Core processing solutions should reflect a financial institution's overall business strategy
More than most businesses, banking revolves around relationships. This seems especially true when it comes to core system technology. Indeed, once consummated, the partnership between a financial institution and core supplier often withstands the test of time.
That's been the case with Summit Bank, a locally-owned bank in Prescott, Ariz., that opened it doors in November. The nascent institution's choice of core banking provider was determined by relationships forged years earlier.
For some banks, such as Sovereign Bank, the governing factor in the choice of core banking provider is economics. For others, like Commercial Federal Bank, it's a desire to stick with a company that's provided years of excellent service.
What they all seem to share is a view of core applications as the foundation for achieving long range goals.
A LASTING IMPRESSION
One of Summit Bank's first acts was to hire Metavante for financial account processing, electronic funds transfer and card solutions, and merchant processing.
"Just entering the banking industry, it was important for us to choose a provider that would allow us to offer a list of robust offerings," according to Michael Keller, president and CEO of Summit Bank.
The bank, which serves Prescott and its surrounding communities with both small business and retail services, was formed in response to a wave of consolidation that had all but wiped out locally-based banks in the area.
"There was a perceived need for a true community bank," said David Denslow, chief financial officer at Summit Bank. "The last one that was here sold out to Zions Bank. Since then, banking has been dominated by Bank One, BofA, Wells Fargo and regional players like National Bank and Stockmans Bank, which has 80 branches around Arizona."
Denslow has seen the changing face of Arizona banking first hand. "I worked for Valley National Bank, which was the premier bank in Arizona for years. I did branch and bank operations, data processing and financial systems." Valley National was acquired by Bank One in 1994.
Nor is he a stranger to de novo banks. "This is my second startup. I started a bank seven years ago in Phoenix."
It was while working for this first startup that Denslow came into contact with Metavante, then known as M&I Data Services. The bank was looking for a provider of check clearing services, and found that M&I's parent company, Marshall & Ilsley Bank, operated a data center just two miles away.
"One of the guys I used to work for was one of Marshall & Ilsley's correspondent officers, so it kind of naturally fit together," said Denslow. "They did all my check clearing processing."
Denslow was impressed by what he saw. "The quality of the data center was exceptional. The people were really good and they stayed. That kind of stability is very important."
When he got to Summit Bank, Denslow was already pre-sold on Metavante. But committed to the board of directors to carry out due diligence, he also investigated Metavante's competitors, including Fiserv and Jack Henry.
All of them have good products, he said. But what they don't have-and what Metavante does have in M&I Bank-is a bank owner. "They have a commitment to their customers, but they don't have a bank that's committed to running the same platform," said Denslow. "If there's a problem with Metavante software, there's going to be a lot of impact at a very high level."
Metavante's data center in Phoenix is only 95 miles away, just a stone's throw by Arizona standards. More important, though, is the stability that made such a lasting impression on Denslow. "At my last bank, we outgrew the data processor severely. With Metavante, as we grow we're not going to outgrow them," he said.
He added, "Metavante isn't the least expensive alternative. What we're paying for is an investment in our future."
Banks such as Summit Bank that are seeking the right technology mix might look to Sovereign Bank as an example.
Back when it was a billion dollar savings institution, Philadelphia-based Sovereign Bank viewed technology as a utility, like electricity, which could be purchased far more cheaply than manufactured. Today, some ten years and 25 acquisitions later, this fundamental view hasn't changed.
"We're not a small bank, but we come from a small bank background," said John McCarthy, chief technology officer at Sovereign Bank. "The focus was not on technical infrastructure so much as acquiring share."
Sovereign eclipses most of the other top banks in terms of percentage of operations outsourced. JP Morgan Chase, which recently signed a $5.5 billion deal with IBM, still retains key IT functions like application development in-house. "Chase, American Express and Deutsche Bank have billion dollar deals, but they tend to outsource just a slice of their infrastructure, either telecom or data processing," said McCarthy.
In January, it signed a six-year deal with Alltel Information Services, Little Rock, Ark., for more than a dozen different core solutions, including deposit and loan processing, mortgage origination and servicing, Web banking and channel integration.
Alltel Information Services (which has been acquired by Fidelity National Financial) will provide the services to Sovereign in an application service provider (ASP) mode.
Sovereign has also contracted with Intercept, Atlanta, for item processing and check imaging services, and with Fifth Third Processing Solutions, Cincinnati, for ATM and card processing.
Sovereign had concluded that its previous core processor, Fiserv, could no longer supply its IT needs. "As we stepped back and looked at the growth curve of the company, as well as the technological capabilities that were available with our current provider, we thought it prudent to go into the marketplace," McCarthy said.
The new contracts provide gain sharing arrangements intended to hold down Sovereign's unit costs. "Intercept awarded us 375,000 shares of stock when we signed a letter of intent," said McCarthy. "From the others, we had combinations of cash discounts and service credits."
The vendors have committed to keeping Sovereign ahead of the technology curve. Intercept, for example, plans to open four new item processing centers, adding to the 27 it already operates, and to add 200 new employees. "There's a significant technological uplift in that they're entirely an image-based operation, from proof of deposit to archiving," McCarthy said.
With Alltel, he noted, "we get the economic benefit of processing our core accounts in a leveraged ASP environment, as well as continual technological innovation."
BANG FOR THE BUCK
Still, Sovereign has no intent of becoming a bleeding-edge technology user. "I don't think we're stretching the limits of technology," said McCarthy, "but we are providing an uplift in core processing capability at a significantly reduced price."
Banks don't compete on technology anyway. "Our customers don't come because of what application systems we're running," he said. "They come because of service, trust and perceived value."
"We don't see this set of technologies as customer-facing, and therefore differentiating," he added. "The things that are commodities we'd prefer to rent rather than own."
Little separates the thousands of thrifts, credit unions and commercial banks in terms of services provided, he said. "We're all doing the same thing. There are commodity aspects to this industry."
Customers care little if anything about technology infrastructure. "Beyond availability, reliability and speed to market, the infrastructure is not a differentiator," said McCarthy. "But there are things like what they see at ATMs and Web banking, how they are serviced."
Where technology does have an impact is in customer-facing applications. "Information as common as what's provided on a statement can be packaged in a way that's unique," he said. "We see the thrust of our technology and operations spend on the customer and service side, not on the infrastructure."
Although nominally a savings institution, Sovereign Bank, at $40 billion in assets, has taken on the characteristics of a full-service commercial bank. As such, it has evolved a three-tier strategy with regard to technology. The first tier, delivery channels and customer applications, will comprise the bulk of technology spending. "Anything that's customer-facing we want to control more than we have in the past," said McCarthy.
This first tier is "where the branding of not just data, but of any other types of information that goes into developing and delivering products, takes place," he said. "That's where we'll continue to invest in proprietary solutions."
The second tier, he said, is "internal MIS, in accordance with a $40 billion bank whose balance sheet looks like a full commercial bank."
For example, Sovereign has recorded a seven-fold increase in the number of users of Salesnet, a sales force automation system it installed at the beginning of last year.
In January 2002, it started using Salesnet in a pilot with 40 customer relationship managers in New England. By April, it had extended the product's use throughout New England, New Jersey and Pennsylvania, where it's used by some 275 employees in the bank's commercial markets group (comprising middle market, specialty lending, healthcare, and asset-based lending divisions).
Salesnet's cross-sales module and communications applications enable Sovereign to track customer relationships, not merely transactions. By monitoring each step of the sales process-prospecting, creating a proposal, credit approval, documentation and closing, and booking-Salesnet allows the bank to track the performance of individual salespeople or entire departments.
The bank had considered traditional customer management systems, but rejected them as too costly.
The third tier of the technology strategy is risk management. "There needs to be a much sharper focus on the varieties of risk that exist in a commercial bank more so than a traditional thrift," McCarthy said.
He continued, "We need to be looking beyond interest rate risk and focus on things that well-managed commercial banks do, like credit risk, foreign exchange, currency risk, market risk, counterparty risk. That's where we want to spend our technology dollars, not on things that are table stakes."
STICKING WITH SUCCESS
Fiserv, which was replaced by Alltel at Sovereign Bank, has fared better at Commercial Federal Bank, which recently renewed its agreement with Fiserv in a 6-year deal worth $120 million. Fiserv, which has managed Omaha, Neb.-based Commercial Federal's data processing since 1989, provides core account processing, data warehousing, mortgage loan processing, teller systems, call center, ATM driving, check processing and statement printing.
"We've had a longstanding relationship with Fiserv," said Tate Fitzgerald, senior vice president and director of IT at $13.5 billion Commercial Federal. "We utilize all Fiserv core applications."
As technology has changed over the years, so has the relationship with Fiserv. "As we move into client-server, the bank plays a significant role in business analysis design," said Fitzgerald. "We've wrapped more services into the agreement. They've taken on some of the bank-designed applications as well."
Fiserv maintains 40 employees on site to handle maintenance, software installation and enhancements, ensuring that problems get resolved speedily. "We have a relationship manager on site," Fitzgerald said. "We meet on a weekly basis." Once a year, the bank and Fiserv conduct higher-level discussions on long-range issues and needs.
The latest round of negotiations with Fiserv began last April and wasn't concluded until Dec. 31. Although the contract wasn't due to expire until April 2004, Commercial Federal decided to start the bargaining early. "If we were going to move somewhere else, we'd need a good 18 months," Fitzgerald said. "So we had to start our negotiations early."
During that time, Commercial Federal was in the process of upgrading its Web banking channel with the Voyager suite from Corillian. Voyager provides enhanced services such as real-time access to financial accounts, an online check register, and the ability to download account data into personal financial management programs like Quicken and Microsoft Money. It also gives Commercial Federal a scalable platform for its increasing number of online banking customers.
Despite the commodity nature of most core banking technology, Commercial Federal sees potential for competitive advantage in data warehousing and data mining.
"We haven't gone off the deep end of CRM and spent millions of dollars like other institutions," said Fitzgerald. "We've started in our call center, focusing on what data should be flowing through there to identify decisions."
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