When automation was first introduced into banking decades ago, its purpose was straightforward: to keep banks from drowning in paper. It was obvious that, as institutions grew, they could no longer process paper checks manually or keep track of new accounts on paper. Technology was a mechanism for keeping the back office in order.
Fast-forward to this century and the meaning of technology has undergone a transformation. At a time when people purchase movie tickets, make dinner reservations, check airline flights, and purchase big-ticket items, all without the aid of a live representative, technology likewise has become essential to interacting with banking customers. In essence, it has emerged as a vital link between the bank and its increasingly tech-savvy clientele, as well as a foundation for strategic and operational change.
The elephant in the room
While traditional products like checking and savings accounts have changed little over the years, the technology supporting them is constantly improving and taking on new forms. This aspect makes it different from all the other disciplines required to run a bank, such as accounting and audit, lending, and risk management, which generally adhere to a static set of principles.
Indeed, technology may well be the most dynamic, yet least understood topic covered in the boardroom. While directors are generally selected for their skill in managing business fundamentals, many perceive themselves as ill-equipped to lend insight on major decisions regarding large-scale, complex, and rapidly changing systems. Yet increasingly, technology is creeping into nearly every nuance of the banks strategic plan.
The increasing imbalance between technologyu00e2u20acu2122s importance to banking and directorsu00e2u20acu2122 often weak knowledge of it raises some serious questions. What is the proper role for the board in overseeing the banku00e2u20acu2122s technology strategy? What are the risks of directors not being involved enough in technology? Are there any consequences from getting too involved?
Deloitte Touche Tohmatsu, the global consulting firm, and Corporate Board Member, sister publication to Bank Director, this year released the results of a survey that found directors increasingly recognize the value of technology, but are far from involved in it. Compared to other industries, directors at financial institutions reported having a slightly better record on technology than directors in other industries, according to the research. But even so, only 17% of directors in the financial services and insurance industries say they are u00e2u20acu0153completely and actively involved in IT,u00e2u20ac just slightly higher than the 14% of 455 respondents worldwide who say so.
Directorsu00e2u20acu2122 lack of involvement is also apparent when individual banks are examined. One might expect directors at $5 billion Santa Clara, California-based Silicon Valley Bank, which provides financial services to innovative and entrepreneurial companies in technology and other industries, to have a better-than-average handle on the banku00e2u20acu2122s technology. Yet its board does not get too involved in the technology that runs the bank itself. Alex W. u00e2u20acu0153Peteu00e2u20ac Hart, chairman of the board and the former president and CEO of MasterCard International, says, u00e2u20acu0153Our board is not very deeply involved in technology decisions at the bank, primarily because our core platform is outsourced. So while we spend a fair amount of time evaluating our capital expenditures and the budget, we are not deeply involved [in technology].u00e2u20ac
Likewise, Joe Dorsey, executive vice president and chief operating officer of $353 million Dania Beach, Florida-based Community Bank of Broward, characterizes his bank boardu00e2u20acu2122s involvement in technology as u00e2u20acu0153limited.u00e2u20ac Jerry Rogers, chief operating officer at $400 million West Texas National Bank in Midland, said the directors approved the technology budget he proposed three years ago before he accepted his current position at the bank. u00e2u20acu0153Since then, theyu00e2u20acu2122ve been very good at delegating,u00e2u20ac he says. At both banks, the boards receive updates of quarterly meetings from the technology subcommittees.
There may be good reason for directors to consider boosting their level of involvement in technology. The Deloitte/Corporate Board Member survey found only 56% of all respondents said their companies do a good job of measuring and monitoring technologyu00e2u20ac”that number is boosted to 61% of those who also said they outperform their peers. Similarly, 62% of the high performers said they receive justifications for technology projects, as well as periodic updates throughout, compared with 56% of all respondents. That still leaves a wide berth of directors who have little information to work with when strategic or financial technology decisions have to be made.
Scott Sommer, president and CEO of Cornerstone Advisors, a Scottsdale, Arizona-based consulting firm, says he agrees directors are not involved enough in technology. At a minimum, be believes directors should receive some sort of annual technology training. u00e2u20acu0153Theyu00e2u20acu2122re not exposed enough to the trends and whatu00e2u20acu2122s going on in the industry,u00e2u20ac he says.
Banks may also be limiting their knowledge base by seeking board members who are seasoned executives, Sommer adds. They should be trying to target the populationu00e2u20acu2122s 130 million Gen Xers and Gen Yers, he says, u00e2u20acu0153yet no one from senior management or the board is in that generation.u00e2u20ac
Today it appears bank directorsu00e2u20acu2122 attitudes toward technology are becoming more forward thinking. Of the five industries highlighted in the Deloitte/Corporate Board Member survey, those in financial services were most likely (52%) to say technology would increase in priority for their company over the next three years, compared to the average of 45% for all respondents.
Michael Roberts, executive vice president and chief information officer at $263 million Bank of Alameda in California, says his banku00e2u20acu2122s board is more receptive than it has been in the past to receiving updates on technology. u00e2u20acu0153Over the last two years, the board has come to see technology as an integral part of general bank management,u00e2u20ac he says. u00e2u20acu0153In the past, IT was more in the background.u00e2u20ac
Roberts points to the Y2K date change as one factor that first highlighted the importance of technology to boards. Others say the rise of the Internet has been instrumental. Technologyu00e2u20acu2122s creep into directorsu00e2u20acu2122 personal lives also is a factor. At $8.1 billion Portland, Oregon-based Umpqua Bank, directors were pushed four years ago into embracing technology at an individual level when the bank began providing electronic access to board papers, rather than mailing them in advance of meetings. u00e2u20acu0153For some, it may have been their first exposure to whatu00e2u20acu2122s possible,u00e2u20ac says Umpqua board member Scott D. Chambers.
Whatever the reason, increasing acknowledgement of technologyu00e2u20acu2122s importance has been slow but steady. u00e2u20acu0153Thereu00e2u20acu2122s been a sea change of progress,u00e2u20ac according to Ken Porrello, senior strategy principal at Deloitte Consulting. Fifteen to 20 years ago, directors viewed technology as something that made the bank more efficient. With the rise of e-business over the last 10 years, u00e2u20acu0153now technology is a key strategic lever,u00e2u20ac Porrello says. The problem is u00e2u20acu0153most boards donu00e2u20acu2122t necessarily turn on a dime.u00e2u20ac
Some are trying. Porrello says a portion of directors surveyed expressed an inclination to move beyond focusing on technology as it relates to compliance. The emergence of Sarbanes-Oxley and greater scrutiny from regulators in general has caused boards in recent years to view technology through the prism of compliance versus seeing it as a strategic tool. u00e2u20acu0153Now thereu00e2u20acu2122s a desire to rebalance,u00e2u20ac he explains.
There are a number of steps a bank can take to move technology up the priority list for the board. One is simply to dedicate time to it during board meetings. u00e2u20acu0153If time is not being allocated on a regular basis, the board will not have the opportunityu00e2u20ac to address it, Porrello says.
In addition, many banks have technology subcommittees that meet quarterly, and the minutes from those meetings are then reported to the board. Banks also address technology at annual strategy meetings, in which they set technology budgets and identify projects that will be taken on throughout the year.
Placing people who have an expertise in technology on the board is another way to boost its importance, notes Porrello. A tech expert can u00e2u20acu0153help champion the issue for the other board members,u00e2u20ac he says.
Some successful banks have done just that. San Jose, California-based Bridge Bank, which has grown to $700 million in assets in its six years of existence, points to its sophisticated use of technology as one of its advantages. Moreover, its board is populated with tech-savvy individuals.
One of Bridgeu00e2u20acu2122s directors, David V. Campbell, is principal of a company that provides equipment and software financing to early-stage technology companies. Another director, Richard M. Brenner, president and CEO of The Brenner Group, has been doing business in the heart of Silicon Valley since 1982, including serving as CEO for a number of start-ups. u00e2u20acu0153I see the advantages of technology,u00e2u20ac Brenner says. u00e2u20acu0153I stay up on it because of my business involvements.u00e2u20ac
The result for the bank is that technology gets addressed from a strategic perspective at the board level. For example, Bridge Bank became one of the first in its area to offer remote deposit capture (see sidebar, u00e2u20acu0153Five Technologies Bank Boards Should Be Talking About,u00e2u20ac pg. 34). From the start, the directors were ingrained in the decision process. The board was informed of the plan, received demonstrations on how the technology worked, and was kept apprised of the progress of the alpha and beta tests, Brenner says.
At Umpqua, Chambers brings technical expertise to the board, thanks to his role as president of Eugene, Oregon-based Chambers Communications, a broadcasting, cable, and TV production company. In the eight years that Chambers has been on the board, Umpqua has grown from $300 million to $8.5 billion in assets.
Recently, Chambers has played a unique role on Umpquau00e2u20acu2122s board. Twice in two years he has been asked by the banku00e2u20acu2122s CEO to participate, along with the chief technology officer, the head of marketing, and the CEO, in daylong meetings with major technology companies. u00e2u20acu0153I live in that world everyday,u00e2u20ac Chambers explains. u00e2u20acu0153Iu00e2u20acu2122m involved in fiber optics, data transport, and massive servers.u00e2u20ac Plus, his company has business dealings with the vendors that the group visited, he says.
The meetings helped put perspective on the challenges facing companies as the next generation of servers evolves to handle the increased data demands of the Internet. u00e2u20acu0153Itu00e2u20acu2122s causing all companies to look at their online experience and how [that activity] affects call centersu00e2u20ac and other delivery channels, Chambers says.
Thereu00e2u20acu2122s no doubt insights from those vendor meetings will make their way into Umpquau00e2u20acu2122s board meetings. Umpquau00e2u20acu2122s board addresses technology as a formal agenda item once or twice a year, Chambers says, but technology issues are discussed at every meeting. The board also holds a strategy retreat two days a year, and over the last three or four years during that time, it has had guests come in to talk about technology innovation and what it means for Umpqua.
Plugging in the board
Another way to boost technologyu00e2u20acu2122s profile for directors is to increase their level of interaction with the banku00e2u20acu2122s chief information officer. Barry Abramowitz, senior vice president and chief information officer at $2.6 billion Middletown, Connecticut-based Liberty Bank, says he prepares a written document every month and presents it to the board. The report brings the board up to date on any technology projects that were completed in the previous 30 days, and those that are scheduled for the next 30. It also covers the activities of the technology and operations subcommittees, highlights any changes in risk assessment, and gives updates on the banku00e2u20acu2122s strategic technology plan.
Other bank boards address technology on a monthly basis, but in a less formal manner. Roberts of Bank of Alameda says he attends every monthly board meetings, and usually makes some sort of presentation that is educational in nature. His goal, he says, is to keep board members apprised of technologies in which the bank is involved, so when they go to industry conferences and hear about something new, they know what it is, understand what the bank is doing with it, and can speak intelligently about it.
Perhaps more important than the quarterly report on the technology subcommitteeu00e2u20acu2122s meetings that Rogers of West Texas National sends to the board is the running technology to-do list that can be accessed via computer by any board member. Currently there are more than 70 items on the list, Rogers says. The banku00e2u20acu2122s CEO, who is also on the board, accesses the list frequently and often provides suggestions on changing priorities. A board member also once gave input on priorities, Rogers says.
Too much information
While interaction with CIOs, even on an informal basis, is useful for boards, there is a danger of information overload. u00e2u20acu0153CIOs, in particular, need to get better at communicating with the board,u00e2u20ac says Porrello. u00e2u20acu0153They tend to speak over the board or past the board.u00e2u20ac Abramowitz of Liberty says he recognizes this dilemma as one of his challenges. u00e2u20acu0153A lot of this is on the CIO,u00e2u20ac he says. u00e2u20acu0153Itu00e2u20acu2122s about not hyping the technology and seeing eyes glaze over.u00e2u20ac
Liberty has devised an organizational structure for reporting to the board that helps ensure directors donu00e2u20acu2122t get bogged down in too many details. An operations subcommittee, comprised of department managers throughout the bank, reviews proposed technology projects and determines if the bank has the resources to complete them and can achieve a return on its investment. It then decides whether to endorse a project or not. Either way, each proposal is passed to the technology subcommittee, which consists of senior management and one board member. The technology subcommittee approaches technology from a more strategic perspective and makes the final go or no-go decision.
There are certain types of technology information that boards like to receive. In Deloitteu00e2u20acu2122s interviews with directors, u00e2u20acu0153we heard pretty consistently that they like updates on major projects,u00e2u20ac Porrello says. When Bank of Alameda undertook a project to u00e2u20acu0153virtualizeu00e2u20ac its serversu00e2u20ac”a technique that makes it possible to increase a serveru00e2u20acu2122s utility by running more than one application and operating system at a timeu00e2u20ac”Roberts informed the board in advance about the costs of the project and the potential savings. Once the project was completed, he explained the impact it was having on the bank.
The way technology gets reported to the board can affect how it is perceived. At some institutions, Porrello says, technology is only addressed by the audit committee. u00e2u20acu0153That will result in a more risk-related focus,u00e2u20ac he says. Alternatively, he knows of one large institution that addresses technology within the strategy committee of the board. u00e2u20acu0153That brings a very different flavor,u00e2u20ac he notes. u00e2u20acu0153Would it work for all banks? Probably not. But it reflects their outlook.u00e2u20ac
There can be a danger in boards getting too involved in technology. Before Rogers was hired by West Texas National, he spent 30 years as a bank technology consultant. During that time, he says, he was hired at least four times by banks that ran into serious trouble when their boards made ill-informed technology decisions. Usually, they had purchased incompatible hardware and software packages, resulting in an enormous waste of resources for the institution.
While boards should be more aware of technology, Rogersu00e2u20acu2122 experience also illustrates the importance of the board knowing its limitations. u00e2u20acu0153If you donu00e2u20acu2122t have [the] knowledge on the board, youu00e2u20acu2122ve got to go hire it,u00e2u20ac he says.
West Texas Nationalu00e2u20acu2122s board exhibited that type of caution when Rogers proposed spending about $1 million on a new core processing system, he says. Rogers had put together a position paper explaining the benefits of the system and its costs, and had attended webinars and gone over the contract with the directors. But the directors only approved the proposal after it had hired an outside consultant to review it. u00e2u20acu0153They did their due diligence,u00e2u20ac Rogers says.
Peter Shablik, a partner at Oakbrook, Illinois-based Grant Thornton, a financial and business advisory firm, echoes that point. u00e2u20acu0153The board really should be able to critique managementu00e2u20acu2122s processesu00e2u20ac for researching vendor solutions, he says. The most successful implementation of a new system that he has ever witnessed, he adds, occurred when a team of executives from a bank went to no less than 10 other banks already running the system it was considering, in order to become fully acquainted with the ins and outs of the software. The lesson, Shablik says, is that boards should validate the research process.
A boardu00e2u20acu2122s involvement in technology should really be a reflection of the skills of its members, Rogers says. u00e2u20acu0153If youu00e2u20acu2122ve got someone with a talent for technology and contract negotiation on the board, definitely use it,u00e2u20ac he advises. u00e2u20acu0153If not, you need someone whou00e2u20acu2122s on staff.u00e2u20ac
Richard Brenner maintains that the best technology decision Bridge Banku00e2u20acu2122s board ever made was to hire a chief technology officer early on to handle critical technology decisions. u00e2u20acu0153Many banks donu00e2u20acu2122t have that position from day one,u00e2u20ac he explains.
One way or another, boards should gain the expertise they need to oversee technology. Technologyu00e2u20acu2122s impact on banking is sure to increase as younger people accustomed to using cell phones and the Web to conduct all their business begin developing financial lives. As that population ages, developing and implementing new delivery methods for banking will be vital.
Though that prospect may be far into the future, there are plenty of reasons to get acquainted with technology now. After facilities and head count, technology is the largest noninterest expense item on a banku00e2u20acu2122s balance sheet, consultant Sommer notes. u00e2u20acu0153And that means youu00e2u20acu2122ve got to know something about it.u00e2u20ac