plus or minus a million, to create a new bank core system for community banks, the first thing I would do is fly to Kansas City. That’s sort of a private matter, but my mission would be to assign all the bread and butter applications to a man I believe has four very rare skills:

(1) The essence of what it takes to manage a bank for peak performance, service, safety and profitability;
(2) The ability to transfer more human tasks to system tasks;
(3) The ability to harness technology to work at the level of human capacities, and;
(4) The ability to deliver a product on time and within budget with no excuses. Dreamer you say? He has done it four times.


The next thing I would do is take 30 days off to design one report for our new system. Here's what that report might look like. First, it would not be printed on green bar paper. It would be displayed on the CEO's PC screen (and mobile device) that are never turned off. It would also be printed on his/her laser printer in red. And the PC would be equipped with an irritating beeper that would turn off only after actions were taken. Clearly, I haven't figured out all the details, but you get my drift. Here's an early look in case you want to help me:

Dear Boss,

Last night's posting and updating run detected suspects that could put the bank at risk to the tune of one half of one percent of the bank's total assets (the system would calculate the actual risk). Each of your responsible department heads should be scrambling right now in preparation for your call. But you know three (variable) of them are out of the bank today, so you're the man.

1. Six items are now in the Suspense Account that are ten days old and have not been resolved.
2. Eighteen overdrafts from customers that are less than a year old have not been contacted.
3. Twenty-three accounts have been closed without explanation.
4. Eighty-four loan payments are now 10 days late. One hundred twelve are five days late.
5. Only three new accounts were opened yesterday. The norm is 8.
6. The Call Center received 345 calls in the past 24 hours, which is 80% higher than the norm.
7. Six employees did not report for work yesterday.
8. You received 37 e-mails yesterday, but 28 look like Spam.
9. You received 14 voice mails yesterday that have not been disposed of.
10. Subprime mortgage loans continue to increase foreclosures, but there are none in our bank's mortgage portfolio.
11. 13% of the mortgage loans have moved from due-date payments to grace-period payments.
12. Core deposits decreased again this month.
13. Although the number of items on the kite suspect list is steady, real kiting has increased by 1.8%.
14. 87 inquiries were posted on our Web site yesterday. 23 were answered.
15. The Investment Portfolio System is showing a steady increase in the purchase of our stock by a local regional bank.
16. Four large cash deposits were taken at the South Side Branch yesterday. The norm for this branch is zero.
17. Your wife called you three times this morning. Our analog to digital converter detected key words such as, fire, smoke, 911, and your study.


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New Systems Need A Test Between Alpha And Beta: I Call It The Dummy Test

Posted on May 29, 2007


By Art Gillis
www.artgillis.com

Every time I walk by the aisle in the book store where the books for dummies are stacked, I feel like I want to buy all of them. So please do not be offended when I use the term "dummy" in the context of technology. The reason for an Alpha Test is to assure the developers that the system works, in a controlled environment, as they had designed it. The reason for the Beta Test is to assure the users that the new system works in the real world as their business processes dictate. What this cycle has not considered is this — Does the system work for us dummies? And that's why I'm suggesting one more test between Alpha and Beta — the Dummy Test.

The term, "Dummy Test" is not an insult. It simply says that we don't know as much as the developers, and we don't have the experience of the users. But in the world of banking, there is a vast group of employees and customers who fit into the middle group. We know enough about the basics, but we don't have years of experience to understand the nuances. In my own case, that became very clear during the initial introduction of Internet-based systems.

Solution: System developers should take their new systems to real people and ask them to step through each phase of the system. The developer should pay them $10 for each glitch they encounter that caused some form of irritation. Ideal test sites might include college campuses, high schools, senior centers, rock concerts, baseball parks, bank lobbies, theaters, Starbucks, gyms, yoga centers, religious centers, etc. You get the idea — total inclusion.

I would have earned $100 if the deal had been offered to me ten years ago. I'd still earn a few bucks today because I run into problems almost every day. Here's how I would have earned my fee:

1. Your system does not recognize "M." as the first name in M. Arthur Gillis, and it doesn't say so until the entire application is completed, rather than when the "violation" occurred.

2. Your error messages must have been written by a Nazi. Chill out!

3. "info@" is like the black hole of Calcutta. Does anyone ever answer these inquiries?

4. Web-based "contact us" provide a convenient way to send messages, with a sincere statement that they will be answered within 24 hours. Even supplying a registration number. 75% of the time, no one answers — ever.

5. Some error messages are contradictory. If a field is "N/A", why should I be expected to provide a name for that field in the next item?

6. When your system finds a response it doesn't like, it stalls. There's no recovery. You're dead in cyberspace.

7. Your system is too arbitrary. There's no option that will permit me to deviate from the form in order to protect my privacy.

8. You just introduced a new version of the system, but you eliminated some features of the old system that I liked. Why did you go backwards?

9. The use of sixth grade English would suit me better than nerd talk.

10. "Clean and simple" is apparently a term that you avoided. Have you passed this by your CEO for his/her opinion?


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How Can Technology Help A Bank's Process Improvement Program?

Posted on May 14, 2007


By Michael D. Nichols, Nichols Quality Associates

It is an undisputed fact that technology has had a major impact on service processes over the last four decades. From customer service call centers to online checking accounts, it is hard to find a key business process at a financial services firm that does not have a significant investment in technology supporting it. Because of this, one would expect that technology departments are leading the charge with modern-era process improvement efforts and methodologies. Unfortunately this is not generally the case.

In a survey we conducted as part of our recent book, Six Sigma for Financial Service: How Leading Companies are Driving Results using Lean, Six Sigma and Process Management, the majority of global financial services companies are using some form (or combination) of modern process improvement methodologies such as Lean, Six Sigma or Process Management. However, none of these companies' business process improvement efforts were being led by the technology functions of those companies.

There are several reasons why this could be happening. While recently interviewing different leaders at financial services companies, a few of the reasons that were brought forward were: technology providers have a more functional background; technology is seen as a supplier, not a partner; and technology groups are often imbedded in their own development methodologies. Let's look at each of these perceptions and break out the opportunity for change.

There is a tremendous demand for functional skill knowledge in IT organizations, and because that knowledge base grows rapidly, there is pressure to develop those skills in a limited amount of time. Unfortunately, this does not translate into useful business process knowledge. Because the technology provider is often only focused on the solutions to specific problems, they are not in the position to challenge the process itself. For example, in a process that has seven work steps in it, technology tries to improve those steps rather than question whether seven steps are really needed when only three may do the job as well, thus improving the overall process performance. The opportunity is for the technology team to challenge the why of the process versus only looking at what technological tools are needed to build a solution for the existing process.

Technologies groups tend not to be proactive partners; instead, they provide a more traditional support or enablement role. This is especially pronounced in organizations where all of technology is charged out to each project and funding must be provided before a resource can be assigned to a project. Due to this, significant opportunities for process improvement project identification are being missed. When you combine the technology groups with the operations around an end-to-end process structure, then technology can be a partner to process improvement. Integrated process leadership teams can then set common goals for the organization. In the interim, technology groups should at least adopt the key performance measures of the process they are supporting on an equal scale as their own. For example, in a loan origination process, the operations group may have a goal on close cycle time or first pass accuracy, while technology only looks at systems availability. By sharing the goal of the process being supported, technology now has more skin in the game to support process improvement.

While one cannot argue that technology groups are imbedded into their own methodologies, those methodologies--such as capability maturity model (CMM)--have become extremely robust in the last decade. All now incorporate some form of internal process improvement cycle. However, the results of internal process improvement within technology's development process is not visible to the business. The opportunity here is for the technology partners to learn the lexicon of the business process improvement teams on the operations side. By understanding Six Sigma terms such as DMAIC, DMADV or Lean terms such as Value Stream Mapping and Muda, they can help support those groups in their process improvement efforts. If technology is a true partner on the Process Leadership Team for an organization they will be aware of all the improvement activities taking place and can provide the right level of support at the right time.

Corporate finance functions underwent a change in the last decade as they began to take a stronger leadership role in identifying opportunities for improvement in the business versus the more traditional accounting, treasury and audit role. This was advanced further as Sarbanes-Oxley (SOX) drove a stronger process view into the organization. Technology has as much, if not more, to offer the modern financial services organization in its quest for continuous process improvement.

Michael D. Nichols is principal consultant/Senior Master Black Belt for Nichols Quality Associates, a consortium of Lean Six Sigma professionals. He was previously the Director - Six Sigma Design/Senior Master Black Belt, at American Express, where he co-developed the Six Sigma Design and Six Sigma Process Management programs.




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Six Bank Tech Company CEOs Agree On At Least One Thing - It’s Going To Be The Big Six Core Solutions Companies Minus X




By Art Gillis
www.artgillis.com

The only thing they wouldn’t say is when.

I heard soon to five years. Aside from that, I must say, answers to my "10 Questions" program produced some of the best feedback the bank tech industry has heard in years. And in keeping with my New Year’s resolution, I’ll leave this blog at short and sweet. But stay tuned.


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Check printer companies are like restaurants serving trans fats. We all know their products are declining but if you’re the only one left in a declining products business, it can become a booming company.

Posted on May 07, 2007


By Art Gillis
www.artgillis.com

MFW stock was trading at about $19 a share when it announced the acquisition of John H. Harland, the check-printing company.




The transaction closed today, about four months after the announcement, and MFW’s stock is now selling at about $62 a share — three times more than when MFW was known as merely a licorice company and a check-printing company. (MFW owns Clarke American and majority stock owner of MFW, Ron Perleman, owns Revlon.)

Think of the possibilities. With one more acquisition (Deluxe), Ron Perleman could own the only company that offers licorice-scented checks to 70 percent of the population that has not yet converted to electronic bill pay.

How’s your stock portfolio doing today?

Disclaimer: Art Gillis does not invest in stocks. He uses a professional portfolio management company to invest all the money he makes as a blogger so his grandsons can matriculate at Harvard and MIT some day.



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CheckFree Is to X as Certegy Was to Fidelity National Information Services

Posted on April 27, 2007


By Art Gillis
www.artgillis.com

Two key drivers influence the financial services tech world these days: 1) vendor consolidation and 2) integration of applications. In my opinion, both make sense and they are very beneficial no matter on which side of the fence one resides.

Vendor consolidation has been happening for at least the past twenty years. In 1987 there were 113 core applications companies. Today (4/25/07, 10:15 AM Central Time) there are 29, with 4 at the top and 25 wannabes.

Integration of applications should have been occurring in the late fifties (which I call Day 1), but who knew then. Integration is still going on today, and the 128 largest banks are the worst offenders. Their systems look like patchwork quilts with one vendor doing one application. “Interface” is a euphemism for the Elmer’s Glue of large bank systems. “Integration” is a word that comes up only during their sweetest dreams.

Consolidation and Integration play very well together for one practical business reason: If you own the company, you can integrate the applications. Best of Breed works at a dog show, but in the world of technology, it’s like trying to make Iraq look like Iowa.

CheckFree and Certegy are two very good specialist companies at what they do. CheckFree is No. 1 in the Electronic Bill Presentment and Payments business. Certegy is either No.1, No. 2 or No. 3 in the credit card business, depending on who the judges are in this “American Idol” contest.

Another common characteristic they share(d) is they are two very good tails looking for a good dog. Certegy found its dog (Fidelity) and both are doing very nicely one year later. According to Wall Street, CheckFree is licking its wounds, and according to me, needs to find a good dog. But that right dog is taking too many naps and won’t hunt. Give it time. It’s bound to happen.

Disclaimer: Art Gillis does not do M&A work, and he doesn’t know the first thing about investing. He doesn’t own stock in any of the 24 public companies included in Automation in Banking - 2007.



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Sometimes Criticisms From the 50-Yard Line Are not Just Cheap Shots

Posted on April 23, 2007


By Art Gillis

Eleven blogs ago, I expressed my views about what a dumb idea it was for Citibank to spend billions on shortening the name of the bank and removing the red umbrella. What were they thinking? Do customers care about names and logos? Now Citi is executing a RIF to the tune of 17,000 employees. Do customers and employees care? I think they do. Put a banker back in the hot seat of Citi and I think you’ll see a better run giant. It seems to work everywhere else in the banking business. But don’t get rid of the lawyer. Just let him handle the employee class action suits.



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Who is going to keep us on the straight and narrow now that Jack Henry is gone?

Posted on April 16, 2007


By Art Gillis

Jack Henry always knew what the score was. More important than that, he made sure we knew the score as well. I have had lots of business encounters with Jack over the years, and not once did I ever worry about my backside. The first time I talked to Jack was by phone in 1980. I was working on a project for a small bank that needed a general ledger system. My mission was to purchase it from a small software company in Missouri. When I called to place the order, Jack wasn’t comfortable dealing with a third party, so we had a back-and-forth exercise for about an hour. That’s when I knew I liked this man. I never knew what he really thought of me. A few years later, I hand picked JHA for a client assignment at a midtier bank. The bank was in deep trouble with an outdated in-house system, and the task was to see if JHA could solve the problem. Jack flew to Minneapolis on his private plane. I flew Northwest. Jack beat me there. In the few minutes we had prior to our meeting, I told (begged) Jack to behave politely and let the bankers talk. Later we would have time to figure out the right strategy. It took about 20 minutes for Jack to figure out the problem, and he proceeded to give management his side of the solution. The bankers were the problem, and even the best new system wouldn’t do much to improve matters. We were not asked to return. But Jack had it right. Within a year, the bank had been acquired and as a result, it was rescued from a management team that didn’t have a clue as to how to run a bank.

Jack was a man of few words. Whenever I called him he answered the same way: “What are you up to now, Gillis?” His best compliment to me after I would mouth-off about an issue was: “That’s right.” Every encounter I have had with this man resulted in some form of business success, but in addition each encounter added some self analysis as to whether I got it right or not. That’s why I’ll miss Jack.



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It’s a great time for Metavante to go public

Posted on April 06, 2007


By Art Gillis

Twenty years ago I offered M&I Data Services (M&IDS) an opportunity to participate in my industry report, which was then called “Automation Trends in the Community Bank Sector.” M&IDS said no, even though 10 other prominent service bureaus (that’s what outsource companies were called then) wanted to pay good money to get in.

I’m a bit of a wuss, so I accepted the rejection. If it hadn’t been for Donald Trump, who in his letter to me on 6/2/1988 said, “Don’t ever take no for an answer,” I would have dropped the matter. Instead, I decided to go over the head of the M&IDS guy who said no and went to the chairman, a former IBMer, Denny Kuester. Mr. Kuester liked my plan, but admitted there was a little bit of bank culture interference working here. He wanted to see if he could eliminate the hurdles so I could make my visit to remove the wraps and take a good look at M&IDS. Within a week I was on a flight to Milwaukee. I put Dennis Kuester’s name on my list of “Quiet Heroes.”

What I saw at M&IDS was so impressive that I was compelled to tell my host at the end of the day, “How do you guys make a profit with so much resource added to customer delivery?” He didn’t have an answer.

When I say the timing is right today, it’s because of these reasons.

• The 1988 old timers are all gone. A new management team says yes to whatever makes sense.
• The 1988 revenue of $90 million is now $1.5 billion.
• In an industry of modest revenue increases, Metavante grew theirs by 20% in 2006.
• Metavante respects the service algorithm: good people + proven software + straight talk during the selling phase + commitment to conversion science + support no matter what = happy customers and no law suits.
• Metavante has all the right pieces of the technology pie in place.
• Metavante knows how to make smart acquisitions. There isn’t one bad apple in the barrel.
• Like all good family ties, when the children go off and do their own thing, the good ones never forget their heritage. M&I Bank will go from owner to customer, and I can’t think of a better “leaving the nest” than that.

Disclaimer: Art Gillis relies on his bank for investment portfolio management. He does not own stock in any company included in Automation in Banking - 2007.



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If you want to know the true cost of a bank’s IT, don’t ask the General Ledger

Posted on March 27, 2007


By Art Gillis

Even though I got a degree in Accounting, I am not a CPA and Boston University didn’t offer courses in Fastow 101. I just know how to put numbers together accurately to come up with true costs. So here are some discoveries that might help bankers get a better handle on their true IT costs.

1. First, accept the fact that you don’t really know what your IT costs are. The more than 300 banks I worked for didn’t know. Some of them thought it was the bottom line of the invoice from their vendor. Others overlooked the bootlegged systems that department heads bought and coded them as “support resources.” Others didn’t know amortization from globalization. Whoever coded the expense ticket decided if it was an IT expense.
2. Annual reports of even the most sophisticated banks show a figure for technology expense. But they don’t include the IT staff because that expense is included in the total HR expense. That’s like drinking a diet Coke for lunch to cut back on your calories, and drinking three beers at dinner. It all goes in one stomach and pumps up your weight. Without people, IT halts.
3. Don’t rely on so-called industry surveys. Most of them just make you feel good, knowing you don’t stand out in a crowd. Surveys show that banks spend 10% of total operating expense on IT. It’s often double that. The highest I’ve seen is Citibank’s at 25.8%. For some community banks, it’s 6%.
4. Since there are no industry standards defining true IT costs (other than my brutally exhaustive spread sheets), force yourself to go on a witch hunt from bowels to board room in search of anything tech-looking.

Finally, don’t feel bad if you have a higher IT cost than your peers. I wasn’t a math major but the math shows that a 13% IT cost, for example, can be better than a 10% IT cost if it eliminated a host of manual functions in bank operations. The whole idea is to get to the truth so you can fix what’s broken. The General Ledger won’t do that for you. It must be a “General” problem. Even Generals at Walter Reed didn’t tell the truth.



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Ken Kirchman, the Founder of Bank Software and Much More

Posted on March 19, 2007


By Art Gillis

There must be hundreds of people who have fascinating stories to tell about Ken. He not only created the first company to sell packaged bank software, but he spawned at least a dozen other companies that other entrepreneurs started after leaving Florida Software Services.

I enjoyed four projects over the years involving Ken’s company. The first was when I worked for a bank and engaged in the riskiest task of my career when I bought a mortgage system. My bank accused me of using the decision to find an excuse to go to Florida in February. The $15,000 investment worked for us because it was what I called a head start. We bought the software, modified it and used it years before we would have created our own.

Ken once had me to his house for lunch, just the two of us. I liked the mood and the opportunity to talk candidly. Ken had a reputation of being a tough businessman, so I spoke my mind. I asked him how the creator of an industry didn’t keep his grip while other companies such as ITI and Jack Henry took over. Ken’s eyes glossed over. We both stopped talking. I realized Ken was not the tough guy people said he was.


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Banking is all about relationships, in more ways than the average 2.3 accounts per customer

Posted on March 13, 2007


By Art Gillis

I recall six good memories out of the hundreds of calls I received from my boss at the bank. One occurred when my wife’s picture appeared in the paper for her community work. “Tell her to use the name of the holding company, which is what is listed on the NYSE, not the name of the bank.” I can confess now after 35 years and the CEO’s death, I never passed the message on to my wife, but I understood the relationship very well.

Another call was about a very good bank customer who owned a string of funeral homes. The owner’s kid wasn’t happy in the business, but he had a thing for computers and Dad wanted the kid to pursue his true love. We hired him and thought he would adapt to the graveyard shift at our computer center. He thrived in the environment and performed excellent work, earning several promotions. We were happy. The kid was happy. Dad was happy. And most important, our CEO was happy. Contrary to popular belief, including Bob Hope’s often told joke that if he ever needed a heart transplant he’d like to get it from a banker because it wouldn’t have been used much. I’m here to tell you that bankers have a heart and they use it.

A story about online banking appeared in the Washington Post about the reporter’s grandma, aka Big Mama. Big Mama loved to go to the bank to conduct her business. She would dress up for the occasion, and she probably stayed there long after the business was done. Her bank tried to convert her to online banking, but she dug in and proceeded to give everyone a turnaround lecture on the virtues of people-based service. The bank never asked Big Mama again. We all know that banks would love to save the money that free online banking provides. But their heart gets in the way, so customers can get the banking mode of their choice.

Even this technophile who spent his entire working life trying to make technology perfect, and has yet to succeed, loves the fact that there are two men and one woman in the second largest bank in the U.S. who he can call once or twice a year to get something special. Harry, Joshua and Kathy know who I am even though they deal with lots of billionaires in Dallas. Technology is always working in the background, but it sure is nice to know a banker.


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M&A Activity - The Key to Survival for Bank Tech Companies

Posted on March 01, 2007


By Art Gillis

First some definitions, because you won’t find them in Webster’s. There are hundreds of companies that sell IT solutions to banks, thrifts and credit unions. I focus on 70 because they supply core processing and several critical peripheral applications. Core processing apps include all deposit systems and all loan systems. They represent about 70 percent to 80 percent of what any financial institution does, from a de novo to Citi. Because these apps are integrated, it’s necessary to include general ledger and customer database as part of core applications. So if I had to justify why I pay so much attention to core processing companies, I’d say it this way: “They can make or break a bank.”

The revenue figures show there are six companies that have prominent positions as tech providers. The 7th, 8th and 9th companies are good companies, but they don’t come close to the sixth in revenue. Achieving high revenues did not happen by organic growth alone. Acquisitions played a major role. Here are the stats for the past 12 years:

Fiserv (FISV) 88
Metavante (part of MI) 26
Jack Henry & Associates (JKHY) 26
Open Solutions Inc. (private) 15
Fidelity National Information Services (FIS) 9
Harland Financial Solutions (now part of JH with a serious proposal by MFW to acquire JH) 9

Sometimes, stats are very friendly in explaining differences. The first three companies have been in business for 22, 40 and 30 years, respectively. The second group of three companies has been in business for 15, 4 and 6 years. Fiserv has made more than 145 acquisitions in its lifetime. Even though Open Solutions is technically 15 years old, I consider it a seven-year-old company after it was reborn with the arrival of the current CEO. Fidelity reached an annual run rate of $4.2 billion in four years, relying largely on the acquisition of independent companies. Hidden in all these stats is the fact that some of the acquired companies had made their own acquisitions, so if those numbers were added to the above, the impact of acquisitions would be even greater.

For what it’s worth, I see no end to the M&A activity, and I even see activity within the six. And I didn’t get my vision from the possible merger of GM and Chrysler.



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When the CIO becomes a political animal, then he/she is no better than the CIA in delivering integrity

Posted on February 26, 2007


By Art Gillis

In adherence to my 2007 resolution to shorten my blogs, I offer this. The only tech guy I know who made a successful career of IT and politics is Frank Lautenberg, formerly CEO of ADP and now senator from New Jersey. But he didn’t try to do both at one time. CIOs should call the shots based on what they know, the results of honest analysis, and their conviction that their recommendations are doable, not what the boss or special interest groups within the bank want to hear.


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If you can’t have the BEST technology, at least have ALL the technology

Posted on February 15, 2007


By Art Gillis

In 1989 a client asked me, “How do we know we have all the pieces of the technology pie?” That kind of no-nonsense interrogation is the mother of invention, so I responded with a graphic that displayed each piece of the pie. My client, a banker in Pennsylvania, then proceeded to color code each of the boxes on the chart and performed a reconciliation of what his bank had and what it didn’t have. He also identified each vendor that provided the solution. There were eight. For historians who are interested, I offer their names - Mellon (now Fiserv), Habersham Item Processing (whereabouts unknown), Interactive Planning (now IPS/Sendero, a Fiserv company), Bunker Aladin (now gone even though Getronics acquired the Bunker Ramo business), SunGard, Plansmith, FED and ADP.

During the next phase of what we called “Catching Up With Available Technologies,” we went on a shopping spree. Please note that every available solution did not get purchased. The max list is intended to inform by showing what the universe of bank tech includes. It does not suggest a need to buy everything. There are 128 solutions. But there are 169 boxes on the chart because I included hardware as well. The major solutions are:

core apps 17
platform apps 17
item processing 15
generic stuff that any good business uses 10
loan administration 9
regulatory compliance 9
security 8
business intelligence 5
electronic payments 5


The chart also tells some stories because I deliberately showed updates as patches to let the reader know what came after 1989. Bank examiners have been intrigued by the substance of the chart to the point of adding a couple of boxes. What else, that’s why they’re called examiners.

In 18 years, however, only nine new boxes have been added. That doesn’t mean vendors have had it easy. Every old application has been changing and expanding. But brand new, never-done-before stuff amounted to nine. For example, Check 21 is one of the nine. Just thought you’d like to know when your job is done.


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Data security at my bank was a major issue even in the 1960s

Posted on February 12, 2007


By Art Gillis

Long before IT developed into a distributed architecture, the idea of protecting the bank’s data was rather simple. Lock down the computer center. The idea was probably based on an old banking rule. Put the cash in the vault every night. My bank took it a step further and buried the “vault.” That’s right, our computer center was under an apple orchard located about 20 miles from downtown Providence. The data center was indeed impressive. Enough food for 30 days, showers to wash off the radiation, mattresses under the raised floor for comfortable sleeping, and try to get in the place. In the five years I worked for the bank, I had seen it only once. The guy in charge of security was modeled after a Barny Fife. No matter what one’s credentials were, he had to know why you were there that day, and impressing prospective customers was not an acceptable reason.

We were never attacked by the Russians or even the local “Sopranos,” and after the bank’s cost analysts did their thing it was decided to abandon the “bunker” in favor of a far less-expensive modern facility in an industrial park that had bellied up, aka OREO on the bank’s balance sheet.

Please don’t assume that I was against this practical view of how much a bank should spend on data security. It hit me when I realized that our extreme security was only as good as a Dodge Dart and one of twenty-something (we had only two SSNs) Brown University students who distributed the work back and forth to the protected data center. The good news was we never lost a piece of data, nor were we ever late delivering even in severe New England weather. And the students never got speeding tickets even though we did not insist on drug testing. The bad news is that technology got more sophisticated, and we lost our grip on securing the “vault.” Data security costs about 10 percent of a bank’s IT budget. Spend it wisely.


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I’ve been complaining about techno-complexity for 49 years. 60 Minutes needed only 15 minutes to get the point across.

Posted on January 31, 2007


By Art Gillis

It wasn’t February 4th, but I was cheering like crazy when Steve Croft presented his segment on the complexities of technology. Even though I have been earning an excellent living as a technology guy, I confess now that I never really loved its complexity, and I’m now out of the closet, thanks to 60 Minutes.

I got my first exposure to computers as a 2nd/Lt in the Air Force in 1958. My most used response to technology then was, “You gotta be kiddin’.” I’m saying the same thing today. As a member of USA TODAY’s Technology Panel, I participated in a survey on January 26, 2007. The question was, “Are you considering upgrading your TV for the occasion (Super Bowl)?”

This is how I responded:

I should tell you I have been working with information technology for the past 49 years. One important lesson I learned was to identify the need first, and then shop for the right solution. I just purchased a new TV because the old one broke. That need was clear and crisp, without emotion or bias. I didn’t want to buy a new one, I had to buy a new one.

Functionally, the new one is just like the old one, but the screen is a little larger. We’re not always glued to the TV, so as long as we can see a very clear picture and hear the sounds, the new TV does the job, it cost half the price of the old one, and I didn’t have to go to school to learn how to use it. The real test in selection was availability. We live in a shopper’s paradise, Dallas, and you’d be surprised how low inventories are. I didn’t choose my new TV, the shelf told me what to buy.

Speaking of that, in today’s news there are two stories about car manufacturers. (1) Toyota is #1, (2) Ford lost $13 billion. Yesterday I bought a new car. I tried to buy a Ford. The dealer didn’t have the exact color and interior for me to look at. They didn’t even have any 2007 brochures so I could at least read about it. I was offered a 2006 brochure and a cup of coffee. Am I in a Starbuck’s? I went to a Toyota dealer and within 48 hours I had the car of my choice down to the smallest detail. The Toyota salesman said yes to everything, or we can get it by 5:00 PM. Ford doesn’t have to hire McKinsey & Co. to figure out why the company is failing. But maybe Toyota did 40 years ago. Technology is great only if you realize that using it is the goal, not the process of getting it and making it work.


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The biggest hindrance to growing any bank is the depersonalization of customers.

Posted on January 29, 2007


By Art Gillis

Solution: If your prospects and customers can get a whiff of your bad breath, then you’ll know you’re providing personal service. In the late '70, I worked on a contract, along with all kinds of other consultants, to help Citibank deploy its ATM network. Working on-site at the new Third Avenue slant-roof sky scraper, I busted into my client’s office one day and said, “I’m starving, let’s go to lunch.” He replied, “I’m so busy I won’t do lunch for several days, but here’s a card that will get you a free lunch at the employee cafeteria, and you’ll love it.” While standing in line, I recognized the CEO, two positions in front of me. Walter Wriston turned to the guy behind him, and in front of me, and asked why he was eating lunch alone. “Take a customer to lunch,” he commanded. The kid nearly collapsed and then turned to me and said, “There goes my appetite.” A few years later, Walter’s successor, John Reed, proclaimed that Citibank was going to get one million customers, one at a time. Do you see the Citibank culture here? One-at-a- time for lunch, for a credit card, for a DDA, for a mortgage, etc. Whatever the customer needs. Recently, the new Citibank culture announced a major transformation - shortening the name to Citi and removing the red umbrella (aka Traveler's logo and Sandy’s bad idea) from Citibank’s identity. Now there’s a campaign that represents real genius. I’m assuming the ad agency got management’s approval, and that’s what’s wrong with some bankers today. Would Walter and John have caved to that kind of insignificance, or would they have gone to the employee lunch room to evangelize the importance of one-on-one marketing?

Community banks have nothing to worry about as long as big bank execs are relying on Madison Avenue ideas to gain marketshare. It’s not about logos, names or slogans. The answers bank customers want these days are, “What are you doing to enhance my financial welfare, and have you taken me to lunch lately so I can tell you what’s really important?”


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Art Buchwald, thanks for the boost

Posted on January 19, 2007


By Art Gillis

June 14, 1983 - Art Buchwald sent me a letter saying he enjoyed my piece very much and I should send it to Personal Computing, Popular Computing, Info World and Byte for publication. I sent the article to Art Buchwald because after I had written it, I read it and it sounded like something he would have written. So I wanted to clear it with him first. Looking back at my records, it turns out I didn’t take his advice because I was in banking, and generic publications didn’t interest me. Independent Banker magazine published it under the title, “Are Computers Really Becoming Friendlier?” I’ve got three “works of art” hanging on my office walls - George Washington, a 1958 photo of a missile in front of my office building at SAC Hq. and Art Buchwald’s letter. Sometimes I think I can hear Art Buchwald’s letter speaking to me in that unique voice.


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In my opinion, bank tech solutions are priced too low

Posted on January 16, 2007


By Art Gillis

The other night, I flew home from Boston to Dallas on what was a very nice flight. It left on time. It arrived on time. A Tasmanian Devil didn’t sit next to me. In fact, I could have had several rows to myself. I didn’t eat anything. And the PA system must have been out of order, or maybe it just didn’t blow me out of my seat. I even managed a couple of cat naps. It reminded me a little of my no-nonsense trips from SAC Hq. to Vandenberg Air Force Base in the fifties. SAC didn’t charge me a penny for 1,500 miles of travel because I was an “employee.” Today, I have no allegiance to American Airlines except that I live in their city, and yet they charged me a mere $115 for 1,700 miles of travel. They even threw in a free ginger ale. That’s why I believe the airlines are going broke. I see the same thing happening with bank tech vendors if they don’t wake up and charge more for their tech solutions.

Whether a bank chooses an in-house system or outsourcing, they’re getting a real bargain. Here’s just one example. A bank that chooses to go in-house pays a one-time license fee for software. Then it agrees to pay 15 percent to 20 percent of the license fee annually forever. Even after 30 years, a bank can run on its updated system thanks to three-times-a-year software releases, and never has to go through another conversion. Bill Gates wouldn’t be the richest man in the world if he had used that pricing scheme for MS-DOS. I think the cheap lunch idea should end. Bank tech vendors should put a time cap on their solutions, like there’s a new pricing paradigm every 10 years, or they should sunset their systems and start over every 10 years. Or maybe I’m just overreacting to the sweet deal banks are getting because it’s time for me to trade in my 13-year-old Jaguar for a new one, and there goes my budget. I wish it were like software from a bank tech vendor.


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A New Year’s resolution for systems developers

Posted on January 08, 2007


By Art Gillis

Eight days into my New Year’s resolution and I’m on track. That qualifies me to tell others what their resolutions should be.

1. Build new automated processes by throwing out the old concepts. Start by asking, “What are we doing here?" not, "How did the old system work?” In the 50s, new systems were designed as if the 80-column punched card was never going to disappear. Some bank systems today start as a customer enters the branch. But in many cases the branch is the customer’s home.

2. Eight years ago, Internet applications were developed by geeks and nerds. Today, normal people who are not geeks and nerds use the Internet. So they can’t adapt to the culture. What we need today is the humanization of the Internet. A sort of “for the people, by the people.”

It seems perfectly normal to throw away a PC after using it a couple of years. But we keep our bank systems for decades as if nothing changed.


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My New Year’s resolution - Write shorter blogs

Posted on December 29, 2006


By Art Gillis

And I’m starting with this one. That’s it.


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Intellectual Property - You may own some and don’t know it

Posted on December 19, 2006


By Art Gillis

Haynes and Boone, a prominent Dallas law firm, invites me to their free knowledge-transfer presentations. I don’t go to all of them, but this time, when I saw the subject, Intellectual Property Rights (IPR), I signed up.

What an enriching experience it was. I’ll begin with the start time - 7 a.m. I was back at my office by 9:15 and didn’t skip a beat in my day’s work. There were 83 other folks there. Forgive me, but I’m the quintessential numbers guy. I counted them.

With absolute precision, the man in charge kicked it off. A panel of six experts (three lawyers, two venture capital specialists and Nortel Networks’ in-house counsel) told me so many things I needed to know, that I wanted to leave a donation when it was all over. Instead, I sent another check to the Dallas Children’s Advocacy Center so my conscience wouldn’t bother me.

If you’re an expert on IPR, you won’t need what this rookie learned. But if you’re in my camp, read on. Rather than my trying to tell you what six experts said, I’ll tell you what an informed audience asked the panel. There were nine questions, but more followed after the bell:

1. Where does Business Process fit into IP?
Answer: It is recognized as patentable, as well as “copyrightable,” so know that patents do not just apply to a physical product. Technology is defined in the broadest sense: anything that is new.

2. Banks are beginning to collateralize IP in making loans to the owner. Is it real?
Answer: Don’t count on it from banks. In the past three years, lenders have entered into this space, but only after the VC investors took the greatest risk. And lenders are not your traditional banks. They are individuals.

3. How does one defend a patent, or fight a patent infringement?
Answer: Any startup should get a patent from Day One, even though it’s not easy and it is costly. Keep in mind that future investors do not want to pay for litigation, so do the legal work up front even though it hurts.

4. Europe has a “fast track process” for getting a patent. Does it work?
Answer: Yes, and it’s a good idea for any owner of an invention who needs to start using it immediately to get his business going.

5. What obstacles will one face in a global economy where laws vary from country to country?
Answer: Be patient, cross-country laws for worldwide protection are becoming more common.

6. How does one get a greater return on his product through the patent process?
Answer: By licensing his invention to partners and achieving business value, not just money.

7. How do I protect myself against a lender who calls the loan and takes my IP?
Answer: Most lenders don’t want the product because they wouldn’t know what to do with it. But the wording of the patent process should protect the owner. The tough answer is don’t breach the loan agreement.

8. Should we worry about China’s laws as we enter into the growth dynamics of their business environment?
Answer: China’s laws look like those of the U.S. But enforcement is different. Laughter in the audience suggested another answer - You’re damn right you should worry.

9. What value does an IP portfolio have?
Answer: Even if you don’t build the products and you license the products, it’s still a good thing to do. The patent process is expensive, but it can be worth it if you know that your business strategy depends on your invention.

What I learned from this investment of 120 minutes: I always thought one had to be a Thomas Edison or engineer to own a patent. I’m neither, but that day I found out I have three patentable products that I use in my consulting practice. A patent costs about $35k, so now I have to figure out if there is a business value for my inventions. With more consultants entering the business worldwide, there should be a market, but I’m not including my inventions on my corporate balance sheet just yet. And it doesn’t help to know that in 1971 the creator of the “Swoosh” was paid 70 bucks for what Nike made billions with.

IPR is something every owner of a new creation should be tuned into, but in my opinion, the right of ownership is like anything else in life. Now that you’ve got it, what are you going to do with it?

Disclaimer - I am not a lawyer, nor do I try to act like one. And I have never told a lawyer joke in my life probably because the 22 law firms I have worked for, as an expert witness in my specialty, have been so impressive that I wouldn’t make a risky move these days without the involvement of a lawyer. In case you’re looking for a hidden endorsement in this blog, I can assure you I have never met, face-to-face, an attorney from Haynes and Boone.


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Sorry, our computers are down.

Posted on December 11, 2006


By Art Gillis

I’ve been hearing that excuse less and less each year. In 1960 I used to say it to our customers, which included General Motors, Met Life, Delco Remy, National Institutes of Health, Army Map Service and some other biggies. What made it tough for me was I was in charge of software releases for a major mainframe (was there any other kind then?) company. Hardware was the only thing we sold. Software was a giveaway. But nothing would run without the software and I couldn’t release the software until it was tested. And I needed a working computer to test it. I apologized a lot. And I worked the graveyard shift a lot because I could scrounge time on any Honeywell 800 computer I could find in the Boston area. Fortunately I was single at the time and no one was looking for me at 3 a.m.

Unfortunately, I didn’t have any girl friends at the time because decent girls were usually at work at 3 p.m. when I would gain consciousness. I was the ultimate nerd before the word was even invented.
Over the years, I had experienced so many disappointing events in the implementation of IT projects, that in 1992 I wrote a little book about 43 of them. The title was, "Sorry, Our Computers Are Down.”

Here’s just one example: The FDA hired us (a major consulting firm) to develop an information system that would better use the resources of food inspectors in the field. It was in vogue then to budget according to program goals. As it was explained to me by the FDA, if rat terds in bread are sterilized during the baking process, why should our inspectors waste their time looking for rat terds? I stopped eating bread after that and now enjoy a 34-inch waist line. We built the specs for that system in 1969 and charged the FDA $1 million. Right after that, the Nixon Administration came to power. A new FDA Commissioner took over and proclaimed our system as impractical. Nineteen volumes of systems specs were trashed, and if you paid taxes in 1970, you have a right to bitch to your Congressman for waste in the Federal Government. For all my Republican friends, take comfort in the fact that change can be good. A Democratic Congress may just be the solution to solving a stupid decision to go to war in Iraq.

These days, reliability of technology is a lot better. For example, I heard the excuse this morning from a company that couldn’t schedule my semi-annual heating system maintenance. No problem, it was only about the fifth time I heard the excuse from a variety of service companies all year.

For a world that now relies on real-time action, the bad news is that 99.999999 up time just ain’t good enough.


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When the generics go vertical

Posted on December 05, 2006


By Art Gillis

Intuit and Microsoft have always had a taste for banking, but somehow they were missing the nuance and culture that are so important in banking. Bill Gates called bankers dinosaurs, not the ideal way to break into a club. Intuit knew how to keep the books, but it didn’t know a deposit from a loan. Now Intuit solved its problem by acquiring a banking company, one that does banking the future way, electronically, not the old way, “paperbound.” What struck me was the enormous initiation fee to get in. While the current price paid for a bank tech company has averaged 2.13 times revenue, Intuit paid Digital Insight shareholders a whopping 6.3 times revenue. Maybe Intuit knows something the rest of us don’t. And I certainly missed the predication in last week’s blog. I talked about the generics and came close with Microsoft, but I missed Intuit entirely. Automation in Banking - 2006 lists 19 Electronic Bill Presentment & Payment solutions. Maybe Microsoft will shoot high and go after CheckFree.

Blogger’s note: Automation in Banking - 2006 includes 81 bank tech companies (250 solutions). But Microsoft and Intuit are not included despite repeated invitations to appear. I always felt there was a connection between bookkeeping software and banking systems, and I’m happy that Intuit confirmed I got at least one thing right.


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Consolidation among core companies is no longer a work in progress.

Posted on November 28, 2006


By Art Gillis

Twenty years ago, there were 113 companies (in-house and outsource modes) offering core apps services to banks and thrifts. Today, there are 29. In 2006, there was only one transaction among core companies. RDSI (a bank-owned processor with 70 customers) acquired Diverse Computer Marketers Inc. (30 customers). So it now appears the well is dry in terms of pickings by the popular acquirers. But I believe there’s still a little play left for those who want to toss out the old models and try new approaches. Here’s how I see the future landscape. And I haven’t had anything stronger to drink than apple juice.

The top six players (Fiserv, Fidelity, Metavante, Jack Henry, Open Solutions and Harland Financial Solutions):
I’ve been saying it for the past four years, so eventually my prediction will come true. Two of these companies will merge. The possibilities are anything but obvious. Open, with its new source of abundant private equity funds, could acquire Metavante, Jack Henry and Harland FS to put itself in the cherished #3 position of the Big Three. Or Metavante could finally go public the easy way by acquiring Jack Henry. Fiserv and Fidelity won’t be players in this field. Mind you, these six companies could survive on their own, but I can’t imagine Wall Street looking the other way and leaving these companies to manage their affairs just for pure business success. Something’s got to happen here.

Of the 23 remaining companies:
5 (representing 386 customers) are reasonable candidates for acquisition if they don’t get too greedy.
7 are locked out as acquirees by their own ownership, culture or desire for independence.
8 just don’t have the appeal that a typical acquirer looks for.
3 are buyers.

If you’re wondering why I haven’t included Fiserv and Fidelity in the acquisition game now, it’s just because I have been talking about core companies and banking. I believe these two companies will be looking for opportunities in other vertical industries that still have some connection with words such as “payments,” “financial,” “market stimulation,” “health, wealth & welfare,” and “anything analytical.” If these predictions don’t excite you, how about a reverse direction with visits from Gates and Ellison, looking for ways to get vertical. Or finally, with Accenture, ACS, BearingPoint, CSC, EDS, H-P, IBM Global Services, Perot Systems, SAIC and Unisys looking for much needed growth, anything’s possible for two $4 billion-a-year plums.



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Free checking is like a shirt made in China - It’s not the cost anymore, stupid.

Posted on November 21, 2006


By Art Gillis

Global economics says a $29 shirt at Wal-Mart was manufactured by a worker in China who was paid seven cents to make it (the coins whose copper value is worth more than the face value). After the shock wore off, I worked on a few value-add services closer to my own business. Free checking, for example, has been available for decades even when it cost a lot to produce a checking account. Now it’s really free, but not for banks. A typical outsource vendor charges a bank $1.08 per month per account for the computer processing service to produce an average (22 trans) customer account. But the cost model vendors are using is as obsolete as a free toaster for opening the account. Take a look.

Checks aren’t as much a part of the equation as they used to be, so input costs are lower. Fine sorting and storage costs are lower and in many cases have disappeared. Reject/reentry costs are lower. Workers in the statement rendering departments have become the current generation of their parents’ generation of unemployed factory workers. Processing costs are lower thanks to ongoing improvements in electronics (smaller, faster, more powerful and cheaper). Some banks that do their own processing once battled the clock to get their work done by seven the next morning. Now the posting and updating run takes about an hour. If the bank is up to date, it’s a lights-out operation, so there’s no labor cost. And some day, there won’t even be a posting and updating run because everything will have been done in real time, before a teller could finish saying, “Have a nice day.” Transporting output by courier is now a function of the Internet delivery channel and I don’t believe Internet engines are run by gasoline. Even low-cost call centers in Mumbai aren’t busy in a do-it-yourself banking world where banks are pushing customers to “go online.”

So it seems to me that the likes of Ralph Lauren or lots of middlemen between the Chinese worker and the consumer are making one heck of a huge profit because the ultimate payer in the chain hasn’t realized that the benefits of the flat world Thomas L. Friedman wrote about two years ago are actually working. I wonder why my bank is charging me 15 bucks a month for my checking account, and I’m not even getting an animated polo player logo on my bank account screen.


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My wife wants me to be her Internet tutor. There goes the marriage.

Posted on November 13, 2006


By Art Gillis

First, I must tell you that my wife and I are complete opposites. I call her analog. She calls me digital. She’s an artistic person seeing shape relationships that I couldn’t discover if I had the benefit of a ten-year exile at the Institute of Computer Aided Design. She looks at a house and instantly relocates the placement and scale of the windows. Ask her about a “9” and she’ll talk about its lack of symmetry and top heaviness. I’ll describe it as 1001, its binary bit configuration. There are hundreds of versions of the color white. A nine is a nine no matter where you are. So just imagine these two people trying to reach a harmonious level of understanding with regard to the Internet. For my part, I psyched up myself to adopt the persona of sweetness, a word that I never associate with men. Here’s how I will start the process before we even get within 50 yards of a PC.

• Give up everything human, logical, mother’s teachings and Emily Post. The Internet is made up of billions of “robots” that can’t react to the statement, “You know what I mean.”
• What normally works when a human is involved gets rejected when the Internet governs. I filled out a form online recently and provided “M.” as my first name. After completing the entire form, it was rejected with a note in red saying, “enter a correct first name.”
• Don’t waste your time communicating with a Web Master or “info@.” You’d be as foolish as if you wanted to speak to a highway billboard. No one will answer.
• Be absolute. Just like when you tell me to pick you up at 6:00. Not 6:00ish or around 6:00. Computer technology is very absolute. A 9 is a 9, not 8.99999999.
• When asked your mother’s maiden name, just give it to them, and pray that even when you get old, you’ll never forget it.
• 98% of the e-mails you receive will be junk or scams. After a while you’ll be able to spot them. For now, beware of anything with the words “friend, congratulations, account, paypal, ebay, diet, health, low-cost, plural representations of some words such as informations, and anything having to do with the stock market.” And don’t waste your time with anything from a bank. Banks don’t use e-mail except the quintessential marketeer of all time - Citibank.
• When you send text, especially to family, write it as a document first so you can edit the heck out of it. Then paste it as an e-mail and send it. Writing online is hazardous. You can’t fix misinterpreted words once the e-mail is sent.
• There will come a time when someone tells you they didn’t get an e-mail you sent. Don’t believe it. The Internet has spawned an entirely new compendium of excuses to cover up blame. Just take it in stride.
• Booking reservations can be risky. Spending two hours surfing for the cheapest hotel rate might save you 10 bucks, but the third party will take your deposit in a microsecond. Remember when you booked directly at the Roosevelt Hotel in NYC and had to cancel due to the flu? The nice lady not only canceled but wished you a speedy recovery.
• Search engines are electronic encyclopedias and then some. The more words you give them the better your search results will be. And this is one time you can believe the word “free.” And don’t worry about how Google makes money. If you had invested your funds in Google when it IPO’d, you’d be one rich chick today, about five times the $85 price I advised you to use your funds to buy it.
• Learn to curb your emotions. The Internet is technically less than 20 years old. Eliminate the first five years as experimental, and you are now dealing with a 14-year-old technology. Did you know everything there was to know when you were 14? Don’t answer that.
• Finally, use the Internet as an information source and as a message transporter. Do not use it to move money. This is from your loving husband, even though my loved clients would consider this advice a form of professional suicide. Bankers want the Internet to do all their dirty work so they can just focus on “Have a nice day.”

Catch ya’ later when the first step will be: How to turn on the computer.
What’s that book in your hand? A primer on the Internet. Burn it. I’m all the technology education you’ll ever need.


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If ya wanna know about banking and technology, visit your doctor

Posted on November 06, 2006


By Art Gillis

I really believe in expert services, so rather than a visit to a Web site that offers do-it-yourself healthcare, I make the huge effort of going to my doctor - twice a year whether I need to or not.

The first question in the usual examination process was, “So how is the banking business?”
Caught a bit off guard, my quick answer was, “Banks are making more money and handling risks well, but the tech companies aren’t so well off.” I hardly finished when the good doctor rattled off a most eloquent statement as to why he believed the leveling off scenario in new tech offerings. “Everything is electronic now, and with the Internet, we as customers get our banking done easily, quickly, conveniently and accurately. Bankers found the cure. Healthcare should be that successful.”

In recent months, I have been hired by other kinds of experts: those who invest in bank tech companies. They’re not convinced that the bank tech business has leveled off. You can see concrete examples of walking the walk, not just talking the talk. The acquisition of Open Solutions Inc. by investors. The total emersion of the biggest title insurance company (FNF), and now the tech company’s (FIS) takeover of its acquirer. A small startup (GFSI), which has had more Wall Street activity than business activity, with an oversubscribed secondary offering. Software giants such as Oracle whose database systems didn’t know a deposit from a loan now own a majority interest in an Indian bank tech company with an intent to overwhelm the U.S. With $100 million to invest in acquisitions, TEMENOS is waking up to Fiserv’s 21-year old strategy of acquire the competition. And when all else fails, bring in a new CEO. That’s what Misys did, and I presume they’ll be overcrowding the U.S. market also.

It’s very clear that investment money is looking for a place to land, and the vendors are lining up. The next phase will be: Are the financial institutions buying? That’s when the final score will be tallied. The doctor and I know where we stand. What do you think?


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