Investing in bank technology is a high-stakes game. In 2003, U.S. commercial banks are expected to spend an estimated $33.8 billion on technology projects, according to a new report from the Tower Group, Needham, Massachusetts.
But if these numbers make it sound like the technology gurus have been handed blank checksu00e2u20ac”like proverbial kids in the candy shopu00e2u20ac”think again. About $30.1 billion has been earmarked for maintenance of existing technologies, such as branch automation systems and the “big iron” machines that run many back offices. The remaining dollarsu00e2u20ac”just under $4 billionu00e2u20ac”will go for “strategic” initiativesu00e2u20ac”those that promise to improve business processes such as workflow automation and data warehousing, explains Virginia Garcia, a Tower Group senior analyst. In reality, there’s not a lot of room for pie-in-the-sky spending. In fact, it’s just the opposite, says Garcia: “Technology investments need to be very focused.”
Other consultants offer similar advice. Research from Grant Thornton, a Chicago-based consultancy, shows community bank executives becoming increasingly reliant on technology to ensure the viability of their institutions. They say much of their institutions’ success relies heavily on technology today, even if their actual goals are derived from nuts-and-bolts banking. Expanding services for business customers; developing new sources of revenue; offering Internet banking services; updating and expanding technology to better track customer needs; and measuring customer profitability were among the initiatives cited in Grant Thornton’s 2003 Annual Survey of Community Bank Executives released in March.
These are lofty goals, especially for banks that expect to divvy up a mere $3.7 billion in discretionary spending. That’s why banks are circumspect about technology spending. Says Ken Proctor, a senior consultant with Alex Sheshunuff Management Services, Austin, Texas: “It is absolutely critical that technology support where you are trying to go strategically.” That focused strategy starts with the board and must be rolled out at every level.
Often, technology spending is driven by what vendors are pushing at the moment, so sometimes the board has to take a pragmatic approach. Upper management must consider the strategy and involve employees and their unique processes to realize a positive return on a technology investment. Throwing money at the situation isn’t the answer.
“What has gotten us in a lot of trouble as an industry these last few years has been an overexuberance of technology spending,” explains Garcia.
In addition, directors need to ask questions about extant systems before considering management’s request for additional outlays. “Layering technologies over existing processes is something that banks have been guilty of doing,” observes Erik Hoghaug, manager of Sheshunuff’s technology practice. Consider the example of a document-imaging system for lending operations. “There’s no technological excuse for a bank not to have it,” says Hoghaug. But, he explains, if a bank installs a document-imaging system without understanding how it can change the way loan officers perform their jobs, or even the way the bank staffs loan operations, that bank will never reap fully the benefits offered by imaging. “The technology is the easy part; it’s the people and the processes that make technology implementations difficult,” Hoghaug says.
In the following vignettes, Bank Director identifies four community banks that use technology to enhance a focused growth strategy. Two de novo institutionsu00e2u20ac”Lydian Trust Co. and Florida Gulf Banku00e2u20ac”exemplify wealth-niche strategies that hinge heavily on technology deploymentu00e2u20ac”one opting for in-house, best of breeds, the other through outsourcing.
The third bank, Oriental Financial, has identified data warehousing as a successful strategy to promote internal growth.
Finally, Des Moines-based Principal Bank demonstrates how an online institution can bolster the sales potential of its parent company through aggressive cross marketing and effective technology tools. Together, these four institutions offer examples of the practical uses of technology to leverage a growth strategy in today’s competitive landscape.
Lydian Trust Co.
Going for the Gold
When John Studdard first sat around a table with a group of colleagues who were drawing up plans to start a bank that appealed to high-net-worth clients, he and his partners were imagining an Internet bank. After all, it was June 1999 and the economy was in the throes of the dot-com bubble. However, that vision, which went live in April 2000 as VirtualBank, is today merely one consumer channel in a multifaceted financial services company known as Lydian Trust Co., which has physical offices in Atlanta, Palm Beach, Seattle, and Rockville, Maryland.
Lydian’s pace of growth has been dizzying. In the space of about 10 months, the company went from “six guys sitting around a table with a blank sheet of paper” to a virtual and brick-and-mortar banking company, according to Studdard, Lydian’s senior vice president and chief technology officer. Lydian Trust also owns Lydian Wealth Management as well as a data-services company that supports investment management services. How was this infrastructure achieved in such a short amount of time?
Technology played a key role. And though the ramp-up was enormous, Studdard says being a de novo bank had its benefits. “We had the luxury of not having a significant legacy presence,” he notes. After weighing the options, Studdard says Lydian Private Bank implemented an in-house technology solution that operates on a Microsoft platform and includes state-of-the-art communications and data-storage capabilities.
Two years later, the Internet bubble burst. The company, known as VirtualBank, embarked on a process of renaming, rebranding, and diversification, explains Studdard. The new name, Lydian, inspired by an ancient entrepreneurial society purported to have produced the world’s first gold coin, was announced in May 2002. Today, Lydian is striving to become a community bank for wealthy customers, a strategy that requires a sophisticated, high-tech infrastructure.
Lydian is a bank for the 21st century. There’s no giant computing ironu00e2u20ac”the company effectively runs on networked PCs. Everything at this high-touch bank is built around off-the-shelf technologies. It uses Microsoft software, Compaq hardware, EMC Corp. data-storage technology, and Cisco Systems network equipment.
“You pick the best of breed in the appropriate area and then you just go with that,” says Studdard, commenting on the technology decision process. What this means, he says, is that the bank only uses software that’s compatible with Microsoft, which “takes out all the noise and foolishness of systems integration.”
The banking unit, Lydian Private Bank, recently opened its first brick-and-mortar office on the island of Palm Beachu00e2u20ac”getaway home to many of the country’s rich and famous. Studdard says other branches are planned, especially in communities with concentrations of personal wealth. “This was the first stone in our brick-and-mortar strategy,” he says…. He describes the bank’s high-touch Palm Beach office as a “very exclusive” private banking client branch that is “highly profitable.”
This strategy of pursuing millionaires, online and offline, holds obvious appeal to many banks today. How well is the strategy working? At the end of 2002, Lydian Private Bank had $574 million in assets, a 74% increase over the $329 million in assets reported at year-end 2001. Lydian Wealth Management had $2.7 billion in assets under management for about 145 clients at year-end 2002. In an August 2002 earnings statement, Chairman and CEO Rory A. Brown said, “Our extraordinary revenue growth and strong earnings are the product of consistent client service supported through innovative technology.” Lydian’s pursuit of the best technology in the industry has been a linchpin of its growth success thus far.
Leveraging Technology through Outsourcing
John Hodas and his colleagues had one clear objective in February 2001 when they opened Florida Gulf Bank in Ft. Myers: to create a community bank that was on par with large banks in terms of products and delivery channels and superior to them when it came to customer service.
“We believe in the power of personal service,” says Hodas, Florida Gulf’s chief financial officer and co-founder. “We want to be seen as a community bank with tech savvy.”
It’s a strategy that thus far has helped grow the bank, which, like Lydian, caters to high-net-worth business owners along the Southwest Florida coast. Florida Gulf has been growing assets at a rate of $3 million a month and opening new accounts at a rate of 120 a month, according to Hodas.
But unlike Lydian, which ramped up technology from the inside, Florida Gulf has opted to outsource its technology-rich products and operations. This allows the bank to offer the kind of technology sophistication customers expect from big banks without sacrificing the level of personal service that wealthy customers want from community banks. This also dovetails with Florida Gulf’s capital management strategy, since with outsourcing you only pay for what you use, and capital is freed for the business of banking.
The benefits of outsourcing are obvious for smaller institutions that want to leverage the most bang for their tech investment buck. And some consultants say this kind of solution is increasing. “There is a trend toward taking advantage of single-vendor economics,” observes the Tower Group’s Garcia.
Florida Gulf is a $90 million bank with two brick-and-mortar branches (a third is on the way) and direct, surcharge-free access to a leading debit card network. It offers an array of high-tech products and services, including telephone banking, Internet banking, debit cards, sophisticated corporate cash-management services, and check-imaging services to allow its customers to view online images of their paid checks. According to Hodas, the bank is “on track” for achieving its founders’ goal of building a $200 million-asset bank in five years. From December 2001 to December 2002, the bank increased deposits 82%.
Florida Gulf Bank has been offering most of these technology-rich services since it opened for business two years ago, yet the bank’s investment has been minimal because it has hired other companies to support its technology needs. Fiserv, the Brookfield, Wisconsin provider of information management and processing services to banks, shoulders most of the work. Debit card transactions are authorized, cleared, and processed by Midwest Payment Systems (MPS), a card network owned by Fifth Third Bancorp, Cincinnati.
Hodas and his three partners, who are the co-founders of Florida Gulf, each had spent time at larger institutions such as Bank of America, Fifth Third, and SunTrust Bank. Yet the four had grown disillusioned with what they saw as unwieldy corporate bureaucracies and eroding customer-service levels at larger banks. They were drawn to community banking, and quickly identified technology outsourcing as a way to maintain a respectable growth rate and stay profitable.
“It really makes us competitive with the big banks we all came from,” says Hodas of the bank’s outsourcing strategy.
Instead of making investments in back-office hardware and software, Florida Gulf Bank simply pays for services like check clearing, loan processing, and mutual fund sales on a transaction-by-transaction basis. “We’ve kept it very simple,” Hodas says, who notes that it’s been profitable, too. Last year, the bank collected $100,000 in fees alone on mutual fund and annuity product sales supported by Fiserv.
The bank has begun to etch its footprint in the coastal sands. Ft. Myers is located in southwest Florida, along the Gulf of Mexico. When the Internet bubble was expanding, start-up tech companies came in droves to settle in along the warm, sunny beach, which became known as the “Internet Coast.” Today, the area remains a hotbed of commercial activity, most notably in real estate development. Florida Gulf Bank staked its claim early on many of these enterprising companies and developed commercial customersu00e2u20ac”along with personal accounts for their executives. The emphasis has always been on service. Customers are encouraged to know staffers at Florida Gulf Bank by name. “We see ourselves as the folks who deliver personal service; that’s something the big banks have forgotten about,” says Hodas.
It appears to be a winning proposition. At last count in March 2003, 209 customer accounts at Florida Gulf Bank have deposits in excess of $100,000. These aren’t CD accounts, Hodas insists, nor are they typically IRA accounts. “We haven’t gone out and bought the money,” he says.
Turning Information into Profits
A little further south, Oriental Financial Group, San Juan, Puerto Rico, describes itself as a financial institution that has broken the mold. Take its moniker, for instance, which doesn’t sound much like the name of a commercial bank: Oriental Group/Financial Planners.
“We see our role not as transaction bankers who open accounts and move money but as financial advisers who bring money-management techniques to the financial requirements of clients,” states Oriental’s 2002 annual report to shareholders. The proof is evident: Using data warehousing, a handful of off-the-shelf Microsoft tools, and Internet/intranet technologies, today Oriental can produce a 360-degree view of every customer. Reports are available directly to staffers and to customers via Oriental’s Internet sites, OrientalOnline and BankingForCDs.com. Detailed paper reports are available as well, and are affixed with bar codes so return mail can be quickly and automatically flagged for follow-up.
Over the years, banks have spent millions of dollars on technologies that promised to deliver a detailed snapshot of customers. But “few banks really know what to do with it,” explains Hoghaug of Alex Sheshunoff Management Services. Oriental, he says, is the exception to that rule, because it uses data warehousing and intranet technologies extremely effectively. In this way it has learned to manage customer relationships across the information silos that have sprung forth as it has grown and diversified. “It allows them to isolate rifle-shot targets” with respect to marketing products and services, explains Sheshunoff’s Proctor.
Oriental’s data warehouse took about six months to build using basic tools such as Microsoft Access, explains Alberto Gratacos, a marketing vice president who co-built the data warehouse with an on-staff programmer in 2001. The timing was perfect: The bank had invested in a powerful database server for its Internet operations and after the Internet bubble burst, there was excess capacity on the server.
Pitching the data warehouse to senior management was easy, Gratacos says, because Oriental had expanded to the point that in-house and customer reporting were being hampered; there were simply too many core systems with fragmented views of customers. In a time when boards and management are charged with understanding the fundamentals of their businesses more than ever before, the investment made sense. “At the time, no one was really sure even how many customers we had,” Gratacos admits. “We got an immediate ‘go ahead.’”
The decision helped produce record results for Oriental, which closed out fiscal year 2002 (on June 30, 2002) with $38.5 million in earnings, a substantial increase over the $8.5 million in earnings reported for fiscal 2001. Return on equity for 2002 was 32.47%, compared to 7.85% in fiscal 2001; the bank’s return on assets was 1.67% for the 12 months ending June 30, 2002. Oriental’s total assets (including assets under management) stood at $5 billion at the close of fiscal 2002, up from $4.48 billion in fiscal 2001 and $3.4 billion in 1998.
The first big test for the system came with the 2002 IRA season. Oriental’s portfolio is heavily weighted with IRA customers and in years past, marketing to them each tax season had been a hit-and-miss affair. Some customers were bombarded, while others slipped between the cracks. Moreover, managing sales and the reporting process across 23 branches was a challenge, explains Gratacos. The data warehouse was used to help create a contact management system that helped Oriental turn in its best IRA season yet. In 2002, “the results were well beyond our expectations,” Gratacos says.
Among the measurements of success: The bank found that the percentage of past-IRA deposit-making customers who also made IRA deposits in 2002 had doubled since the previous tax season. And while the bank’s dependency on new customers fell. Oriental nevertheless saw a 17% increase in its customer portfolio, fiscal 2002 over fiscal 2001, says Gratacos.
Management believes the opportunities for continued successes from Oriental’s data warehouse and complementary technology investments are almost limitless. “When you get to know the power of the data warehouse, your mind is always on the lookout for ways to improve,” Gratacos says.
Ongoing Online Growth
As president and CEO of Principal Bank, Barrie Christman is a traditional banker who brings a wealth of technology experience to bear on a nontraditional bank. In an environment where a singular online strategy has been largely given up, this Des Moines-based commercial bank that opened five years ago still doesn’t operate a single branch. Principal Bank does, however, operate a customer contact center where customers can seek assistance from “personal bankers” 24 hours a day, 365 days a year. Customers also can access accounts and services at the bank by way of the Internet, a nationwide network of ATMs, and the U.S. Postal Service. In addition, Principal Bank offers a full complement of consumer electronic payment services, like online bill pay, Visa check cards, telephone-initiated funds transfers, and online access to images of cleared checks. This is bolstered of course, by a complete line of consumer lending and deposit products.
Despite appearances as a high-tech-driven model, Principal Bank hasn’t made any significant outlays for technology, because backbone operations are outsourced to third parties, at least for the time being. Not that Christman is any stranger to intricate in-house systemsu00e2u20ac”she joined Principal in 2001 after stints at Huntington Bank, Mellon, and Bank One. Yet for now, in-house technology spending is on hold. Principal outsources its core processing to Alltel, and Metavante runs its online bill-pay service.
Christman says she hopes eventually to bring some technology operations in-house. But she’s not in too much of a hurry to do that, nor does she seem in a rush to open brick-and-mortar branches, though she holds the possibility open.
“We think there is room for a bank that is focused on the value proposition of not having to invest in a brick-and-mortar presence,” she explains. Today, according to Christman, about 30% of customers access the bank via the Internet; most opt to do business with Principal Bank’s “telephone” bankers.
It’s a focused strategy that, so far, has served the bank well. Principal Bank exceeded its initial four-year plan to become a $100 million bank, says Christman. As it began its fifth year in business this February, Principal had $1.5 billion in assets with 85,000-plus customers (nationwide, although about 20% reside in the bank’s home state of Iowa).
Last year, Principal Bank’s assets and deposits each grew 39% over 2001; 2002 net income was $16.35 million.
The Principal Financial Group, (NYSE: PFG) the Des Moines-based giant that is perhaps best known for its insurance and 401(k) plans, owns Principal Bank. The company started its federally insured online thrift in February 1998 to help it retain assets. Christman was hired to head the company’s foray into banking and cross-market to the bulk of its customers that come from Principal Financial’s customer base. The 28-year veteran of banking says she plans to start bringing technology operations in-house within the next four to five years. “The systems that got us through the first five years may not be able to get us where we want to go” over the next five to 10 years, she says.
But first, growth. Christman says the institution’s goal is to become a $5 billion bank by 2005. One way the bank will achieve this is by leveraging the strength of its technology partners and its relationship with The Principal Group (which provides 401(k) plans to a large base of small to mid-sized companies) to expand into corporate banking. “This added target audience, coupled with our rapidly growing consumer business, should enable us to achieve that goal,” she says.